As filed with the Securities and Exchange Commission on June 25, 1997
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
OREGON TRAIL FINANCIAL CORP.
(Exact name of registrant as specified in charter)
Oregon 6035 Applied For
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
2055 First Street
Baker City, Oregon 97814
(541) 523-6327
(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)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, 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. [ ]
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Calculation of Registration Fee
============================================================================================================================
Title of Each Class of Securities Proposed Maximum Proposed Offering Proposed Maximum Amount of
Being Registered Amount Being Price(1) Aggregate Offering Registration Fee
Registered(1) Price(1)
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 Par Value 4,377,475 $10.00 $43,774,750 $13,266
Participation interests 240,000 -- -- (2)
============================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued and
sold are subject to adjustment based upon the estimated pro forma market
value of the registrant and market and financial conditions.
(2) The securities of Oregon Trail Financial Corp. to be purchased by the
Pioneer Bank, A Federal Savings Bank 401(k) Plan are included in the amount
shown for Common Stock. Accordingly, pursuant to Rule 457(h) of the
Securities Act of 1933, as amended, no separate fee is required for the
participation interests. Pursuant to such rule, the amount being registered
has been calculated on the basis of the number of shares of Common Stock
that may be purchased with the current assets of such Plan.
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 S-1
1. Forepart of the Registration Forepart of the 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, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings
to Fixed Charges
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Offering Price Market for Common Stock
6. Dilution *
7. Selling Security Holders *
8. Plan of Distribution The Conversion
9. Description of Securities to be Description of Capital Stock
Registered
10. Interests of Named Experts and Legal and Tax Opinions; Experts
Counsel
11. Information with Respect to the
Registrant
(a) Description of Business Business of the Holding Company;
Business of the Savings Bank
(b) Description of Property Business of the Savings Bank -- Properties
(c) Legal Proceedings Business of the Savings Bank -- Legal
Proceedings
(d) Market Price of and Dividends Outside Front Cover Page; Market for
on the Registrant's Common Equity Common Stock; Dividend Policy
and Related Stockholder Matters
(e) Financial Statements Financial Statements; Pro Forma Data
(f) Selected Financial Data Selected Financial and Other Data
(g) Supplementary Financial *
Information
(h) Management's Discussion and Management's Discussion and Analysis of
Analysis of Financial Condition Financial Condition and Results of Operations
and Results of Operations
(i) Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
(j) Directors and Executive Management of the Holding Company; Management of
Officers the Savings Bank
(k) Executive Compensation Management of the Holding Company; Management of
the Savings Bank -- Benefits -- Executive Compensation
(l) Security Ownership of Certain *
Beneficial Owners and Management
(m) Certain Relationships and Management of the Savings Bank -- Transactions with
Related Transactions the Savings Bank
12. Disclosure of Commission Position Part II - Item 17
on Indemnification for Securities
Act Liabilities
- ----------
*Item is omitted because answer is negative or item inapplicable.
PROSPECTUS SUPPLEMENT
OREGON TRAIL FINANCIAL CORP.
PIONEER BANK, FSB
PROFIT SHARING 401(K) PLAN
This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the Pioneer Bank, FSB Profit Sharing 401(k) Plan ("Plan" or
"401(k) Plan") of participation interests and shares of Oregon Trail Financial
Corp. common stock, par value $.01 per share ("Common Stock"), as set forth
herein.
In connection with the proposed conversion of Pioneer Bank, FSB ("Savings
Bank" or "Employer") from a federally chartered mutual savings bank to a
federally chartered stock savings bank, a holding company, Oregon Trail
Financial Corp. ("Holding Company"), has been formed. The simultaneous
conversion of the Savings Bank to stock form, the issuance of the Savings Bank's
common stock to the Holding Company and the offer and sale of the Holding
Company's Common Stock to the public are herein referred to as the "Conversion."
Applicable provisions of the 401(k) Plan permit the investment of the Plan
assets in Common Stock of the Holding Company at the direction of a Plan
Participant. This Prospectus Supplement relates to the election of a Participant
to direct the purchase of Common Stock in connection with the Conversion.
The Prospectus dated ______, 1997 of the Holding Company ("Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operation and business of the Savings Bank and the Holding Company.
This Prospectus Supplement, which provides detailed information with respect to
the Plan, should be read only in conjunction with the Prospectus. Terms not
otherwise defined in this Prospectus Supplement are defined in the Plan or the
Prospectus.
A Participant's eligibility to purchase Common Stock in the Conversion
through the Plan is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion and the maximum and minimum limitations
set forth in the Plan of Conversion. See "THE CONVERSION" and "-- Limitations on
Purchases of Shares" in the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "RISK FACTORS" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("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.
The date of this Prospectus Supplement is ______, 1997.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or the Plan. This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Savings Bank or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached herein and should be
retained for future reference.
TABLE OF CONTENTS
PAGE
The Offering
Securities Offered ....................................................
Election to Purchase Common Stock in the Conversion .............
Value of Participation Interests .....................................
Method of Directing Transfer ..........................................
Time for Directing Transfer ...........................................
Irrevocability of Transfer Direction ................................
Direction to Purchase Common Stock After the Conversion ...............
Purchase Price of Common Stock ........................................
Nature of a Participant's Interest in the Holding
Company Common Stock ................................................
Voting and Tender Rights of Common Stock ..............................
Description of the Plan
Introduction ..........................................................
Eligibility and Participation .........................................
Contributions Under the Plan ..........................................
Limitations on Contributions ..........................................
Investment of Contributions ...........................................
The Employer Stock Fund ...............................................
Benefits Under the Plan ...............................................
Withdrawals and Distributions from the Plan ...........................
Administration of the Plan ............................................
Reports to Plan Participants ..........................................
Plan Administrator ....................................................
Amendment and Termination .............................................
Merger, Consolidation or Transfer .....................................
Federal Income Tax Consequences .......................................
Restrictions on Resale ................................................
Legal Opinions .............................................................
Investment Form ............................................................
i
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan and
up to ______ shares, at the actual purchase price of $10.00 per share, of Common
Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Savings Bank and their
beneficiaries may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and the financial condition, results of operation and business of the
Savings Bank and the Holding Company is contained in the attached Prospectus.
The address of the principal executive office of the Savings Bank is 2055 First
Street, Baker City, Oregon 97814. The Savings Bank's telephone number is (541)
523-6327.
Election to Purchase Common Stock in the Conversion
In connection with the Savings Bank's Conversion, each Participant in the
401(k) Plan may direct the trustees of the Plan (collectively, the "Trustees")
to transfer up to ___% of a Participant's beneficial interest in the assets of
the Plan to a newly created Employer Stock Fund and to use such funds to
purchase Common Stock issued in connection with the Conversion. Amounts
transferred may include salary deferral, Employer matching and profit sharing
contributions. The Employer Stock Fund will consist of investments in the Common
Stock made on or after the effective date of the Conversion. Funds not
transferred to the Employer Stock Fund will be invested at the Participant's
discretion in the other investment options available under the Plan. See
"DESCRIPTION OF THE PLAN -- Investment of Contributions" below. A Participant's
ability to transfer funds to the Employer Stock Fund in the Conversion is
subject to the Participant's general eligibility to purchase shares of Common
Stock in the Conversion. For general information as to the ability of the
Participants to purchase shares in the Conversion, see "THE CONVERSION -- The
Subscription, Direct Community and Syndicated Community Offerings" in the
attached Prospectus.
Value of Participation Interests
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on a
_______ basis. This value represents the market value of past contributions to
the Plan by the Savings Bank and by the Participants and earnings thereon, less
previous withdrawals, and transfers from the Savings Fund.
Method of Directing Transfer
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund ("Investment Form"). If a Participant
wishes to transfer funds to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, the
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Participant should indicate that decision in Part 2 of the Investment Form. If a
Participant does not wish to make such an election, he or she does not need to
take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion is _____, 1997. The Investment Form should be returned to ___________
at the Savings Bank no later than the close of business on such date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.
Direction to Purchase Common Stock After the Conversion
After the Conversion, a Participant will be able to direct that a certain
percentage of such Participant's interests in the trust assets ("Trust") be
transferred to the Employer Stock Fund and invested in Common Stock, or to the
other investment funds available under the Plan. Alternatively, a Participant
may direct that a certain percentage of such Participant's interest in the
Employer Stock Fund be transferred from the Employer Stock Fund to other
investment funds available under the Plan. Participants will be permitted to
direct that future contributions made to the Plan by or on their behalf be
invested in Common Stock. Following the initial election, the allocation of a
Participant's interest in the Employer Stock Fund may be changed by the
Participant on a _______ basis. Special restrictions may apply to transfers
directed by those Participants who are executive officers, directors and
principal stockholders of the Holding Company who are subject to the provisions
of Section 16(b) of the Securities and Exchange Act of 1934, as amended
("Exchange Act").
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustees to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion.
Nature of a Participant's Interest in the Holding Company Stock
The Holding Company Stock purchased for an account of a Participant will be
held in the name of the Trustees of the Plan in the Employer Stock Fund. Any
earnings, losses or expenses with respect to the Holding Company Stock,
including dividends and appreciation or depreciation
S-2
in value, will be credited or debited to the account and will not be credited to
or borne by any other accounts.
Voting and Tender Rights of Common Stock
The Trustees generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
Introduction
The Savings Bank adopted the Plan effective April 1, 1996 as an amendment
and restatement of the Savings Bank's prior retirement plan. The Plan is a cash
or deferred arrangement established in accordance with the requirement under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended ("Code").
The Savings Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Savings
Bank will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury Regulations.
The Savings Bank has received a determination from the Internal Revenue Service
("IRS") that the Plan is qualified under Section 401(a) of the Code and that it
satisfies the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As such,
the Plan is subject to all of the provisions of Title I (Protection of Employee
Benefit Rights) and Title II (Amendments to the Internal Revenue Code Relating
to Retirement Plans) of ERISA, except the funding requirements contained in Part
3 of Title I of ERISA, which by their terms do not apply to an individual
account plan (other than a money purchase pension plan). The Plan is not subject
to Title IV (Plan Termination Insurance) of ERISA. Neither the funding
requirements contained in Title IV of ERISA nor the plan termination insurance
provisions contained in Title IV will be extended to Participants or
beneficiaries under the Plan.
S-3
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE SAVINGS BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
the material provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to the
registration statement filed with the SEC. Copies of the Plan are available to
all employees by filing a request with the Plan Administrator. Each employee is
urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Savings Bank is eligible to participate and will become
a Participant in the Plan following completion of six months of service with the
Savings Bank. The Plan fiscal year is period April 1 through March 31 ("Plan
Year"). Directors who are not employees of the Savings Bank are not eligible to
participate in the Plan.
During 1996, approximately _____ employees participated in the Plan.
Contributions Under the Plan
Participant Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement and have that amount contributed to the Plan on such
Participant's behalf. Such amounts are credited to the Participant's deferral
contributions account. For purposes of the Plan, "Compensation" means a
Participant's total amount of earnings reportable W-2 wages for federal income
tax withholding purposes plus a Participant's elective deferrals pursuant to a
salary reduction agreement under the Plan or any elective deferrals to a Section
125 plan. Due to recent statutory changes, the annual Compensation of each
Participant taken into account under the Plan is limited to $160,000 (as
adjusted under applicable Code provisions). A Participant may elect to modify
the amount contributed to the Plan under the participant's salary reduction
agreement during the Plan Year. Deferral contributions are generally transferred
by the Savings Bank to the Trustees of the Plan on a periodic basis.
Employer Contributions. The Savings Bank currently matches employee
deferral contributions on a discretionary basis. Additional contributions may
also be made on a discretionary basis in proportion to each Participant's
Compensation.
S-4
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted under applicable Code provisions). A Participant's "Section 415
Compensation" is a Participant's Compensation, excluding any amount contributed
to the Plan under a salary reduction agreement or any employer contribution to
the Plan or to any other plan or deferred compensation or any distributions from
a plan of deferred compensation. In addition, annual additions are limited to
the extent necessary to prevent the limitations for the combined plans of the
Savings Bank from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions to the Plan with respect to a
Participant, the excess must be reallocated to the remaining Participants who
are eligible for an allocation of Employer contributions for the Plan Year.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $9,500 (as adjusted under
applicable Code provisions). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross federal income tax
purposes in the year they are made. In addition, any such excess deferral will
again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Sections
401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a Plan Year (I.E.,
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of salary reduction contributions credited to
the salary reduction contribution account of such eligible employee by such
employee's compensation for the Plan Year) of the Highly Compensated Employees
may not exceed the greater of (a) 125% of the actual deferred percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual deferred
percentage of all other eligible employees, or (ii) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for a Plan Year (I.E., the average
of the ratios calculated separately for each eligible employee in each group, by
dividing the amount of employer contributions credited to the Matching
contributions account of such eligible employee by each eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual contribution percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual
S-5
contribution percentage of all other eligible employees, or (ii) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (I.E.,
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combines voting power of all stock of the
Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted under applicable Code provisions)
and, if elected by the Savings Bank, was in the top paid group of employees for
such Plan Year.
In order to prevent disqualification of the Plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Savings Bank will be subject to a
10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the Savings
Bank with respect to any excess aggregate contributions, unless such amounts,
plus any income allocable thereto, are distributed within 2 1/2 months following
the close of the Plan Year in which they arose.
Top-Heavy Plan Requirements. If, for any Plan Year, the Plan is a Top-Heavy
Plan (as defined below), then (i) the Savings Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined plan maintained by the Savings Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees" generally
include any employee, who at any time during the Plan Year or any other the four
preceding Plan Years, if (1) an officer of the Savings Bank having annual
compensation in excess of $60,000 who is in administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owing, directly or indirectly, the largest interest in the employer,
(3) a 5% owner of the employer (I.E., owns directly or indirectly more than 5%
of the stock of the employer, or stock possessing more than 5% of the total
combined voting power of all stock of the employer), or (4) a 1% of owner of the
employer having compensation in excess of $150,000.
S-6
Investment of Contributions
All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustees. The Trustees are appointed by
the Savings Bank's Board of Directors. The Plan provides that a Participant may
direct the Trustees to invest all or a portion of his or her Accounts in various
managed investment portfolios, as described below. A Participant may
periodically elect to change his or her investment directions with respect to
both past contributions and for more additions to the Participant's accounts
invested in these investment alternatives.
Under the Plan, the Accounts of Participant held in the Trust will be
invested by the Trustees at the direction of the Participant in the following
portfolios:
Investment Fund A -
Investment Fund B -
Investment Fund C -
Investment Fund D -
Investment Fund E -
Investment Fund F - The Employer Stock Fund which invests in common stock of the
Holding Company.
A Participant may elect, to have both past and future contributions and
additions to the Participant's Account invested either in the Employer Stock
Fund or in any of the other portfolios listed above. Any amounts credited to a
Participant's Accounts for which investment directions are not given will be
invested in Investment Fund __.
The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined on a _________ basis. For purposes
of such allocation, all assets of the Trust are valued at their fair market
value.
The Employer Stock Fund
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Investment Form, Participants will be able
to change their investments at a time other than the normal election intervals.
Any cash dividends paid on Common Stock held in the Employer Stock Fund will be
credited to a cash dividend subaccount for each Participant
S-7
investing in the Employer Stock Fund. The Trustees will, to the extent
practicable, use all amounts held by it in the Employer Stock Fund (except the
amounts credited to cash dividend subaccounts) to purchase shares of Common
Stock. It is expected that all purchases will be made at prevailing market
prices. Under certain circumstances, the Trustees may be required to limit the
daily volume of shares purchased. Pending investment in Common Stock, assets
held in the Employer Stock Fund will be placed in bank deposits and other
short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase or
sale. A Participant's Account will be adjusted to reflect changes in the value
of shares of Common Stock resulting from stock dividends, stock splits and
similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase. Following the Conversion, the Board of the Holding Company may
consider a policy of paying dividends on the Common Stock, however, no decision
has been made by the Board of the Holding Company regarding the amount or timing
of dividends, if any.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
Investments in the Employer Stock Fund may involve certain risk factors
associated with investments in Common Stock of the Holding Company. For a
discussion of these risk factors, see "RISK FACTORS" on pages 1 through __ in
the Prospectus.
Benefits Under the Plan
Vesting. A Participant, has at all times a fully vested, nonforfeitable
interest in all of his or her deferred contributions and the earnings thereon
under the Plan. A Participant is 100% vested in his or her matching
contributions account and employer discretionary contributions after the
completion of six years of service under the Plan's vesting schedule (20% per
year beginning with the completion of two years of service).
Withdrawals and Distributions from the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK.
S-8
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. At the request of the Participant, the distribution may include an
in-kind distribution of Common Stock of the Holding Company credited to the
Participant's Account. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payments, to be paid in annual installments over a period not exceeding the life
expectancy of the Participant or the joint life expectancies of the Participant
and his or her designated beneficiary. Benefits payments ordinarily shall be
made not later than 60 days following the end of the Plan Year in which occurs
later of the Participant's: (i) termination of employment; (ii) attainment of
age 65; or (iii) tenth anniversary of commencement of participation in the Plan;
but in no event later than April 1 following the calendar year in which the
Participant attains age 70 1/2 (if the Participant is retired). However, if the
vested portion of the Participant's Account balances exceeds $3,500, no
distribution shall be made from the Plan prior to the Participant's attaining
age 65 unless the Participant consents to an earlier distribution. Special rules
may apply to the distribution of Common Stock of the Holding Company to those
Participants who are executive officers, directors and principal shareholders of
the Holding Company who are subject to the provisions of Section 16(b) of the
Exchange Act.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his or her benefits paid to the surviving
spouse in a lump sum, or if the payment of his or her benefits had commenced
before his or her death, in accordance with the distribution method in effect at
his or her death. With respect to an unmarried Participant, and in the case of a
married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary, payments of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump sum
payment in cash or in Common Stock, or if the payment of his or her benefit had
commenced before his or her death, in accordance with the distribution method if
effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
Trustees. The Trustees with respect to Plan assets are currently Dan L.
Webber, Jerry F. Aldape, William H. Winegar and Nadine J. Johnson.
S-9
Pursuant to the terms of the Plan, the Trustees receive and hold
contributions to the Plan in trust and have exclusive authority and discretion
to manage and control the assets of the Plan pursuant to the terms of the Plan
and to manage, invest and reinvest the Trust and income therefrom. The Trustees
have the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustees have authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustees have full power to vote any corporate securities in the Trust
in person or by proxy; provided, however, that the Participants will direct the
Trustees as to voting and tendering of all Common Stock held in the Employer
Stock Fund.
The Trustees receive no compensation for their services. The expenses of
the Trustees are paid out of the Trust except to the extent such expenses and
compensation are paid by the Savings Bank.
The Trustees must render at least annual reports to the Savings Bank and to
the Participants in such form and containing such information that the Trustees
deem necessary.
Reports to Plan Participants
The administrator will furnish to each Participant a statement at least
____________ showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
Plan Administrator
The Savings Bank currently serves as the Plan Administrator. The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
The Savings Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his or her Account. The Savings Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not
S-10
cause any part of the Trust to be used for, or diverted to, any purpose other
than the exclusive benefit of the Participants or their beneficiaries.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has received a determination from the IRS that it is qualified
under Section 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Savings Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will be
submitted to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
S-11
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan. Special
tax treatment may apply to the taxable portion of any distribution that includes
Common Stock or qualified as a "Lump Sum Distribution" (as described below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it is
made: (i) within a single taxable year of the Participant or beneficiary; (ii)
on account of the Participant's death or separation from service, or after the
Participant attains age 59 1/2; and (iii) consists of the balance to the credits
of the Participant under the Plan and all other profit sharing plans, if any,
maintained by the Savings Bank. The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes ("total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit sharing plans maintained by
the Savings Bank which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution ("ordinary income portion") will be taxable generally as ordinary
income for federal income tax purposes. However, for distributions occurring
prior to January 1, 2000, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. The special five-year averaging rule has been
repealed for distributions occurring after December 31, 1999. Under a special
grandfather rule, individuals who turned 50 by 1986 may elect to have their Lump
Sum Distribution taxed under either the five-year averaging rule (if available)
or the prior law ten-year averaging rule. Such individuals also may elect to
have that portion of the Lump Sum Distribution attributable to the Participant's
pre-1974 participation in the Plan taxed at a flat 20% rate as gain from the
sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
I.E., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net
S-12
unrealized appreciation. Any gain on a subsequent sale or other taxable
disposition of such Common Stock, to the extent of the amount of net unrealized
appreciation at the time of distribution, will be considered long-term capital
gain regardless of the holding period of such Common Stock. Any gain on a
subsequent sale or other taxable disposition of the Common Stock in excess of
the amount of net unrealized appreciation at the time of distribution will be
considered either short-term capital gain or long-term capital gain depending
upon the length of the holding period of the Common Stock. The recipient of a
distribution may elect to include the amount of any net unrealized appreciation
in the total taxable amount of such distribution to the extent allowed by the
regulations by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993, virtually
all distributions from the Plan may be rolled over to another qualified Plan or
to an individual retirement account ("IRA") without regard to whether the
distribution is a Lump Sum Distribution or Partial Distribution. Effective
January 1, 1993, Participants have the right to elect to have the Trustees
transfer all or any portion of an "eligible rollover distribution" directly to
another plan qualified under Section 401(a) of the Code or to an IRA. If the
Participant does not elect to have an "eligible rollover distribution"
transferred directly to another qualified plan of to an IRA, the distribution
will be subject to a mandatory federal withholding tax equal to 20% of the
taxable distribution. An "eligible rollover distribution" means any amount
distributed from the Plan except: (1) a distribution that is (a) one of a series
of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, I.E., forward averaging, capital gains tax treatment and the
nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his or her
beneficiary, (iv) made to the Participant after separation from service on
account of early retirement under the Plan after attainment of age 55, (v) made
to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
S-13
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
Restrictions on Resale
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Savings Bank or the Holding Company as the term "affiliate"
is used in Rules 144 and 405 under the Securities Act of 1933, as amended
("Securities Act") (e.g., directors, officers and substantial shareholders of
the Savings Bank) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act (the Holding Company and
the Savings Bank having no obligation to file such registration statement) or,
assuming the availability thereof, pursuant to Rule 144 or some other exemption
from the registration requirements of the Securities Act. Any person who may be
an "affiliate" of the Savings Bank or the Holding Company may wish to consult
with counsel before transferring any Common Stock owned by him or her. In
addition, Participants are advised to consult with counsel as to the
applicability of the reporting and short-swing profit liability rules of Section
16 of the Exchange Act which may affect the purchase and sale of the Common
Stock where acquired or sold under the Plan or otherwise.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Savings Bank's Conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank and the concurrent formation of the Holding Company.
S-14
Investment Form
(Employer Stock Fund)
PIONEER BANK, FSB
PROFIT SHARING 401(K) PLAN
Name of Participant:__________________________
Social Security Number: ______________________
1. Instructions. In connection with the proposed conversion of Pioneer
Bank, FSB ("Savings Bank") to a stock savings bank and the simultaneous
formation of a holding company ("Conversion"), participants in the Pioneer Bank,
FSB Profit Sharing 401(k) Plan ("Plan") may elect to direct the investment of up
to ___% of their ___________, 1997 account balances into the Employer Stock Fund
("Employer Stock Fund"). Amounts transferred at the direction of Participants
into the Employer Stock Fund will be used to purchase shares of the common stock
of Oregon Trail Financial Corp. ("Common Stock"), the proposed holding company
for the Savings Bank. A Participant's eligibility to purchase shares of Common
Stock is subject to the Participant's general eligibility to purchase shares of
Common Stock in the Conversion and the maximum and minimum limitations set forth
in the Plan Conversion. See the Prospectus for additional information.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to purchase Common Stock in the Conversion.
To direct such a transfer to the Employer Stock Fund, you should complete this
form and return it to ___________ at the Savings Bank, no later than the close
of business on ______, 1997. The Savings Bank will keep a copy of this form and
return a copy to you. (If you need assistance in completing this form, please
contact ___________.
2. Transfer Direction. I hereby direct the Plan Administrator to transfer
$__________ (in increments of $10) from my Plan account to the Employer Stock
Fund to be applied to the purchase of Common Stock in the Conversion. Please
transfer this amount from the following investments in the amounts indicated:___
________________________________________________________________________________
3. Effectiveness of Direction. I understand that this Investment Form shall
be subject to all of the terms and conditions of the Plan and the terms and
conditions of the Conversion. I acknowledge that I have received a copy of the
Prospectus and the Prospectus Supplement.
- ----------------------------------- -----------------------------
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
- ----------------------------------- -----------------------------
Plan Administrator Date
S-15
PROSPECTUS OREGON TRAIL FINANCIAL CORP.
(Proposed Holding Company for Pioneer Bank, a Federal Savings Bank)
Up to 3,806,500 Shares of Common Stock
$10.00 Purchase Price Per Share
Oregon Trail Financial Corp. ("Holding Company"), an Oregon corporation, is
offering between 2,813,500 and 3,806,500 shares of its common stock, $.01 par
value per share ("Common Stock"), in connection with the conversion of Pioneer
Bank, a Federal Savings Bank ("Savings Bank") from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank and the
simultaneous issuance of all of the Savings Bank's outstanding capital stock to
the Holding Company. The simultaneous conversion of the Savings Bank to stock
form, the issuance of all of its outstanding capital stock to the Holding
Company, and the offer and sale of the Common Stock by the Holding Company
hereby are undertaken pursuant to a plan of conversion ("Plan" or "Plan of
Conversion") and are referred to herein as the "Conversion."
Pursuant to the Plan of Conversion, 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 Savings Bank
as of December 31, 1995 ("Eligible Account Holders"), (ii) the Savings Bank's
employee stock ownership plan ("ESOP"), a tax-qualified employee benefit plan,
(iii) depositors with $50.00 or more on deposit at the Savings Bank as of _____
__, 1997 ("Supplemental Eligible Account Holders"), and (iv) depositors of the
Savings Bank as of _____, 1997 ("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 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 Baker, Union, Wallawa, Malheur, Harney and Grant
Counties, Oregon ("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 Savings Bank
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 (___)________ 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.
(cover continued on following page)
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is
_____, 1997.
- -------------------------------------------------------------------------------------------------------------------------------
Estimated Underwriting
Purchase Commissions and Estimated Net
Price(1) Other Fees and Expenses(2) Proceeds(3)
- -------------------------------------------------------------------------------------------------------------------------------
Minimum Price Per Share.................................. $10.00 $0.29 $9.71
- -------------------------------------------------------------------------------------------------------------------------------
Midpoint Price Per Share................................. $10.00 $0.27 $9.73
- -------------------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share.................................. $10.00 $0.25 $9.75
- -------------------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share, as adjusted(4).................. $10.00 $0.24 $9.76
- -------------------------------------------------------------------------------------------------------------------------------
Minimum Total(5)......................................... $28,135,000 $815,260 $27,319,740
- -------------------------------------------------------------------------------------------------------------------------------
Midpoint Total(6)........................................ $33,100,000 $883,760 $32,216,240
- -------------------------------------------------------------------------------------------------------------------------------
Maximum Total(7)......................................... $38,065,000 $952,300 $37,112,700
- -------------------------------------------------------------------------------------------------------------------------------
Maximum Total, as adjusted(4)(8)......................... $43,774,750 $1,031,060 $42,143,690
- -------------------------------------------------------------------------------------------------------------------------------
(1) Determined in accordance with an independent appraisal prepared by Keller &
Company, Inc. ("Keller") as of June 4, 1997, which states that the
estimated aggregate pro forma market value of the Holding Company and the
Savings Bank as converted ranged from $28,135,000 to $38,065,000, with a
midpoint of $33,100,000 ("Estimated Valuation Range"). See "THE CONVERSION
-- Stock Pricing and Number of Shares to be Issued."
(2) Includes estimated expenses to the Holding Company and the Savings Bank
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 Savings Bank have agreed to indemnify Webb against certain
liabilities, including liabilities that might 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) Actual net proceeds can vary substantially from the estimated amounts
depending upon actual expenses and the relative number of shares sold in
the Offerings. See "USE OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares that could be sold in
the Offerings due to an increase in the pro forma market value of the
Holding Company and the Savings Bank as converted up to 15% above the
maximum of the Estimated Valuation Range, 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. The issuance of such
additional shares will be conditioned on a determination by Keller that
such issuance is compatible with its determination of the estimated pro
forma market value of the Holding Company and the Savings Bank as
converted. See "THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued."
(5) Assumes the issuance of 2,813,500 shares at $10.00 per share.
(6) Assumes the issuance of 3,310,000 shares at $10.00 per share.
(7) Assumes the issuance of 3,806,500 shares at $10.00 per share.
(8) Assumes the issuance of 4,377,475 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 $200,000 (20,000
shares based on the Purchase Price); no person may purchase in the Direct
Community Offering, if any, or the Syndicated Community Offering, if any, shares
of Common Stock having an aggregate purchase price of more than $200,000 (20,000
shares based on the Purchase Price); no person (including all persons on a joint
account) either alone or together with associates of or persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1% of the total number of shares of Common Stock
issued in the Conversion (exclusive of any shares issued pursuant to an increase
in the Estimated Valuation Range of up to 15%). Under certain circumstances, the
maximum purchase limitation may be increased or decreased at the sole discretion
of the Savings Bank and the Holding Company. The minimum purchase is 25 shares.
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 Subscription Offering will expire at Noon, Pacific Time, on _________
__, 1997 ("Expiration Date"), unless extended by the Savings Bank and the
Holding Company for up to __ days to _______ __, 1997. Such extension may be
granted without additional notice to subscribers. The Direct Community Offering
is also expected to terminate at Noon, Pacific Time, on ________ __, 1997 or at
a date thereafter, however, in no event later than ________ __, 1997. The
Holding Company must receive at an office of the Savings Bank the accompanying
original Stock Order Form and a fully executed Certification Form (collectively,
the "Stock Order Form") (facsimile copies and photocopies will not be accepted)
along with full payment (or appropriate instructions authorizing a withdrawal
from a deposit account at the Savings Bank) of $10.00 per share ("Purchase
Price") for all shares subscribed for or ordered by the Expiration Date. Payment
for shares of Common Stock by wire transfer will not be accepted. Funds so
received will be placed in segregated accounts created for this purpose at the
Savings Bank, and interest will be paid at the Savings Bank's 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. Orders submitted are irrevocable until the consummation
or termination 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 Savings
Bank 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 Savings Bank 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 Savings Bank 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 Nasdaq
National Market under the symbol "OTFC." 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."
Pioneer Bank, a Federal Savings Bank
Baker City, Oregon
[Map to be filed by amendment]
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE SAVINGS BANK'S PLAN OF
CONVERSION BY AT LEAST A MAJORITY OF THE SAVINGS BANK'S ELIGIBLE VOTING MEMBERS,
THE SALE OF AT LEAST 2,183,500 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."
Oregon Trail Financial Corp.
The Holding Company was organized on June 9, 1997 under Oregon law at the
direction of the Savings Bank to acquire all of the capital stock that the
Savings Bank will issue upon its conversion from the mutual to stock form of
ownership. The Holding Company has engaged only in organizational activities to
date. The Holding Company has applied for OTS approval to become a savings and
loan holding company through the acquisition of 100% of the capital stock of the
Savings Bank. Immediately following the Conversion, the only significant assets
of the Holding Company will be the outstanding capital stock of the Savings
Bank, 50% of the net investable proceeds of the Offerings (see table under "PRO
FORMA DATA") as permitted by the OTS to be retained by it, and a note receivable
from the ESOP evidencing a loan to enable the ESOP to purchase 8% of the Common
Stock issued in the Conversion. Funds retained by the Holding Company will be
used for general business activities. See "USE OF PROCEEDS." Upon Conversion,
the Holding Company will be classified as a unitary savings and loan holding
company subject to OTS regulation. See "REGULATION -- Savings and Loan Holding
Company Regulations." The main office of the Holding Company is located at 2055
First Street, Baker City, Oregon 97814 and its telephone number is (541)
523-6327.
Pioneer Bank, a Federal Savings Bank
Chartered in 1901, the Savings Bank is a federal mutual savings bank
headquartered in Baker City, Oregon. As a result of the Conversion, the Savings
Bank will convert to a federal capital stock savings bank and will become a
wholly-owned subsidiary of the Holding Company. The Savings Bank is regulated by
the OTS, its primary regulator, and by the FDIC, the insurer of its deposits.
The Savings Bank's deposits have been federally-insured since 1934 and are
currently insured by the FDIC under the SAIF. The Savings Bank has been a member
of the Federal Home Loan Bank ("FHLB") System since 1934. At March 31, 1997, the
Savings Bank had total assets of $204.2 million, total deposits of $179.2
million and total equity of $21.0 million on a consolidated basis.
The Savings Bank is a community oriented financial institution whose
principal business is attracting retail deposits from the general public and
using these funds to originate one- to- four family residential mortgage loans
and consumer loans within its primary market area. At March 31, 1997, one- to-
four family loans totalled $101.8 million, or 72.0%, of total loans receivable.
The Savings Bank has also been active in the origination of home equity and
second mortgage loans and at March 31, 1997, such loans were $17.5 million, or
12.4%, of total loans receivable. As a result of a perceived local demand for
non-mortgage lending products, management's concern as to the Savings Bank's
level of interest rate risk and a perception of minimal anticipated growth in
residential loan demand within the Savings Bank's market primary area resulting
from strong competition, the Savings Bank began supplementing its traditional
lending activities in 1996 with the development of commercial business loans,
agricultural loans and the purchase of dealer-originated automobile contracts.
The Savings Bank has hired experienced commercial lending officers familiar with
the Savings Bank's primary market area in an attempt to develop commercial
business and agricultural lending and to expand the purchase of
dealer-originated automobile contracts to include the purchase of
dealer-originated contracts secured by recreational vehicles, trailers,
motorcycles and other vehicles. As a result of these activities, at March 31,
1997 the Savings Bank had agricultural loans of $2.5
(i)
million, commercial business loans of $4.1 million and automobile loans of $2.1
million (including $389,000 of purchased dealer-originated contracts). See "RISK
FACTORS -- Recent Growth in, Unseasoned Nature of Agricultural, Commercial
Business and Indirect Automobile Lending," "-- Certain Lending Risks -- Risks of
Agricultural Lending," "-- Interest Rate Risk" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management."
In addition to its lending activities, the Savings Bank invests excess
liquidity in short and intermediate term U.S. Government and government agency
securities and mortgage-backed and related securities issued by U.S. Government
agencies. Investment securities and mortgage-backed and related securities,
which constituted 25.0% of total assets at March 31, 1997, had an amortized cost
of $51.2 million at March 31, 1997. See "BUSINESS OF THE SAVINGS BANK --
Investment Activities."
The Savings Bank conducts its operations from its main office and one
branch office located in Baker City, Oregon, and six additional branch offices
located in Burns (Harney County), Enterprise (Wallowa County), John Day (Grant
County), La Grande (two offices; Union County) and Ontario (Malheur County),
Oregon. See "BUSINESS OF THE SAVINGS BANK -- Properties." The main office is
located at 2055 First Street, Baker City, Oregon 97814, and its telephone number
is (541) 523-6327.
The Conversion
The Savings Bank proposes to convert from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank and become a
wholly-owned subsidiary of the Holding Company by issuing all of its capital
stock to the Holding Company in exchange for 50% of the net investable proceeds
of the Offerings. Simultaneously, the Holding Company will sell its Common Stock
in the Offerings. The Conversion has been approved by the OTS, subject to
approval by the Savings Bank's members at a special meeting to be held on ____
__, 1997. After consummation of the Conversion, depositors of the Savings Bank
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
Savings Bank, as converted. Keller has advised the Savings Bank that in its
opinion, at June 4, 1997, the aggregate estimated pro forma market value of the
Holding Company and the Savings Bank, as converted, ranged from $28,135,000 to
$38,065,000, with a midpoint of $33,100,000, or from 2,813,500 shares to
3,806,500 shares, with a midpoint of 3,310,000 shares, assuming a $10.00 per
share Purchase Price. The appraisal of the pro forma market value of the Holding
Company and the Savings Bank, 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 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 consummation of the Conversion.
The Board of Directors and management believe that the Conversion is in the
best interests of the Savings Bank, its members and the communities it serves.
The capital raised in the Conversion is intended to support the Savings Bank's
current lending and investment activities and may also support possible future
expansion and diversification of operations, although there are no current
specific plans, arrangements or understandings, written or oral, regarding any
such expansion or diversification. The Conversion is also expected to afford the
Savings Bank's members and others the opportunity to become stockholders of the
Holding Company and participate more directly in, and contribute to, any future
growth of the Holding Company and the Savings Bank. The Conversion will also
enable the Holding Company and the Savings Bank to raise additional capital in
the public equity or debt markets should the need arise, although there are no
current specific plans, arrangements or understandings, written or oral,
regarding any such financing activities. See "THE CONVERSION -- Purposes of
Conversion."
(ii)
The Subscription, Direct Community and Syndicated Community Offerings
The Holding Company is offering up to 3,806,500 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 Savings Bank'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 Savings Bank'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. 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 Savings Bank have engaged Webb to consult with and
advise the Holding Company and the Savings Bank 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 or termination 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 ____
_.m., Pacific Time, on ________ __, 1997, unless extended by the Savings Bank
and the Holding Company for up to __ days. The Direct Community Offering and
Syndicated Community Offering, if any, are also expected to terminate at ____
_.m., Pacific Time, on ________ __, 1997, and may terminate on a date
thereafter, however, in no event later than ________ __, 1997.
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 any later than two days prior to the
Expiration Date. Execution of the Order Form will confirm receipt or delivery of
a Prospectus in accordance with Rule 15c2-8. Order Forms will be distributed
only with a Prospectus. Neither the Holding Company, the Savings Bank nor Webb
is obligated to deliver a Prospectus and an Order Form by any means other than
the U.S. Postal Service.
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 on the 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 (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original Order Form. The Holding Company is not obligated to accept
orders submitted on photocopied or telecopied Stock Order Forms. Orders cannot
and will not be accepted without the execution of the Certification Form
appearing on the reverse side of the Stock Order Form. See "THE CONVERSION --
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering."
(iii)
Purchase Limitations
With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Conversion, the Plan of Conversion
provides for the following purchase limitations: (i) No Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member, including, in each case,
all persons on a joint account, may purchase shares of Common Stock with an
aggregate purchase price of more than $200,000, (ii) no person, either alone or
together with associates of or persons acting in concert with such person, may
purchase in the Direct Community Offering, if any, or in the Syndicated
Community Offering, if any, shares of Common Stock with an aggregate purchase
price of more than $200,000, and (iii) no person (including all persons on a
joint account), either alone or together with associates of or persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1% of the total number of shares of Common Stock
issued in the Conversion (exclusive of any shares issued pursuant to an increase
in the Estimated Valuation Range of up to 15%). This maximum purchase limitation
may be increased consistent with OTS regulations in the sole discretion of the
Holding Company and the Savings Bank subject to any required regulatory
approval. The minimum purchase is 25 shares.
The term "acting in concert" is defined in the Plan of Conversion to mean:
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. The Holding Company and the Savings Bank 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 Securities and Exchange Commission ("SEC") with respect to other companies.
The term "associate" of a person is defined in the Plan of Conversion to mean:
(i) any corporation or organization (other than the Savings Bank or a
majority-owned subsidiary of the Savings Bank) 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 Savings Bank or any of its parents or subsidiaries.
The Holding Company and the Savings Bank 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.
Stock orders received either through the Direct Community Offering or the
Syndicated Community Offering, if held, may be accepted or rejected, in whole or
in part, at the discretion of the Holding Company and the Savings Bank. 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 Subscription Offering is a uniform price
established by the Board of Directors for all subscribers, including members of
the Holding Company's and the Savings Bank's Boards of Directors, their
management and tax-qualified employee plans. 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 Savings Bank, as
converted. The aggregate pro forma market value was estimated by Keller to range
from $28,135,000 to $38,065,000 as of June 4, 1997, or from 2,813,500 to
3,806,500 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 Savings Bank, 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 4,377,475 shares due to
material
(iv)
changes in the financial condition or results of operations of the Savings Bank
or changes in market conditions or general financial, economic or regulatory
conditions. No resolicitation of subscribers will be made and subscribers 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 or more
than 15% above the maximum of the current Estimated Valuation Range. The
appraisal is not intended to be and should not be construed as a recommendation
of any kind as to the advisability of purchasing Common Stock in the Offerings
nor can assurance be given that purchasers of the Common Stock in the Offerings
will be able to sell such shares after consummation of 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.
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to range
from $27.3 million to $37.1 million, or to $42.7 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 conditional
OTS approval to purchase all of the capital stock of the Savings Bank to be
issued in the Conversion in exchange for 50% of the net investable proceeds of
the Offerings. This will result in the Holding Company retaining approximately
$12.0 million to $16.3 million of the net proceeds, or up to $18.8 million if
the Estimated Valuation Range is increased by 15%, and the Savings Bank
receiving an equal amount. See "PRO FORMA DATA."
Receipt of 50% of the net investable proceeds of the sale of the Common
Stock will increase the Savings Bank's capital and will support the expansion of
the Savings Bank's existing business activities, including agricultural and
commercial business lending and the purchase of dealer-originated contracts
secured by automobiles, recreational vehicles, trailers, motorcycles and other
vehicles. The Savings Bank will use the funds contributed to it for general
corporate purposes, including, initially, lending and investment in short-term
U.S. Government and government agency obligations.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the 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 ($3,045,200 at the maximum of the Estimated
Valuation Range) and would be repaid principally from the Savings Bank'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 short-term U.S. Government and government agency
obligations. Such proceeds will be available for additional contributions to the
Savings Bank 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 Oregon law and OTS regulations. The
Holding Company will consider exploring opportunities to use such funds to
expand operations through acquiring or establishing additional branch offices
and the acquisition of other financial institutions. Currently, there are no
specific plans, arrangements, agreements or understandings, written or oral,
regarding any such activities.
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 System under the symbol "OTFC." 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,
(v)
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."
Dividend Policy
The Holding Company's Board of Directors anticipates declaring and paying
quarterly cash dividends on the Common Stock at an annual rate of 2%, or $0.20
per share per year based on the Purchase Price. The first quarterly cash
dividend is expected to be declared during the quarter ending March 31, 1998 and
paid during the quarter ending June 30, 1998. In addition, the Board of
Directors may determine to pay periodic special cash dividends in addition to,
or in lieu of, regular cash dividends. Declarations and payments of any
dividends (regular and special) 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 Savings
Bank'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 Savings Bank or earnings on Holding Company assets.
There are certain limitations on the payment of dividends from the Savings Bank
to the Holding Company. See "REGULATION -- Federal Regulation of Savings Banks
- -- 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, if commenced, will continue. See "DIVIDEND POLICY."
Officers' and Directors' Common Stock Purchases and Beneficial Ownership
Officers and directors of the Savings Bank (23 persons) are expected to
subscribe for an aggregate of approximately $2.2 million of Common Stock, or
7.9% and 5.8% of the shares based on the minimum and maximum of the Estimated
Valuation Range, respectively. See "SHARES TO BE PURCHASED BY MANAGEMENT
PURSUANT TO SUBSCRIPTION RIGHTS." In addition, purchases by the ESOP,
allocations under the Oregon Trail Financial Corp. 1997 Management Recognition
Plan and Trust ("MRP"), and the exercise of stock options issued under the
Oregon Trail Financial Corp. 1997 Stock Option Plan ("Stock Option Plan"), will
increase the number of shares beneficially owned by officers, directors and
employees. Allocations under the MRP will be at no cost to recipients. Stock
options are valuable only to the extent that they are exercisable and to the
extent that the market price for the underlying share of Common Stock exceeds
the exercise price. An option effectively eliminates the market risk of holding
the underlying security since the option holder pays no consideration for the
option until it is exercised. Therefore, the option holder may, within the
limits of the term of the option, wait to exercise the option until the market
price exceeds the exercise price. 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 issued in the Conversion, directors,
officers and employees of the Holding Company and the Savings Bank would have
voting control, on a fully diluted basis, of 30.9% and 28.8% of the Common
Stock, based on the issuance of Common Stock at the minimum and maximum of the
Estimated Valuation Range, respectively. 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 Stock
Conversion.
Risk Factors
See "RISK FACTORS" beginning on page 1 for a discussion of certain risks
related to the Offerings that should be considered by all prospective investors.
(vi)
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Savings Bank
and its subsidiaries at the dates and for the periods indicated. This
information is qualified in its entirety by reference to the detailed
information contained in the Consolidated Financial Statements and Notes thereto
presented elsewhere in this Prospectus. The Savings Bank changed its fiscal year
end from June 30 to March 31 subsequent to June 30, 1996.
At June 30,
At March 31, --------------------------------------
1997 1996 1995 1994 1993
----------------- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets................................... $204,213 $203,457 $205,400 $196,736 $193,334
Loans receivable, net.......................... 138,881 132,347 124,440 112,101 97,562
Loans held-for-sale............................ 428 -- -- -- --
Investment securities held-to-maturity......... 2,763 2,609 21,657 22,735 19,888
Investment securities available-for-sale....... 15,906 19,950 2,902 2,780 --
Mortgage-backed and related securities
held-for-trading............................. -- 2,569 3,786 3,668 --
Mortgage-backed and related securities
available for sale........................... 19,745 19,451 -- -- --
Mortgage-backed and related securities
held-to-maturity............................. 15,302 17,011 42,245 46,441 55,827
Cash, federal funds sold and overnight
interest-bearing deposits ................... 4,975 3,416 4,844 4,867 15,897
Deposit accounts............................... 179,158 176,619 172,569 177,107 175,617
Borrowings..................................... 2,231 4,082 12,161 1,896 2,195
Total equity................................... 21,026 20,004 17,812 15,477 12,966
Nine Months Ended
March 31, Year Ended June 30,
-------------------- -------------------------------------------
1997 1996 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
(Unaudited)
(In thousands)
OPERATING DATA:
Interest income................................ $12,030 $11,960 $16,012 $14,807 $14,621 $15,192
Interest expense............................... 5,553 6,134 8,057 7,083 6,534 7,649
------- ------- ------- ------- ------- -------
Net interest income ........................... 6,477 5,826 7,955 7,724 8,087 7,543
Provision (credit) for loan losses............. 216 91 115 67 (90) 175
------- ------- ------- ------- ------- -------
Net interest income
after provision for loan losses............... 6,261 5,735 7,840 7,657 8,177 7,368
Gains from sale of securities.................. -- 34 34 -- 59 48
Other income................................... 661 563 677 1,141 629 919
Other expenses(1).............................. 5,075 3,647 5,009 5,027 4,602 4,507
------- ------- ------- ------- ------- -------
Income before income taxes..................... 1,847 2,685 3,542 3,771 4,263 3,828
Provision for income taxes .................... 749 1,033 1,363 1,512 1,616 1,470
------- ------- ------- ------- ------- -------
Net income..................................... $ 1,098 $ 1,652 $ 2,179 $ 2,259 $ 2,647 $ 2,358
======= ======= ======= ======= ======= =======
(vii)
At June 30,
At March 31, --------------------------------
1997 1996 1995 1994 1993
------------ ---- ---- ---- ----
SELECTED OTHER DATA:
Number of:
Real estate loans outstanding................. 2,381 2,493 2,527 2,545 2,602
Deposit accounts.............................. 29,455 30,524 30,136 28,839 28,360
Full-service offices.......................... 6 6 6 6 6
At or For
Nine Months Ended
March 31, Year Ended June 30,
------------ --------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(Unaudited)
SELECTED FINANCIAL RATIOS(2):
Performance Ratios:
Return on average assets(3) ............... 0.72% 1.06% 1.06% 1.12% 1.35% 1.24%
Return on average equity(4)................ 7.09 11.67 11.40 13.59 18.57 20.00
Interest rate spread(6).................... 3.90 3.45 3.56 3.61 3.95 3.87
Net interest margin(7)..................... 4.40 3.87 3.97 3.94 4.22 4.07
Average interest-earning assets
to average interest-bearing
liabilities............................... 113.20 110.33 110.64 109.27 107.88 104.88
Noninterest expense as a
percent of average total assets........... 2.50 1.76 2.43 2.49 2.34 2.37
Efficiency ratio(8)........................ 73.31 57.60 58.58 57.14 51.92 54.07
Asset Quality Ratios:
Nonaccrual and 90 days or more
past due loans as a percent
of total loans, net....................... 0.14 0.10 0.12 0.05 0.04 0.13
Nonperforming assets as a
percent of total assets................... 0.10 0.06 0.10 0.03 0.03 0.07
Allowance for losses as a
percent of gross
loans receivable.......................... 0.52 0.41 0.41 0.37 0.36 0.52
Allowance for losses as a
percent of nonperforming
loans..................................... 381.58 424.80 331.90 679.10 982.93 389.23
Net charge-offs to average
outstanding loans......................... 0.03 0.02 0.02 0.01 0.02 0.01
Capital Ratios:
Total equity-to-assets ratio(5)............ 10.30 8.68 9.83 8.67 7.87 6.71
Average equity to average assets........... 10.14 9.11 9.26 8.25 7.25 6.19
- ----------
(1) Includes FDIC SAIF assessment of $1.1 million during the nine months ended
March 31, 1997.
(2) Annualized, where appropriate, for the nine months ended March 31, 1997 and
1996.
(3) Net earnings divided by average total assets.
(4) Net earnings divided by average equity.
(5) Average total equity divided by average total assets.
(6) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(7) Net interest income as a percentage of average interest-earning assets.
(8) Other expenses divided by the sum of net interest income and other income.
Efficiency ratio without FDIC SAIF assessment was 56.75% for the nine
months ended March 31, 1997.
(viii)
RISK FACTORS
BEFORE INVESTING IN SHARES OF THE COMMON STOCK OFFERED HEREBY, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS PRESENTED BELOW, IN ADDITION TO
MATTERS DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
Recent Growth in, Unseasoned Nature of Agricultural, Commercial Business and
Indirect Automobile Lending
The Savings Bank's lending strategy involves a shift from a primary focus
on residential lending to a community banking approach. As part of the expansion
of its community banking activities, the Savings Bank intends to increase its
efforts to originate commercial business loans, agricultural loans and indirect
automobile loans. The Savings Bank's community banking strategy may take a
period of time to implement fully and may require the incurrence of additional
expenses to originate the desired volume of non-residential loans. There can be
no assurances that the Savings Bank will meet its objective in increasing the
size of its non-mortgage loan portfolio. Factors that may effect the ability of
the Savings Bank to increase its originations of such loans include the demand
for such loans, interest rates and the state of the local and national economy.
In implementing this strategy, the Savings Bank has increased recently its
risk profile relative to traditional thrift institutions by significantly
increasing its commercial banking activities during the nine months ended
March 31, 1997. Given the relatively low market interest rates and generally
favorable economic conditions in the Savings Bank's primary market area during
that time period, a substantial portion of these loans have not been subject to
unfavorable economic conditions, although the borrowers are generally
established persons and entities who have experienced less favorable economic
conditions in the past. No assurances can be given that a downturn in the
local economy will not have a material adverse effect on the quality of the
non-mortgage loan portfolio, thereby resulting in material delinquencies and
even losses to the Savings Bank. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Agricultural Lending," "-- Commercial Business Lending"
and "-- Consumer and Other Lending."
Certain Lending Risks
Risks Of Agricultural Lending. At March 31, 1997, agricultural loans
totalled $2.5 million, or 1.7% of the Savings Bank's total loans portfolio.
Agricultural lending involves a greater degree of risk than residential real
estate loans. Payments on agricultural real estate loans depend primarily on
the successful operation and management of the farm to produce cash flows
sufficient to service the loan. The success of the farm may be affected by many
factors outside the control of the farm borrower, including adverse weather
conditions that limit crop yields (such as hail, drought and floods), declines
in market prices for agricultural products and the impact of government
regulations (including changes in price supports, subsidies and
environmental regulations). In addition, many farms are dependent on a
limited number of key individuals whose injury or death may significantly affect
the successful operation of the farm. Generally, most of the Savings Bank's
loans are agricultural operating loans that are not secured by real estate.
Agricultural operating loans entail greater risk than do mortgage loans,
particularly in the case of loans that are unsecured or secured by assets
such as cattle or crops. In such cases, any repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation. In connection with the adoption of its community banking
strategy, the Savings Bank intends, subject to market conditions, to
continue to expand its agricultural lending activities. The primary crops in
the Savings Bank's market area are wheat, barley, mint, onions, potatoes, corn
and alfalfa. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Agricultural Lending."
Risks of Consumer Lending. At March 31, 1997, the Savings Bank had
$25.4 million outstanding in consumer loans, representing 18.0% of total loans.
Of the $25.4 million, $7.9 million represented loans other than home equity and
second mortgage loans. Consumer loans may entail greater credit risk
than do single-family residential mortgage loans, particularly in the case
of loans secured by assets that depreciate rapidly, such as mobile homes,
automobiles, boats and recreational vehicles. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan and the remaining deficiency often does not warrant
1
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing
financial stability and, thus, are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. This is particularly
applicable in the case of unsecured loans. At March 31, 1997, the Savings Bank
had $1.6 million, or 1.1% of total loans in unsecured consumer loans.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amounts
recovered on such loans. Consumer loans may also give rise to claims and
defenses by the borrower against the Savings Bank as the holder of the loan,
and a borrower may be able to assert claims and defenses that it has against
the seller of the underlying collateral. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Consumer and Other Lending."
Risks Of Commercial Business Lending. Because payments on commercial
business loans are often dependent on successful operation of the business
involved, repayment of such loans may be subject to a greater extent to adverse
conditions in the economy. The Savings Bank seeks to minimize these risks
through its underwriting guidelines, which require that the loan be supported
by adequate cash flow of the borrower, profitability of the business,
collateral and personal guarantees of the individuals in the business. In
addition, the Savings Bank limits this type of lending to its primary market
area and to borrowers with which it has prior experience or who are
otherwise well known to the Savings Bank. See "BUSINESS OF THE SAVINGS
BANK -- Lending Activities -- Commercial Business Lending."
Concentration of Credit Risk and Dependance on Agriculture
At March 31, 1997, a substantial portion of the Savings Bank's loan
portfolio consisted of loans made to borrowers and secured by real estate,
either as primary or secondary collateral, located in its primary market
area. This concentration of credit risk could be expected to have a material
adverse effect on the Savings Bank's financial condition and results of
operations to the extent there is a deterioration in that county's economy and
real estate values. Unemployment rates in the primary market area are
considerably higher than both state and national unemployment rates and have
increased consistently over the past few years. This risk is further
exacerbated in the case of agricultural loans, commercial real estate loans
and commercial business loan portfolios, which are generally more sensitive
to economic downturns than the one- to four-family loan portfolio because
their repayment often depends primarily on the successful operation of the
underlying business entity. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities."
Furthermore, the economy of the Savings Bank's primary market area
depends heavily on the state of its agriculture based economy.
Historically, the agricultural industry has been subject to more frequent
and more severe recessionary periods which would be expected to have a
material adverse effect on the ability of the Savings Bank's borrowers to
meet their financial obligations. See "BUSINESS OF THE SAVINGS BANK -- Market
Area."
Interest Rate Risk
General. Like all financial institutions, the Savings Bank's
financial condition and operations are influenced significantly by general
economic conditions, the related monetary and fiscal policies of the federal
government and government regulations. Deposit flows and the cost of funds are
influenced by interest rates of competing investments and general market
interest rates. Lending activities are affected by the demand for mortgage
financing and for consumer and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered and by
other factors affecting the supply of housing and the availability of
funds. The Savings Bank's profitability, like that of most financial
institutions, depends largely 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. To mitigate the impact of changes in interest
rates, the Savings Bank has sought to improve the match between asset and
liability maturities or repricing periods and rates by emphasizing the
origination and purchase of adjustable-rate mortgage ("ARM") loans and
shorter term agricultural, commercial business, and consumer loans.
2
Potential Adverse Impact On Results Of Operations. The Savings Bank's
results of operations would be adversely affected by a material prolonged
increase in market interest rates. At March 31, 1997, assuming, for
example, an instantaneous 200 basis point increase in market interest rates,
the Savings Bank's net portfolio value ("NPV") (the present value of
expected cash flows from assets, liabilities and off-balance sheet contracts)
would decrease by approximately $4.8 million, or 22.5%. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -- Asset and Liability Management."
Potential Adverse Impact On Financial Condition. Changes in the
level of interest rates also affect the volume of loans originated or
purchased by the Savings Bank and, thus, the amount of loan and commitment
fees, as well as the market value of the Savings Bank's investment
securities and other interest-earning assets. Changes in interest rates
also can affect the average life of loans. Decreases in interest rates may
result in increased prepayments of loans, as borrowers refinance to reduce
borrowing costs. Under these circumstances, the Savings Bank is subject to
reinvestment risk to the extent that it is not able to reinvest such
prepayments at rates which are comparable to the rates on the maturing loans
or securities. Moreover, volatility in interest rates also can result in
disintermediation, or the flow of funds away from savings institutions 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 pay higher rates of return than savings
institutions.
At March 31, 1997, out of total gross loans of $141.4 million in the
Savings Bank's portfolio, $66.9 million were ARM loans, the majority of which
reprice every year. Furthermore, the Savings Bank's ARM loans contain
periodic and lifetime interest rate adjustment limits which, in a rising
interest rate environment, may prevent such loans from repricing to market
interest rates. While management anticipates that ARM loans will better
offset the adverse effects of an increase in interest rates as compared to
fixed-rate mortgages, the increased mortgage payments required of ARM
borrowers in a rising interest rate environment could potentially cause an
increase in delinquencies and defaults. The Savings Bank has not
historically had an increase in such delinquencies and defaults on ARM loans,
but no assurance can be given that such delinquencies or defaults would not
occur in the future. The marketability of the underlying property also may be
adversely affected in a high interest rate environment. Moreover, the Savings
Bank's ability to originate or purchase ARM loans may be affected by changes in
the level of interest rates and by market acceptance of the terms of such
loans. In a relatively low interest rate environment, as currently exists,
borrowers generally tend to favor fixed-rate loans over ARM loans to hedge
against future increases in interest rates.
Competition
The Savings Bank has faced, and will continue to face strong competition
both in making loans and attracting deposits. Many of the financial
institutions in the Savings Bank's primary market area are significantly larger
than the Savings Bank and have greater financial resources and compete with
the Savings Bank in varying degrees. Competition for loans principally comes
from commercial banks, thrift institutions, credit unions, mortgage banking
companies and insurance companies. Historically, commercial banks, thrift
institutions and credit unions have been the Savings Bank's most direct
competition for deposits. The Savings Bank also competes with short-term money
market funds and with other financial institutions, such as brokerage firms and
insurance companies, for deposits. The strong competition for residential
mortgage loans was a major factor in the Savings Bank's decision to pursue
agricultural and commercial business lending and the purchase of
dealer-originated automobile contracts. Furthermore, in competing for loans,
the Savings Bank may be forced to offer lower loan interest rates periodically.
Conversely, in competing for deposits, the Savings Bank may be forced to offer
higher deposit interest rates periodically. Either case or both cases could
adversely affect net interest income. See "BUSINESS OF THE SAVINGS BANK --
Competition."
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 Savings
Bank's
3
return on equity for the nine months ended March 31, 1997 was, and the Holding
Company's post-Conversion return on equity will be, less than the average return
on equity for publicly traded thrift institutions and their holding companies.
See "SELECTED CONSOLIDATED FINANCIAL INFORMATION" for numerical information
regarding the Savings Bank's historical return on equity and "CAPITALIZATION"
for a discussion of the Holding Company's estimated pro forma consolidated
capitalization as a result of the Conversion. In order for the Holding Company
to achieve a return on equity comparable to the historical levels of the Savings
Bank, the Holding Company either would have to increase net income or reduce
stockholders' equity, or both, commensurate with the increase in equity
resulting from the Conversion. Reductions in equity could be achieved by, among
other things, the payment of regular or special cash dividends (although no
assurances can be given as to their payment or, if paid, their amount and
frequency), the repurchase of shares of Common Stock subject to applicable
regulatory restrictions, or the acquisition of branch offices, other financial
institutions or related businesses (neither the Holding Company nor the Savings
Bank has any present plans, arrangements, or understandings, written or oral,
regarding any repurchase or acquisitions). See "DIVIDEND POLICY" and "USE OF
PROCEEDS." Achievement of increased net income levels will depend on several
important factors outside management's control, such as general economic
conditions, including the level of market interest rates, competition and
related factors, among others. In addition, the expenses associated with the
ESOP and the MRP (see "-- New Expenses Associated with ESOP and MRP") are
expected to contribute initially to reduced earnings levels. Subject to market
conditions, initially the Savings Bank intends to deploy the net proceeds of the
Offerings to support its core lending activities to increase earnings per share
and book value per share, without assuming undue risk, with the goal of
achieving a return on equity comparable to the average for publicly traded
thrift institutions and their holding companies. This goal will likely take a
number of years to achieve and no assurances can be given that this goal can be
attained. Consequently, for the foreseeable future, investors should not expect
a return on equity which will meet or exceed the average return on equity for
publicly traded thrift institutions, many of which are not newly converted
institutions and have had time to deploy their conversion capital.
New Expenses Associated With ESOP and MRP
The Savings Bank will recognize additional material employee compensation
and benefit expenses assuming the ESOP and the MRP are implemented. The
actual aggregate amount of these new expenses cannot be currently predicted
because applicable accounting practices require that they be based on the
fair market value of the shares of Common Stock when the expenses are
recognized, which would occur when shares are committed to be released in the
case of the ESOP and over the vesting period of awards made to recipients in
the case of the MRP. These expenses have been reflected in the pro forma
financial information under "PRO FORMA DATA" assuming the Purchase Price
($10.00 per share) as fair market value. Actual expenses, however, will be
based on the fair market value of the Common Stock at the time of recognition,
which may be higher or lower than the Purchase Price. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Impact of Accounting Pronouncements and Regulatory Policies -- Accounting for
Employee Stock Ownership Plans," "-- Accounting for Stock-Based Compensation,"
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock Ownership
Plan" and "-- Benefits -- Management Recognition Plan."
Anti-takeover Considerations
Provisions in the Holding Company's Governing Instruments and Oregon and
Federal Law. Certain provisions included in the Holding Company's Articles of
Incorporation and in the Oregon Business Corporation Act ("OBCA") will assist
the Holding Company in maintaining its independence as a separate, publicly
owned corporation. These provisions may discourage potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors.
As a result, these provisions may preclude takeover attempts which certain
stockholders may deem to be in their interest and perpetuate existing
management. These provisions restrict, among other things, acquisitions of more
than 10% of the Holding Company's outstanding voting stock for a period of five
years from the date the Conversion is consummated. In addition, the Articles of
Incorporation provide 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, provisions for approval of certain business
combinations and
4
provisions allowing the Board to consider non-monetary factors in evaluating a
business combination or a tender or exchange offer. The Articles of
Incorporation of the Holding Company also contain provisions regarding the
timing and content of stockholder proposals and nominations. Certain provisions
of the Articles of Incorporation of the Holding Company cannot be amended by
stockholders unless an 80% stockholder vote is obtained. See "CERTAIN
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
The Holding Company's Articles of Incorporation provide that for a
period of five years from the effective date of the completion of the
Conversion of the Savings Bank from mutual to stock form, no person shall
directly or indirectly offer to acquire or acquire 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 Continuing Directors, as defined in the Articles of
Incorporation. This provision does not apply to any employee stock benefit
plan of the Holding Company or the Savings Bank, such as the ESOP or the MRP.
In addition, for a period for five years from the completion of the Conversion
of the Savings Bank, and notwithstanding any provision to the contrary in the
Articles of Incorporation or in the Bylaws of the Holding Company, where any
person directly or indirectly acquires beneficial ownership of more than 10%
of any class of equity security of the Holding Company in violation of the
provisions of the Articles of Incorporation, the securities beneficially
owned in excess of 10% shall not be counted as shares entitled to vote, shall
not be voted by any person or counted as voting shares in connection with any
matter submitted to the stockholders for a vote, and shall not be counted as
outstanding for purposes of determining a quorum or the affirmative vote
necessary to approve any matter submitted to the stockholders for a vote.
The Articles of Incorporation further provide that if, at any time after
five years from the effective date of the completion of the Conversion, any
person shall acquire the beneficial ownership of more than 10% of any class of
equity security of the Holding Company without the prior approval by a
two-thirds vote of the Continuing Directors, as defined in Articles of
Incorporation, 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. For a further discussion of the provisions of the Holding
Company's Articles of Incorporation, see "CERTAIN RESTRICTIONS ON ACQUISITION OF
THE HOLDING COMPANY."
In connection with a proxy solicitation that is opposed by the Board
of Directors, the Holding Company could assert the above-described
anti-takeover provisions of its Articles of Incorporation to cancel any voting
rights related to those shares owned by any person in excess of 10% of the
outstanding shares of Common Stock of the Holding Company. If the Board of
Directors elected to assert this provision, it would be able to deter
takeover attempts or certain other transactions which have not been negotiated
with and approved by its Board of Directors. The Board of Directors believes
that these provisions are in the best interest of the Savings Bank and Holding
Company and its stockholders. See "CERTAIN RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY -- Change of Control -- Restrictions on Acquisitions of
Securities" and "-- Purpose and Takeover Defensive Effects of the Holding
Company's Articles of Incorporation and Bylaws."
Voting Control By Insiders. Directors and officers of the Savings Bank and
the Holding Company (and their associates) expect to purchase 221,500 shares
of Common Stock, or 7.9% and 5.8% of the shares issued in the Offerings at
the minimum and the maximum of the Estimated Valuation Range,
respectively. 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 ESOP trustees in the same proportion as the votes cast by participants with
respect to the allocated shares. Four, current, officers of the Savings
Bank will serve as the ESOP trustees.
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-
5
qualified restricted stock plan for the benefit of key employees and directors
of the Holding Company and the Savings Bank. The Holding Company expects to
acquire 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 112,540 and
152,260 shares at the minimum and the maximum of the Estimated Valuation Range,
respectively. These shares will be acquired either through open market
purchases through a trust established in conjunction with the MRP or from
authorized but unissued shares of Common Stock. A committee of the Board of
Directors of the Holding Company will administer the MRP, the members of
which would also serve as trustees of the MRP trust, if formed. 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 (281,350 and 380,650 shares at the minimum and the
maximum of the Estimated Valuation Range, respectively). 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 implementation of 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
issued in the Conversion, directors, officers and employees of the Holding
Company and the Savings Bank would have voting control, on a fully diluted
basis, of an additional 30.9% and 28.8% of the Common Stock, based on the
issuance of the minimum and maximum of the Estimated Valuation Range,
respectively. Management's potential voting control alone, as well as together
with additional stockholder support, might preclude or make more difficult
takeover attempts that certain stockholders deem to be in their best interest
and might tend to perpetuate existing management.
Provisions of Employment and Severance Agreements, Severance Plan and
Directors Plan. The employment and severance agreements of Dan L. Webber,
President and Chief Executive Officer of the Holding Company and the Savings
Bank, and other senior officers of the Holding Company and the Savings Bank
provide for cash severance payments and/or the continuation of health, life
and disability benefits in the event of their termination of employment
following a change in control of the Holding Company or the Savings Bank.
Assuming a change of control occurred as of March 31, 1997, the aggregate value
of the severance benefits available to these executive officers under the
agreements would have been approximately $779,000. In addition, assuming
that a change in control had occurred at March 31, 1997 and the termination of
all eligible employees, the maximum aggregate payment due under the
Severance Plan would be approximately $911,000. Furthermore, assuming a
change in control had occurred at March 31, 1997, the aggregate amount
payable under the Pioneer Bank Directors Plan ("Directors Plan") to the
Savings Bank's directors and directors emeriti would be approximately
$348,000. These agreements and plans may have the effect of increasing the
costs of acquiring the Holding Company, thereby discouraging future attempts
to take over the Holding Company or the Savings Bank. See "MANAGEMENT OF
THE SAVINGS BANK -- Benefits," "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY."
Possible Dilutive Effect of Benefit Programs
The MRP intends to acquire 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 acquires 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 SAVINGS BANK -- Benefits -- Management Recognition Plan."
The MRP is subject to approval by the Holding Company's stockholders.
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
6
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
stockholders and may decrease net income per share and stockholders' equity
per share. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1997 Stock
Option Plan." The Stock Option Plan is subject to approval by the Holding
Company's stockholders.
If the ESOP is not able to purchase 8% of the shares of Common Stock
issued in the Offerings, the ESOP may purchase newly issued shares from
the Holding Company. In such event, the voting interests of existing
stockholders will be diluted and net income per share and stockholders'
equity per share will be decreased. See "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Employee Stock Ownership Plan."
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 under the symbol "OTFC," there can be no assurance
that an active and liquid trading market for the Common Stock will develop, or
once developed, will continue. Furthermore, 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."
Possible Increase in Estimated Price Range and Number of Shares Issued
The Estimated Valuation Range may be increased up to 15% to reflect
material changes in the financial condition or results of operations of the
Savings Bank or changes in market conditions or general financial, economic
or regulatory conditions following the commencement of the Offerings. If
the Estimated Valuation Range is increased, it is expected that the Holding
Company would increase the Estimated Price Range so that up to 4,377,475
shares of Common Stock at the Purchase Price would be issued for an aggregate
price of up to $43,774,750. This increase in the number of shares would decrease
a subscriber's pro forma net income per share and stockholders' equity per
share, increase the Holding Company's pro forma consolidated stockholders'
equity and net income, and increase the Purchase Price as a percentage of
pro forma stockholders' equity per share and net earnings per share. See "PRO
FORMA DATA."
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 Savings Bank
are deemed to have an ascertainable value, receipt of such rights may be a
taxable event (either as capital gain or ordinary income), to those Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members who
receive and/or exercise the Subscription Rights in an amount equal to such
value. Additionally, the Savings Bank 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 Savings
Bank 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 Savings Bank -- Tax Effects."
OREGON TRAIL FINANCIAL CORP.
The Holding Company was organized on June 9, 1997 under Oregon law at
the direction of the Savings Bank to acquire all of the capital stock that
the Savings Bank will issue upon its conversion from the mutual to stock
form of ownership. The Holding Company has applied for OTS approval to become a
savings and loan holding company through the acquisition of 100% of the capital
stock of the Savings Bank. 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 Savings Bank. Immediately following the Conversion, the only
significant assets of the Holding
7
Company will be the capital stock of the Savings Bank, 50% of the net
investable proceeds of the Offerings as permitted by the OTS to be retained by
it, and a note receivable from the ESOP evidencing a loan to enable the ESOP to
purchase 8% of the Common Stock issued in the Conversion. See "BUSINESS OF THE
HOLDING COMPANY."
The holding company structure will permit the Holding Company to expand
the financial services currently offered through the Savings Bank.
Management believes that the holding company structure and retention of a
portion of the proceeds of the Offerings will, should it decide to do so,
facilitate the expansion and diversification of its operations. The holding
company structure will also enable the Holding Company to repurchase its stock
without adverse tax consequences, subject to applicable regulatory restrictions,
including waiting periods. 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."
PIONEER BANK, A FEDERAL SAVINGS BANK
Chartered in 1901, the Savings Bank is a federal mutual savings
bank headquartered in Baker City, Oregon. As a result of the Conversion, the
Savings Bank will convert to a federal capital stock savings bank and will
become a wholly-owned subsidiary of the Holding Company. The Savings Bank is
regulated by the OTS, its primary regulator, and by the FDIC, the insurer of
its deposits. The Savings Bank's deposits have been federally-insured since
1934 and are currently insured by the FDIC under the SAIF. The Savings Bank has
been a member of the Federal Home Loan Bank ("FHLB") System since 1934. At March
31, 1997, the Savings Bank had total assets of $204.2 million, total
deposits of $179.2 million and total equity of $21.0 million on a consolidated
basis.
The Savings Bank is a community oriented financial institution whose
principal business is attracting retail deposits from the general public and
using these funds to originate one- to- four family residential mortgage loans
and consumer loans within its primary market area. At March 31, 1997, one-
to- four family loans totalled $101.8 million, or 72.0%, of total loans
receivable. The Savings Bank has also been active in the origination of home
equity and second mortgage loans and at March 31, 1997, such loans were $17.5
million, or 12.4%, of total loans receivable. As a result of a perceived
local demand for non-mortgage lending products, as well as management's
concern as to the Savings Bank's level of interest rate risk and a perception
of minimal anticipated growth in residential loan demand within the Savings
Bank's market primary area resulting from strong competition, the Savings Bank
began supplementing its traditional lending activities in 1996 with the
development of commercial business loans, agricultural loans and the purchase
of dealer-originated automobile contracts. The Savings Bank has hired
experienced commercial lending officers familiar with the Savings Bank's
primary market area in an attempt to develop commercial business and
agricultural lending and to expand the purchase of
dealer-originated automobile contacts to include the purchase of
dealer-originated contracts secured by recreational vehicles, trailers,
motorcycles and other vehicles. As a result of these activities, at March 31,
1997 the Savings Bank had agricultural loans of $2.5 million, commercial
business loans of $4.1 million and automobile loans of $2.1 million (including
$371,000 of dealer-originated automobile contracts). See "RISK FACTORS -- Recent
Growth in, Unseasoned Nature of Agricultural, Commercial Business and Indirect
Automobile Lending," "-- Certain Lending Risks -- Risks of Agricultural
Lending," "-- Interest Rate Risk" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management."
The Savings Bank's business strategy is to operate as a
well-capitalized, profitable and independent financial institution
dedicated to a community-oriented approach that emphasizes management
involvement with customers and the community at large, local decision-making
and quality customer service. Management believes that it can best serve an
important segment of the marketplace and enhance the long-term value of the
Holding Company by operating independently and continuing with and expanding its
community-oriented approach, especially in light of recent consolidations of
financial institutions in the Savings Bank's primary market area.
In addition to its lending activities, the Savings Bank invests
excess liquidity in short and intermediate term U.S. Government and government
agency securities, and mortgage-backed and related securities issued by U.S.
8
Government agencies. Investment securities and mortgage-backed and related
securities, which constituted 25.0% of total assets at March 31, 1997, had an
amortized cost of $51.2 million at March 31, 1997. See "BUSINESS OF THE
SAVINGS BANK -- Investment Activities."
The Savings Bank conducts its operations from its main office and one
branch office located in Baker City, Oregon, and six branch offices located
in Burns (Harney County), Enterprise (Wallowa County), John Day (Grant County),
La Grande (two offices; Union County) and Ontario (Malheur County), Oregon. See
"BUSINESS OF THE SAVINGS BANK -- Properties." The main office is located at
2055 First Street, Baker City, Oregon 97814, and its telephone number is (541)
523-6327.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $27.3 million to $37.1 million, or up to $42.7
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 conditional OTS approval to purchase all of the capital
stock of the Savings Bank to be issued in the Conversion in exchange for 50%
of the net investable proceeds of the Offerings. This will result in the
Holding Company retaining approximately $12.0 million to $16.3 million of
net proceeds, or up to $18.8 million if the Estimated Valuation Range is
increased by 15%, and the Savings Bank receiving an equal amount. See "PRO FORMA
DATA."
Receipt of 50% of the net proceeds of the sale of the Common Stock
will increase the Savings Bank's capital and will support the expansion of
the Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including, initially,
lending (including agricultural and commercial business lending), the
purchase of dealer-originated automobile contracts and dealer-originated
contracts secured by recreational vehicles, trailers, motorcycles and
other vehicles, and investment in short-term U.S. Government and government
agency obligations.
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 $2,250,800 to $3,045,200 based on the
sale of 225,080 shares to the ESOP (at the minimum of the Estimated Valuation
Range) and 304,520 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 4,377,475 shares, are sold in the Conversion, the Holding
Company's loan to the ESOP would be approximately $3,501,980 (based on the sale
of 350,198 shares to the ESOP). 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 Savings Bank's contributions to the ESOP and from any
dividends paid on shares of Common Stock held by the ESOP.
The remaining net proceeds retained by the Holding Company initially
will be invested primarily in short-term U.S. Government and government
agency obligations. Such proceeds will be available for additional contributions
to the Savings Bank 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 Oregon law and federal regulations. The
Holding Company will consider exploring opportunities to use such funds to
expand operations through acquiring or establishing additional branch offices or
acquiring other financial institutions. Currently, there are no specific plans,
arrangements, agreements or understandings, written or oral, regarding any
diversification activities.
Following consummation of the Conversion, the Board of Directors will have
the authority to adopt plans for repurchases of Common Stock, subject to
statutory and regulatory requirements. Since the Holding Company has not yet
issued stock, there currently is 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
9
future would include but are not limited to: (i) market and economic factors
such as the price at which the stock is trading in the market, the
volume of trading, the attractiveness of other investment alternatives in
terms of the rate of return and risk involved in the investment, the ability
to increase the book value and/or earnings per share of the remaining
outstanding shares, and the ability to improve the Holding Company's return
on equity; (ii) the avoidance of dilution to stockholders by not having to
issue additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the 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 Savings Bank 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 nonperforming and classified
assets, the Holding Company's and the Savings Bank's current and projected
results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. For a discussion of the
regulatory limitations applicable to stock repurchases and current OTS policy
with respect thereto, see "THE CONVERSION -- Restrictions on Repurchase of
Stock."
DIVIDEND POLICY
General
The Holding Company's Board of Directors anticipates declaring and
paying quarterly cash dividends on the Common Stock at an annual rate of 2%,
or $0.20 per share per year based on the Purchase Price. The first
quarterly cash dividend is expected to be declared during the quarter ending
March 31, 1998 and paid during the quarter ending June 30, 1998. In
addition, the Board of Directors may determine to pay periodic special cash
dividends in addition to, or in lieu of, regular cash dividends. Declarations or
payments of any dividends (regular and special) 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 the regulatory restrictions that affect the payment of
dividends by the Savings Bank to the Holding Company discussed below. Under
Oregon law, the Holding Company will be permitted to pay cash dividends after
the Conversion either out of surplus or, if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. 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
Savings Bank or earnings on Holding Company assets. No assurances can be given
that any dividends, either regular or special, will be declared or, if
declared, what the amount of dividends will be or whether such dividends, if
commenced, will continue.
Current Restrictions
Dividends from the Holding Company may depend, in part, upon
receipt of dividends from the Savings Bank because the Holding Company initially
will have no source of income other than dividends from the Savings Bank and
earnings from the investment of the net proceeds from the Offerings retained
by the Holding Company. OTS regulations require the Savings Bank 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 Savings Bank to the
Holding Company which utilize a three-tiered approach that permits various
levels of distributions based primarily upon a savings association's capital
level. The Savings Bank 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
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. In addition, the Savings Bank 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 Savings Bank below the amount required for
the liquidation account to be established pursuant to the Savings Bank's
Plan of Conversion. See "REGULATION -- Federal Regulation of Savings Banks --
Limitations on Capital Distributions," "THE CONVERSION -- Effects of
Conversion to Stock
10
Form on Depositors and Borrowers of the Savings Bank -- Liquidation Account" and
Note 16 of Notes to the Consolidated Financial Statements included elsewhere
herein.
Under Oregon law, the Holding Company is generally limited to paying
dividends in an amount equal to the excess of its net assets (total assets
minus total liabilities) over its statutory capital or, if no such excess
exists, to its net profits for the current and/or immediately preceding fiscal
year.
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.
Tax Considerations
In addition to the foregoing, retained earnings of the Savings Bank
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Savings Bank to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Savings Bank at the then
prevailing 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 Savings Bank that would result in a recapture of the
Savings Bank'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 System under the symbol "OTFC," there can be no
assurance that the Holding Company will meet Nasdaq National Market System
listing requirements, which include a minimum market capitalization, at least
two market makers and a minimum number of record holders. Keefe, Bruyette has
indicated its intention to act as a market maker for the Holding Company's
Common Stock following consummation of the Conversion and will assist the
Holding Company in seeking to encourage at least one additional market maker
to establish and maintain a market in the Common Stock. 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. The Holding
Company anticipates that prior to the completion of the Conversion it will be
able to obtain the commitment from at least one additional broker-dealer to
act as market maker for the Common Stock. Additionally, the development of a
liquid public market depends on the existence of willing buyers and sellers,
the presence of which is not within the control of the Holding Company, the
Savings Bank or any market maker. There can be no assurance that an active and
liquid trading market for the Common Stock will develop or that, if
developed, it will continue. The number of active buyers and sellers of the
Common Stock at any particular time may be limited. Under such circumstances,
investors in the Common Stock could have difficulty disposing of their shares
on short notice and should not view the Common Stock as a short-term
investment. Furthermore, there can be no assurance that purchasers will be
able to sell their shares at or above the Purchase Price or that
quotations will be available on the Nasdaq National Market System as
contemplated.
11
CAPITALIZATION
The following table presents the historical capitalization of the Savings
Bank at March 31, 1997, 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 at
the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range. The shares that would be issued at the maximum, as adjusted,
of the Estimated Valuation Range would be subject to receipt of OTS
approval of an updated appraisal confirming such valuation. A CHANGE IN THE
NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION WOULD MATERIALLY AFFECT
PRO FORMA CONSOLIDATED CAPITALIZATION.
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
-----------------------------------------------------------------
2,813,500 3,310,000 3,806,500 4,377,475
Capitalization Shares at Shares at Shares at Shares at
as of $10.00 $10.00 $10.00 $10.00
March 31, 1997 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
-------------- ------------ ------------ ------------ ------------
(In thousands)
Deposits(3) $179,158 $179,158 $179,158 $179,158 $179,158
FHLB of Seattle advances 800 800 800 800 800
Securities sold under
agreements to repurchase 1,431 1,431 1,431 1,431 1,431
-------- -------- -------- -------- --------
Total deposits and
borrowed funds $181,389 $181,389 $181,389 $181,389 $181,389
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
250,000 shares, $.01
par value per share,
authorized; none issued
or outstanding $ -- $ -- $ -- $ -- $ --
Common Stock:
8,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4) -- 28 33 38 44
Additional paid-in capital -- 27,492 32,183 37,075 42,700
Retained earnings(5) 21,148 21,148 21,148 21,148 21,148
Unrealized loss on securities
available for sale, net of tax (122) (122) (122) (122) (122)
Less:
Common Stock acquired
by ESOP(6) -- 2,251 2,648 3,045 3,502
Common Stock to be acquired
by MRP(7) -- 1,125 1,324 1,523 1,751
-------- -------- -------- -------- --------
Total stockholders' equity $ 21,026 $ 45,170 $ 49,270 $ 53,571 $ 58,517
======== ======== ======== ======== ========
(footnotes on following page)
12
- ---------------
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or results of
operations of the Savings Bank or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the Stock Option Plan.
(2) This column 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) The Savings Bank'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.
(5) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Savings Bank 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 Savings Bank'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 Savings Bank -- Liquidation
Account."
(6) Assumes that 8% of the Common Stock sold in the Conversion will be
acquired by the ESOP in the Conversion with funds borrowed from the
Holding Company. Under generally accepted accounting principles ("GAAP"),
the amount of Common Stock to be purchased by the ESOP represents unearned
compensation and is, accordingly, reflected as a reduction of capital. As
shares are released to ESOP participants' accounts, a corresponding
reduction in the charge against capital will occur. 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
SAVINGS BANK -- Benefits -- Employee Stock Ownership Plan."
(7) 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 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%. The shares are
reflected as a reduction of stockholders' equity. See "RISK FACTORS --
Possible Dilutive Effect of Benefit Programs," "PRO FORMA DATA" and
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management Recognition
Plan." The MRP is subject to stockholder approval, which is expected to be
sought at a meeting to be held no earlier than six months following
consummation of the Conversion.
13
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro
forma capital position relative to its capital requirements at March 31, 1997.
The amount of capital infused into the Savings Bank for purposes of the
following table is 50% of the net proceeds of the Offerings. For purpose of the
table below, the amount expected to be borrowed by the ESOP and the cost of the
shares expected to be acquired by the MRP are deducted from pro forma regulatory
capital. 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 Savings Bank, see "REGULATION -- Federal Regulation
of Savings Banks -- Capital Requirements."
PRO FORMA AT MARCH 31, 1997
-------------------------------------------------------------------------------------------------------
15% above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
------------------- ------------------- ------------------- -------------------
2,813,500 Shares 3,310,000 Shares 3,806,500 Shares 4,377,475 Shares
March 31, 1997 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 $ 21,026 10.3% $ 31,310 14.6% $ 33,162 15.3% $ 35,015 16.0% $ 37,145 16.9%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Tangible capital $ 20,911 10.3% $ 31,194 14.5% $ 33,046 15.3% $ 34,899 16.0% $ 37,029 16.8%
Tangible capital
requirement 3,061 1.5 3,217 1.5 3,245 1.5 3,273 1.5 3,305 1.5
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Excess $ 17,850 8.8% $ 27,976 13.0% $ 29,801 13.8% $ 31,626 14.5% $ 33,724 15.3%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Core capital $ 20,911 10.2% $ 31,194 14.5% $ 33,046 15.3% $ 34,899 16.0% $ 37,029 16.8%
Core capital
requirement(2) 6,123 3.0 6,435 3.0 6,490 3.0 6,546 3.0 6,610 3.0
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Excess $ 14,788 7.2% $ 24,759 11.5% $ 26,556 12.3% $ 28,353 13.0% $ 30,419 13.8%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Total capital(3) $ 21,636 21.2% $ 31,919 30.8% $ 33,771 32.4% $ 35,624 34.1% $ 37,754 36.0%
Risk-based capital
requirement 8,174 8.0 8,299 8.0 8,329 8.0 8,358 8.0 8,392 8.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess $ 13,462 13.2% $ 23,620 22.8% $ 25,442 24.4% $ 27,265 26.1% $29,362 26.0%
======== ==== ======== ==== ======== ==== ======== ==== ======= ====
- -------------------
(1) Based upon total adjusted assets of $204.2 million at March 31, 1997 and
$214.5 million, $216.3 million, $218.2 million and $220.3 million at the
minimum, midpoint, maximum, and maximum, as adjusted, of the Estimated
Valuation Range, respectively, for purposes of the tangible and core
capital requirements, and upon risk-weighted assets of $102.2 million at
March 31, 1997 and $104.2 million, $104.6 million, $105.0 million and $105
million at the minimum, midpoint, maximum, and maximum, as adjusted, of the
Estimated Valuation Range, respectively, for purposes of the risk-based
capital requirement.
(2) 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.
(3) Percentage represents total core and supplementary capital divided
by total risk-weighted assets. Assumes net proceeds are invested in
assets that carry a 20% risk-weighting.
14
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
Savings Bank as converted, based upon an independent valuation. The Estimated
Valuation Range as of June 4, 1997 is from a minimum of $28,135,000 to a maximum
of $38,065,000 with a midpoint of $33,100,000 or, at a price per share of
$10.00, a minimum number of shares of 2,813,500, a maximum number of shares of
3,806,500 and a midpoint number of shares of 3,310,000. The actual net proceeds
from the sale of the Common Stock cannot be determined until the Conversion is
completed. However, net proceeds set forth on the following table are based upon
the following assumptions: (i) Webb will receive fees of $424,000, $355,000,
$492,000 and $571,000 at the minimum, midpoint, maximum and 15% above the
Estimated Valuation Range, respectively, assuming all shares are sold to
investors residing in Oregon (see "THE CONVERSION -- Plan of Distribution for
the Subscription, Direct Community and Syndicated Community Offerings); (ii) all
of the Common Stock will be sold in the Subscription and Direct Community
Offerings; and (iii) Conversion expenses, excluding the fees paid to Webb, will
total approximately $460,000 at each of the minimum, midpoint, maximum and 15%
above the Estimated Valuation Range. Actual expenses may vary from this
estimate, and the fees paid will depend upon the percentages and total number of
shares sold in the Subscription, Direct Community and Syndicated Community
Offerings and other factors.
The pro forma consolidated net income of the Savings Bank for the nine
months ended March 31, 1997 and the year ended June 30, 1996 have been
calculated as if the Conversion had been consummated at the beginning of the
respective periods and the estimated net proceeds received by the Holding
Company and the Savings Bank had been invested at 5.92% and 5.55% at the
beginning of the respective periods, which represent the yield on the one-year
U.S. Treasury Bill as of March 31, 1997 and June 30, 1996, respectively. 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. A pro
forma after-tax return of 3.64% is used for both the Holding Company and the
Savings Bank for the periods, after giving effect to an incremental combined
federal and state income tax rate of 38.5% for both periods. Historical and pro
forma per share amounts have been calculated by dividing historical and pro
forma amounts by the number of shares of Common Stock indicated in the footnotes
to the table. Per share amounts have been computed as if the Common Stock had
been outstanding at the beginning of the respective periods or at March 31, 1997
or June 30, 1996, but without any adjustment of per share historical or pro
forma stockholders' equity to reflect the earnings on the estimated net
proceeds.
The following tables summarize the historical net income and retained
earnings of the Savings Bank 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 to: (i) the shares to be reserved for issuance
under the Holding Company's Stock Option Plan, which is expected to be voted
upon by stockholders at a meeting to be held no earlier than six months
following consummation of the Conversion; (ii) withdrawals from deposit accounts
for the purpose of purchasing Common Stock in the Conversion; (iii) the issuance
of shares from authorized but unissued shares to the MRP, which is expected to
be voted upon by stockholders at a meeting to be held no earlier than six months
following consummation of the Conversion; or (iv) the establishment of a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits --
1997 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 Savings Bank, which will reduce deposits by the amounts of such purchases.
Accordingly, the net amount of funds available for investment will be reduced by
the amount of deposit withdrawals used to fund stock purchases.
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 LOANS AND OTHER ASSETS
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.
15
At or For the Nine Months Ended March 31, 1997
-------------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
--------- --------- --------- ---------------
2,813,500 3,310,000 3,806,500 4,377,475(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ------------
(In Thousands, Except Per Share Amounts)
Gross proceeds $ 28,135 $ 33,100 $ 38,065 $ 43,775
Less: estimated expenses (815) (884) (952) (1,031)
-------- -------- -------- --------
Estimated net proceeds 27,320 32,216 37,113 42,744
Less: Common Stock acquired by ESOP (2,251) (2,648) (3,045) (3,502)
Less: Common Stock to be acquired by MRP (1,125) (1,324) (1,523) (1,751)
-------- -------- -------- --------
Net investable proceeds $ 23,944 $ 28,244 $ 32,545 $ 37,491
======== ======== ======== ========
Consolidated net income:
Historical $ 1,098 $ 1,098 $ 1,098 $ 1,098
Pro forma income on net proceeds(2) 654 771 869 1,024
Pro forma ESOP adjustments(3) (192) (226) (260) (299)
Pro forma MRP adjustments(4) (104) (122) (140) (162)
-------- -------- -------- --------
Pro forma net income $ 1,456 $ 1,521 $ 1,567 $ 1,661
======== ======== ======== ========
Consolidated net income per share (5)(6):
Historical $ 0.42 $ 0.36 $ 0.31 $ 0.27
Pro forma income on net proceeds 0.25 0.25 0.25 0.25
Pro forma ESOP adjustments(3) (0.07) (0.07) (0.07) (0.07)
Pro forma MRP adjustments(4) (0.04) (0.04) (0.04) (0.04)
-------- -------- -------- --------
Pro forma net income per share $ 0.56 $ 0.50 $ 0.45 $ 0.41
======== ======== ======== ========
Consolidated stockholders' equity (book value):
Historical $ 21,026 $ 21,026 $ 21,026 $ 21,026
Estimated net proceeds 27,320 32,216 37,113 42,744
Less: Common Stock acquired by ESOP (2,251) (2,648) (3,045) (3,502)
Less: Common Stock to be acquired by MRP(4) (1,125) (1,324) (1,523) (1,751)
-------- -------- -------- --------
Pro forma stockholders' equity(7) $ 44,970 $ 49,270 $ 53,571 $ 58,517
======== ======== ======== ========
Consolidated stockholders' equity per share(6)(8):
Historical(6) $ 7.47 $ 6.35 $ 5.52 $ 4.80
Estimated net proceeds 9.71 9.73 9.75 9.76
Less: Common Stock acquired by ESOP (0.80) (0.80) (0.80) (0.80)
Less: Common Stock to be acquired by MRP(4) (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(9) $ 15.98 $ 14.88 $ 14.07 $ 13.36
======== ======== ======== ========
Purchase Price as a percentage of pro forma
stockholders' equity per share 62.58% 66.93% 73.86% 74.85%
======== ======== ======== ========
Purchase Price as a multiple of pro forma
net income per share (annualized) 17.85x 20.00x 22.22x 24.39x
===== ===== ===== =====
(footnotes on second following page)
16
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
--------- --------- --------- ---------------
2,813,500 3,310,000 3,806,500 4,377,475(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ------------
(In Thousands, Except Per Share Amounts)
Gross proceeds $ 28,135 $ 33,100 $ 38,065 $ 43,775
Less: estimated expenses (815) (884) (952) (1,031)
-------- -------- -------- --------
Estimated net proceeds 27,320 32,216 37,113 42,744
Less: Common Stock acquired by ESOP (2,251) (2,648) (3,045) (3,502)
Less: Common Stock to be acquired by MRP (1,125) (1,324) (1,523) (1,751)
-------- -------- -------- --------
Net investable proceeds $ 23,944 $ 28,244 $ 32,545 $ 37,491
======== ======== ======== ========
Consolidated net income:
Historical $ 2,179 $ 2,179 $ 2,179 $ 2,179
Pro forma income on net proceeds(2) 817 964 1,111 1,280
Pro forma ESOP adjustments(3) (256) (301) (346) (398)
Pro forma MRP adjustments(4) (138) (163) (187) (215)
-------- -------- -------- --------
Pro forma net income $ 2,602 $ 2,679 $ 2,757 $ 2,846
======== ======== ======== ========
Consolidated net income per share (5)(6):
Historical $ 0.83 $ 0.71 $ 0.62 $ 0.54
Pro forma income on net proceeds 0.31 0.31 0.31 0.31
Pro forma ESOP adjustments(3) (0.10) (0.10) (0.10) (0.10)
Pro forma MRP adjustments(4) (0.05) (0.05) (0.05) (0.05)
------- -------- -------- --------
Pro forma net income per share $ 0.99 $ 0.87 $ 0.78 $ 0.70
======= ======== ======== ========
Consolidated stockholders' equity (book value):
Historical $ 20,004 $ 20,004 $ 20,004 $ 20,004
Estimated net proceeds 27,320 32,216 37,113 42,744
Less: Common Stock acquired by ESOP (2,251) (2,648) (3,045) (3,502)
Less: Common Stock to be acquired by MRP(4) (1,125) (1,324) (1,523) (1,751)
-------- -------- -------- --------
Pro forma stockholders' equity(7) $ 43,948 $ 48,248 $ 52,549 $ 57,495
======== ======== ======== ========
Consolidated stockholders' equity per share(6)(8):
Historical(6) $ 7.11 $ 6.04 $ 5.26 $ 4.57
Estimated net proceeds 9.71 9.73 9.75 9.76
Less: Common Stock acquired by ESOP (0.80) (0.80) (0.80) (0.80)
Less: Common Stock to be acquired by MRP(4) (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(9) $ 15.62 $ 14.57 $ 13.81 $ 13.13
======== ======== ======== ========
Purchase Price as a percentage of pro forma
stockholders' equity per share 64.02% 68.63% 72.41% 76.16%
===== ===== ===== =====
Purchase Price as a multiple of pro forma
net income per share 10.10x 11.49x 12.82x 14.29x
===== ===== ===== =====
(footnotes on second following page)
17
- -------------------
(1) Gives effect to the sale of an additional 570,975 shares in the
Conversion, which may be issued to cover an increase in the pro forma
market value of the Holding Company and the Savings Bank as converted,
without the resolicitation of subscribers or any right of cancellation.
The issuance of such additional shares will be conditioned on a
determination by Keller that such issuance is compatible with its
determination of the estimated pro forma market value of the Holding
Company and the Savings Bank as converted. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. Since funds on
deposit at the Savings Bank may be withdrawn to purchase shares of Common
Stock (which will reduce deposits by the amount of such purchases), the
net amount of funds available to the Savings Bank for investment following
receipt of the net proceeds of the Offerings will be reduced by the amount
of such withdrawals.
(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 8.50%) from the net proceeds from
the Offerings retained by the Holding Company. The amount of this
borrowing has been reflected as a reduction from gross proceeds to
determine estimated net investable proceeds. The Savings Bank intends to
make contributions to the ESOP in amounts at least equal to the principal
and interest requirement of the debt. As the debt is paid down,
stockholders' equity will be increased. The Savings Bank's payment of the
ESOP debt is based upon equal installments of principal over a 10-year
period, assuming a combined federal and state income tax rate of 38.5%.
Interest income earned by the Holding Company on the ESOP debt offsets the
interest paid by the Savings Bank on the ESOP loan. No reinvestment is
assumed on proceeds contributed to fund the ESOP. The ESOP expense
reflects adoption of Statement of Position ("SOP") 93-6, which will
require recognition of expense based upon shares committed to be released
and the exclusion of unallocated shares from earnings 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 SAVINGS BANK -- 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, that the shares were
acquired by the MRP at the beginning of the period presented in open
market purchases at the Purchase Price, that 20% of the amount contributed
was an amortized expense during such period, and that the combined federal
and state income tax rate is 38.5%. The issuance of authorized but
unissued shares of the Common Stock instead of open market purchases would
dilute the voting interests of existing stockholders by approximately
3.85% and pro forma net income per share would be $0.59, $0.53, $0.48 and
$0.44 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range for the nine months ended March 31, 1997,
respectively, and $1.02, $0.90, $0.82 and $0.74 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 $15.75, $14.70, $13.92 and $13.24 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range at March 31, 1997, respectively, and $15.40, $14.40, $13.66 and
$13.01 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 shares are awarded under 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 $168,810, $198,600,
$228,390 and $262,649 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the nine months ended March
31, 1997, respectively, and $225,080, $264,800, $304,520 and $350,198 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
18
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 and ownership interests of existing stockholders would be
diluted by approximately 9.1%. Assuming stockholder approval of the
Stock Option Plan and that all options were exercised at the end of the
nine months ended March 31, 1997 and the year ended June 30, 1996,
respectively, at an exercise price of $10.00 per share, pro forma net
earnings per share would be $0.51, $0.45, $0.41 and $0.37, respectively,
for the nine months ended March 31, 1997, and $0.91, $0.79, $0.71 and
$0.64, respectively, for the year ended June 30, 1996, and pro forma
stockholders' equity per share would be $14.53, $13.53, $12.79 and $12.15,
respectively, for the nine months ended March 31, 1997, and $14.20,
$13.25, $12.55 and $11.94, respectively, for the year ended June 30, 1996
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits
-- 1997 Stock Option Plan" and "-- Benefits -- Management Recognition
Plan" and "RISK FACTORS -- Possible Dilutive Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 2,605,301,
3,065,060, 3,524,819 and 4,053,542 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the nine months
ended March 31, 1997, respectively and 2,610,928, 3,071,680, 3,532,432 and
4,062,297 for the year ended June 30, 1996, respectively, which includes
the shares of Common Stock sold in the Conversion less the number of
shares assumed to be held by the ESOP not committed to be released within
the first year following the Conversion.
(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) "Book value" represents the difference between the stated amounts of the
Savings Bank's assets and liabilities. The amounts shown do not reflect
the liquidation account which 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 Savings Bank'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 Savings Bank" and "TAXATION." The amounts shown for book
value do not represent fair market values or amounts distributable to
stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 2,813,500,
3,310,000, 3,806,500 and 4,377,475 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the Common Stock.
19
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 Savings Bank, including their associates, as defined by applicable
regulations. 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 Savings Bank and their
associates may not purchase in excess of 31% of the shares sold in the
Conversion. For purposes of the following table, it has been assumed that
sufficient shares will be available to satisfy subscriptions in all categories.
Directors, officers and employees 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 Percent of
Shares at Shares at
Minimum of Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated Estimated
Position Shares Purchased (1) Amount Purchased Valuation Range Valuation Range
-------- ------------------------- ---------------- --------------- ---------------
Dan L. Webber 15,000 $ 150,000 0.53% 0.39%
President and Chief
Executive Officer
Jerry F. Aldape 10,000 100,000 0.36 0.26
Senior Vice President/Support
Services and Corporate Secretary
Don S. Reay 4,000 40,000 0.14 0.11
Senior Vice President
of Customer Services
Nadine J. Johnson 2,500 25,000 0.09 0.07
Vice President and
Treasurer/Controller
John Gentry 20,000 200,000 0.71 0.53
Chairman of the Board
Albert H. Durgan 10,000 100,000 0.36 0.26
Director
Edward H. Elms 20,000 200,000 0.71 0.53
Director
John A. Lienkaemper 27,000 270,000 0.96 0.71
Director
Charles Rouse 20,000 200,000 0.71 0.53
Director
Stephen R. Whittemore 20,000 200,000 0.71 0.53
Director
Other officers (13 persons) 73,000 730,000 2.59 1.92
-------- ------------ ---- ----
Total 221,500 $2,215,000 7.87% 5.84%
======== ============ ==== ====
- ---------------------
(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 intended awards under
the MRP and Stock Option Plan, see "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Employee Stock Ownership Plan," "-- Benefits -- 1997 Stock
Option Plan" and "-- Benefits -- Management Recognition Plan."
20
PIONEER BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THE FOLLOWING CONSOLIDATED STATEMENT OF INCOME OF PIONEER BANK, A FEDERAL
SAVINGS BANK AND SUBSIDIARIES FOR THE NINE MONTHS ENDED MARCH 31, 1997 HAS BEEN
AUDITED BY DELOITTE & TOUCHE LLP, PORTLAND, OREGON, INDEPENDENT AUDITORS, WHOSE
REPORT THEREON APPEARS ELSEWHERE IN THIS PROSPECTUS. THE CONSOLIDATED STATEMENTS
OF INCOME FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 HAVE BEEN AUDITED BY
COOPERS & LYBRAND L.L.P., 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.
Years
Nine Months Ended June 30,
Ended March 31, --------------------
1997 1996 1995
-------------------- ------ ------
INVESTMENT INCOME:
Interest and fees on loans receivable $8,916,375 $11,154,250 $9,680,067
Securities:
Mortgage-backed and related securities 2,058,194 3,123,102 3,361,726
U.S. Government and government agencies 901,456 1,550,094 1,622,604
Other interest and dividends 154,212 184,659 142,166
----------- ----------- -----------
Total interest income 12,030,237 16,012,105 14,806,563
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 5,484,996 7,579,041 6,789,749
Securities sold under agreements to repurchase 36,329 44,795 50,477
FHLB of Seattle advances 31,578 432,896 242,843
----------- ----------- -----------
Total interest expense 5,552,903 8,056,732 7,083,069
----------- ----------- -----------
Net interest income 6,477,334 7,955,373 7,723,494
PROVISION FOR LOAN LOSSES 216,063 115,397 66,548
----------- ----------- -----------
Net interest income after provision for loan losses 6,261,271 7,839,976 7,656,946
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 482,713 520,346 505,613
Loan servicing fees 49,932 64,905 82,978
Net gain (loss) on trading securities (2,151) (71,274) 279,545
Other income 130,217 196,913 272,262
----------- ----------- -----------
Total non interest income 660,711 710,890 1,140,398
----------- ----------- -----------
OTHER EXPENSES:
Employee compensation and benefits 2,168,413 2,685,328 2,848,950
Special SAIF assessment 1,146,387 -- --
Supplies, postage, and telephone 284,567 361,913 299,742
Depreciation 271,012 299,611 243,569
Occupancy and equipment 231,803 273,109 347,585
FDIC insurance premium. 209,188 402,572 409,707
Customer account 187,021 272,919 239,307
Advertising 172,606 202,292 151,137
Professional fees 125,413 138,832 105,516
Other 278,309 372,254 381,265
----------- ----------- -----------
Total other expenses 5,074,719 5,008,830 5,026,778
----------- ----------- -----------
Income before income taxes 1,847,263 3,542,036 3,770,566
PROVISION FOR INCOME TAXES 749,669 1,362,907 1,511,724
----------- ----------- -----------
NET INCOME $ 1,097,594 $ 2,179,129 $ 2,258,842
=========== =========== ===========
See Notes to Consolidated Financial Statements.
21
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 Savings Bank. 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 Savings Bank's results of operations depend primarily on net interest
income, which is the difference between the income earned on its
interest-earning assets, such as loans and investments, and the cost of its
interest-bearing liabilities, consisting of deposits, repurchase agreements and
FHLB-Seattle borrowings. The Savings Bank's net income is also affected by,
among other things, fee income, provisions for loan losses, operating expenses
and income tax provisions. The Savings Bank'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 Savings Bank operates, and intends to continue to operate, as a
community oriented financial institution devoted to serving the needs of its
customers. The Savings Bank's business consists primarily of attracting retail
deposits from the general public and using those funds to originate one- to
four-family residential and consumer loans in its primary market area. To a
lesser but growing extent, the Savings Bank also originates agricultural loans,
commercial business loans and indirect automobile loans. See "BUSINESS OF THE
SAVINGS BANK -- Lending Activities."
As a result of management's concern regarding the Savings Bank's level of
interest rate risk, management's perception of minimal anticipated growth in
residential loan demand within its market area resulting from strong
competition, and a local demand for agricultural, commercial business and
indirect dealer automobile loans, the Savings Bank determined to reduce its
interest rate risk by increasing the Savings Bank's credit risk through the
origination of agricultural, commercial and, recently, indirect dealer
automobile loans. Management's strategy to balance interest rate risk with
credit risk was enhanced by the experience of its Senior Vice President of
Customer Services, Don S. Reay, who was hired in September 1995. In addition,
the Savings Bank hired three additional officers from a large commercial bank,
two of whom have extensive commercial lending and agricultural lending
experience and one of whom has indirect dealer lending and commercial lending
experience. With over 25 years of commercial lending experience in the Savings
Bank's primary market area, Mr. Reay and the other commercial lending personnel
have brought several lending relationships to the Savings Bank. Consequently, in
July 1996, the Savings Bank began originating commercial business loans, in
October 1996 agricultural loans and the purchase of dealer-originated automobile
contracts began in January 1997. Subject to market conditions and other factors,
the Savings Bank intends to expand the purchase of dealer-originated contracts
to include contracts secured by recreational vehicles, trailers, motorcycles and
other vehicles. As a result of these lending activities, at March 31, 1997 the
Savings Bank had agricultural loans of $2.5 million, commercial business loans
of $4.1 million and automobile loans of $2.1 million. While such loans generally
have shorter terms to maturity and carry higher rates of interest, which
mitigate the Savings Bank's exposure to interest rate risk, there are certain
credit risks associated with such loans that are greater than the risk
associated with one- to four-family residential mortgage loans. Difficulty in
estimating collateral values accurately, greater sensitivity of borrowers to
changing economic conditions, among other things, are major factors that
contribute to this higher risk. The Savings Bank's agricultural and indirect
automobile lending activities also have added risk in that the Savings Bank
lacks significant prior history with such lending. See "RISK FACTORS -- Recent
Growth in, Unseasoned Nature of Agricultural, Commercial Business and Indirect
Automobile Lending," "-- Certain Lending Risks -- Risks of Agricultural
Lending," "-- Interest Rate Risk"
22
and "-- Asset and Liability Management." In addition to mitigating interest rate
risk by originating agricultural and commercial business loans and purchasing
dealer-originated automobile contracts, since January 1997 the Savings Bank also
has attempted to mitigate interest rate risk by selling all conforming fixed
rate residential mortgage loans with maturities of over 15 years. See "BUSINESS
OF THE SAVINGS BANK -- Lending Activities -- Loan Originations, Sales and
Purchases."
Subject to market conditions and the Savings Bank's underwriting
guidelines, the Savings Bank expects to continue to emphasize commercial banking
activities to provide a larger array of loan products to meet the financial
needs of customers in its primary market area other than the need for
residential mortgage financing. Currently, the Savings Bank's Board of Directors
has established a maximum dollar limit of $10 million on outstanding
agricultural loans (exclusive of any unused portions of commitments to extend
agricultural credit). However, there can be no assurances that the Savings Bank
will meet its objectives in increasing the size of its agricultural, commercial
business and indirect dealer automobile loan portfolio. Factors that may affect
the ability of the Savings Bank to increase its originations in this area
include the demand for such loans, interest rates and the local and national
economic conditions.
Comparison of Financial Condition at March 31, 1997 and June 30, 1996
Total assets of the Savings Bank were $204.2 million at March 31, 1997 and
$203.5 million at June 30, 1996. This slight increase resulted primarily from
growth in the loan portfolio, which was funded primarily by maturities of
investment securities and retained earnings.
Loans receivable, net, were $138.9 million at March 31, 1997 compared to
$132.3 million at June 30, 1996, a 5.0% increase. A substantial portion of the
Savings Bank's loan portfolio is secured by real estate, either as primary or
secondary collateral, located in its primary market area. There are certain
risks associated with this credit concentration. See "RISK FACTORS --
Concentration of Credit Risk." In addition, the period between June 30, 1996 and
March 31, 1997 saw a continuing trend in the growth of the consumer and
commercial business loan portfolios as the Savings Bank emphasized the
origination of loans with shorter maturities for asset and liability management
purposes (see "-- Asset and Liability Management"), as well as the development
of an agricultural loan portfolio that amounted to $2.5 million at March 31,
1997.
Loans held-for-sale were $428,000 at March 31, 1997. No loans were
classified as held-for-sale at June 30, 1996. To mitigate interest rate risk,
the Savings Bank occasionally classifies fixed rate one- to- four family
mortgage loans that conform to secondary market standards and with terms of 15
years or more as held for sale. The Savings Bank generally sells such loans and
the related servicing rights to private investors. See "-- Asset and Liability
Management."
Cash and cash equivalents were $5.0 million at March 31, 1997 compared to
$3.4 million at June 30, 1996. The increase between June 30, 1996 and March 31,
1997 primarily reflects the increase in deposits and the proceeds from maturing
securities.
Trading securities totaled $2.6 million at June 30, 1996. There were no
trading securities at March 31. 1997. During the nine months ended March 31,
1997, the Savings Bank reclassified, under SFAS No. 115 guidelines, $2.4 million
of trading securities (at fair value) to available-for-sale as management had
not purchased such securities with the principal intent of selling them in the
near term. See Note 1 of Notes to Consolidated Financial Statements. Trading of
investment securities is not part of the Savings Bank's operating strategy.
Available-for-sale securities were $35.7 million at March 31, 1997,
compared to $39.4 million at June 30, 1996. This decrease primarily resulted
from maturities and the redemption prior to maturity of $5.0 million of callable
U.S. government agency obligations, as well as maturities of mortgage-backed and
related securities. These decreases were primarily offset by the transfer of
trading securities to available-for-sale classification and the
23
purchase during April and May 1997 of $8.0 million of intermediate term FNMA
obligations and $2.0 of intermediate term FHLB agency securities.
Held-to-maturity securities declined to $15.3 million at March 31, 1997
from $17.0 million at June 30, 1996 because of principal reductions on
mortgage-backed and related securities.
Premises and equipment, net, increased to $4.6 million at March 31, 1997
from $4.4 million at June 30, 1996 primarily as a result of construction in
process associated with the construction of the Island City branch office. See
"BUSINESS OF THE SAVINGS BANK -- Properties" and Note 5 of Notes to Consolidated
Financial Statements.
Total deposits were $179.2 million at March 31, 1997, compared to $176.6
million at June 30, 1996. Management attributes the increase primarily to
seasonal deposit flows (I.E., deposit balances are typically higher immediately
before the April 15th federal income tax deadline) and an attempt to attract
core deposits.
FHLB of Seattle advances decreased to $800,000 at March 31, 1997 from $2.7
million at June 30, 1996 as deposit growth and funds generated from maturing
securities and retained earnings were sufficient to meet liquidity needs.
Subject to market conditions, the Savings Bank intends to engage in "wholesale
leveraging" by investing FHLB of Seattle advances in investment securities of
the type in which the Savings Bank currently invests, with the goal of
recognizing income on the difference between the interest rate paid on the
advances and the interest rate earned on the securities. Accordingly, FHLB
advances could be expected to increase to approximately $25 million to support
such "wholesale leveraging," which may commence prior to the consummation of the
Conversion. To the extent any such FHLB advances would be outstanding before the
consummation of the Conversion, the Savings Bank may use a portion of the net
proceeds to repay them. See "USE OF PROCEEDS," "BUSINESS OF THE SAVINGS BANK --
Investment Activities" and "-- Deposit Activities and Other Sources of Funds --
Borrowings."
Advances from borrowers for taxes and insurance decreased to $678,000 at
March 31, 1997 from $1.4 million at June 30, 1996 as a result of timing
differences in annual mortgage escrow payments.
Total equity increased to $21.0 million at March 31, 1997 from $20.0
million at June 30, 1996.
Comparison of Operating Results for the Nine Months Ended March 31, 1997 and
1996
General. Subsequent to June 30, 1996, the Savings Bank changed its fiscal
year end from June 30 to March 31. To assist in the analysis of the results of
operations for the nine months ended March 31, 1997, the results of operations
for such period have been compared to the results of operations for the nine
months ended March 31, 1996, rather than the year ended June 30, 1996. See
"SELECTED CONSOLIDATED FINANCIAL INFORMATION" for summary numerical information
regarding the results of operations for the nine months ended March 31, 1996.
Net Income. Net income was $1.1 million for the nine months ended March 31,
1997, compared to $1.7 million for the nine months ended March 31, 1996. This
35.3% decline, resulted primarily from an increase in other expenses and, to a
lesser extent, an increase in the provision for loan losses. The increase in
other expenses was primarily the result of the legislatively-mandated, one-time
assessment levied by the FDIC on all SAIF-insured institutions to recapitalize
the SAIF. Without this assessment, which amounted to $1.1 million ($707,000
after tax), net income would have been $1.8 million for the nine months ended
March 31, 1997.
Net Interest Income. Net interest income increased 12.1% to $6.5 million
for the nine months ended March 31, 1997 from $5.8 million for the nine months
ended March 31, 1996 primarily as a result of a decrease in interest expense.
Interest income was $12.0 million for both the nine months ended March 31, 1997
and 1996. Interest expense decreased 8.2% from $6.1 million for the nine months
ended March 31, 1996 to $5.6 million for the nine months ended March 31, 1997
primarily as a result of a decrease in the average cost of all interest-bearing
24
liabilities. The average cost of deposits decreased from 4.43% for the nine
months ended March 31, 1996 to 4.27% for the nine months ended March 31, 1997,
primarily as a result of a lower average rate paid on all deposits, other than
passbook accounts. The Savings Bank has been able to maintain its deposit base
without resorting to aggressive deposit pricing. The average rate paid on
securities sold under agreements to repurchase decreased from 3.58% for the nine
months ended March 31, 1996 to 3.47% for the nine months ended March 31, 1997,
primarily as a result of a general decline in interest rates. The average rate
paid on FHLB of Seattle advances decreased from 6.08% for the nine months ended
March 31, 1996 to 4.88% for the nine months ended March 31, 1997, as a result of
the repayment of higher cost longer term advances. Interest rate spread
increased to 3.90% for the nine months ended March 31, 1997 from 3.45% for the
nine months ended March 31, 1996.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for known and inherent risks in the loan
portfolio, including management's continuing analysis of factors underlying the
quality of the loan portfolio. These factors include changes in portfolio size
and composition, actual loan loss experience, current and anticipated economic
conditions, detailed analysis of individual loans for which full collectibility
may not be assured, and determination of the existence and realizable value of
the collateral and guarantees securing the loans. See "BUSINESS OF THE SAVINGS
BANK -- Lending Activities -- Nonperforming Assets and Delinquencies" and Note 1
of Notes to Consolidated Financial Statements.
The provision for loan losses was $216,000 for the nine months ended March
31, 1997 compared to $91,000 for the same period in 1996. Management deemed the
increase in the provision for loan losses necessary in light of the increase in
the relative level of estimated losses caused by the growth of the loan
portfolio, particularly in the higher risk areas of agricultural, commercial
business and consumer loans. See "RISK FACTORS -- Recent Growth in, Unseasoned
Nature of Agricultural, Commercial Business and Indirect Automobile Lending."
Management deemed the allowance for loan losses adequate at March 31, 1997.
Other Income. Other income was $661,000 for the nine months ended March 31,
1997, compared to $597,000 for the nine months ended March 31, 1996. This 10.7%
increase resulted primarily from a general increase in the Savings Bank's
service charge and fee schedule.
Other Expenses. Other expenses were $5.1 million for the nine months ended
March 31, 1997, compared to $3.6 million for the same period in 1996. This
increase resulted primarily from the FDIC special assessment on all SAIF-insured
institutions to recapitalize the SAIF. The Savings Bank's assessment amounted to
$1.1 million, pre-tax, and was accrued during the quarter ended September 30,
1996. Prior to the SAIF recapitalization, the Savings Bank's total annual
deposit insurance premiums amounted to 0.23% of assessable deposits. Effective
January 1, 1997, the rate decreased to 0.065% of assessable deposits. See
"REGULATION -- Federal Regulation of the Savings Bank -- Federal Deposit
Insurance Corporation" and Note 10 of Notes to the Consolidated Financial
Statements. Other expenses also increased as a result of increases in occupancy,
compensation and marketing expenses. Occupancy expenses increased from $206,000
for the nine months ended March 31, 1996 to $232,000 for the same period in 1997
as a result of remodeling expenses of two branch facilities. Compensation
expenses increased from $2.0 million for the nine months ended March 31, 1996 to
$2.2 million for the same period in 1997 as a result of the hiring of new
employees. Marketing expenses increased from $107,000 for the nine months ended
March 31, 1996 to $173,000 for the same period in 1997 as a result of general
increases in marketing expenses. The general growth of the Savings Bank and
inflation also resulted in normal increases in the various other categories of
other expenses. The Savings Bank anticipates that other expenses will increase
in subsequent periods following the consummation of the Conversion as a result
of increased costs associated with operating as a public company and increased
compensation expense as a result of the adoption of the ESOP and, if approved by
the Holding Company's stockholders, the MRP. See "RISK FACTORS -- Return on
Equity After Conversion," and "-- New Expenses Associated With ESOP and MRP."
25
Income Taxes. The provision for income taxes was $749,000 for the nine
months ended March 31, 1997 compared to $1.0 million for the nine months ended
March 31, 1996 as a result of lower income before income taxes.
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Net Income. Net income was $2.2 million for the year ended June 30, 1996
compared to $2.3 million a year earlier. This 4.3% decline resulted primarily
from an increase in the provision for loan losses and a decrease in other income
that together more than offset an increase in net interest income.
Net Interest Income. Net interest income was $8.0 million for the year
ended June 30, 1996, compared to $7.7 million for the year ended June 30, 1995,
a 3.9% increase. The increase in interest income from $14.8 million in 1995 to
$16.0 million in 1996 more than offset the increase in interest expense from
$7.1 million in 1995 to $8.1 million in 1996. The increase in interest income
resulted primarily from an increase in the average yield on interest-earning
assets from 7.56% in 1995 to 8.02% in 1996 and, to a lesser extent, to an
increase in the average balance of interest earning assets from $195.8 million
in 1995 to $199.7 million in 1996. Both the average balance (from $118.7 million
in 1995 to $129.0 million in 1996) and the average yield earned (from 8.16% in
1995 to 8.65% in 1996) on loans receivable, net, increased as a result of growth
in one- to- four family mortgage loans, growth in higher yielding commercial
business and consumer loans and the upward repricing of approximately $44.8
million of ARM loans tied to the Eleventh District Cost of Funds Index ("COFI"),
a lagging index. The increase in interest expense was primarily the result of an
increase in the average cost of deposits and an increase in the average cost of
FHLB of Seattle advances. The average cost of deposits increased from 3.92% in
1995 to 4.40% in 1996 as lower cost passbook and NOW accounts were replaced by
higher cost certificates of deposit. The average cost of FHLB of Seattle
advances increased from 5.18% in 1995 to 6.21% in 1996 as longer term advances
were used to meet liquidity needs as the average balance of deposits decreased
from $173.0 million in 1995 to $172.2 million in 1996. Interest rate spread
declined from 3.61% in 1995 to 3.56% in 1996.
Provision for Loan Losses. The provision for loan losses was $115,000 for
the year ended June 30, 1996, compared to $67,000 for the year ended June 30,
1995. Management increased the provision for loan losses primarily to replenish
the allowance for loan losses depleted by the charge-off of $41,000 of
outstanding credit card balances during 1996. See "BUSINESS OF THE SAVINGS BANK
- -- Lending Activities -- Allowance for Loan Losses."
Other Income. Other income was $711,000 for the year ended June 30, 1996,
compared to $1.1 million for the year ended June 30, 1995. Service charges on
deposit accounts increased from $506,000 in 1995 to $520,000 in 1996 as the
Savings Bank collected insufficient funds fees and other account service charges
more aggressively. Loan servicing fees decreased from $83,000 in 1995 to $65,000
in 1996 as a result of the origination of no fee loan products during 1996. Net
losses on trading securities of $71,000 were realized in 1996, as opposed to net
gains of $280,000 in 1995. During the nine months ended March 31, 1997, the
Savings Bank reclassified all trading securities and available-for-sale
securities. See "-- Comparison of Financial Condition at March 31, 1997 and June
30, 1996."
Other Expenses. Other expenses were $5.0 million for the years ended June
30, 1996 and 1995. Employee compensation and benefits decreased from $2.8
million in 1995 to $2.7 million in 1996 as a result of normal attrition.
Occupancy and equipment expense decreased from $348,000 in 1995 to $273,000 in
1996 as a result of the implementation of cost controls. Supplies, postage and
telephone increased from $300,000 in 1995 to $362,000 in 1996 primarily as a
result of increased telephone costs associated with an upgrade in the data
processing communications equipment. Depreciation expense increased from
$244,000 in 1995 to $300,000 in 1996 as a result of the depreciation of new
furniture, fixtures and equipment associated with the remodeling of the Ontario
branch. The Savings Bank hired an outside marketing consultant in 1996 to
analyze and offer suggestions to improve the Savings Bank's competitive position
in its primary market area, which resulted in an increase in advertising expense
from $151,000 in 1995 to $202,000 in 1996.
26
Income Taxes. The provision for income taxes was $1.4 million for the year
ended June 30, 1996, compared to $1.5 million for the year ended June 30, 1995
as a result of lower income before income taxes.
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 balances of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
monthly balances. Management does not believe that the use of month-end balances
instead of daily balances has caused any material inconsistencies in the
information presented.
27
Nine Months Ended March 31,
------------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1) ............................ $135,768 $ 8,916 8.75% $128,305 $ 8,284 8.59%
Mortgage-backed and related securities ............... 36,942 2,058 7.42 43,580 2,378 7.26
Investment securities ................................ 17,181 860 6.67 20,788 1,122 7.18
FHLB of Seattle stock ................................ 2,672 154 7.69 2,477 135 7.25
Federal funds sold and overnight
interest-earning deposits ........................... 3,584 42 1.55 5,078 43 1.12
-------- ------- -------- -------
Total interest-earning assets ...................... 196,147 12,030 8.17 200,228 11,962 7.95
-------- ------- -------- -------
Non-interest-earning assets ........................... 7,161 6,607
-------- --------
Total-assets ........................................ 203,318 12,030 206,835
-------- ------- --------
Interest-bearing liabilities:
Passbook accounts .................................... 24,245 525 2.89 25,640 555 2.88
Money market accounts ................................ 15,195 404 3.54 14,242 396 3.70
NOW accounts ......................................... 27,102 318 1.56 28,470 422 1.97
Certificates of deposit .............................. 104,480 4,238 5.40 103,971 4,365 5.59
-------- ------- -------- -------
Total deposits ..................................... 171,022 5,485 4.27 172,323 5,738 4.43
-------- ------- -------- ------- ----
Securities sold under agreements
to repurchase ....................................... 1,396 36 3.47 1,215 33 3.58
FHLB of Seattle advances ............................. 862 32 4.88 7,939 363 6.08
-------- ------- -------- -------
Total interest-bearing liabilities ................. 173,280 5,553 4.27 181,477 6,134 4.50
-------- ------- -------- -------
Non-interest-bearing liabilities ...................... 9,418 6,522
-------- --------
Total liabilities .................................. 182,698 187,999
-------- --------
Retained earnings ..................................... 20,610 18,836
-------- --------
Total liabilities and retained
earnings ..................................... $203,308 $206,835
======== ========
Net interest income ................................... $ 6,477 $ 5,828
======= =======
Interest rate spread .................................. 3.90% 3.45%
Net interest margin ................................... 4.40% 3.87%
Ratio of average interest-earning
assets to average interest-
bearing liabilities .................................. 113.20% 110.33%
Year Ended June 30,
-------------------------------------------------------------------------
1996 1995
----------------------------------- ----------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1) ............................ $128,986 $11,154 8.65% $118,674 $ 9,680 8.16%
Mortgage-backed and related securities ............... 42,660 3,123 7.32 47,731 3,362 7.04
Investment securities ................................ 20,673 1,445 6.99 22,945 1,530 6.67
FHLB of Seattle stock ................................ 2,500 185 7.39 2,329 142 6.10
Federal funds sold and overnight
interest-earning deposits ........................... 4,850 105 2.17 4,162 92 2.22
------- ------ ------- ------
Total interest-earning assets ...................... 199,669 16,012 8.02 195,841 14,806 7.56
------- ------ ------- ------
Non-interest-earning assets ........................... 6,635 5,743
------- -------
Total-assets ........................................ 206,304 201,584
------- -------
Interest-bearing liabilities:
Passbook accounts .................................... 25,446 735 2.89 30,985 895 2.89
Money market accounts ................................ 14,469 530 3.67 14,140 483 3.42
NOW accounts ......................................... 28,170 532 1.89 31,134 704 2.26
Certificates of deposit .............................. 104,156 5,782 5.55 96,740 4,707 4.87
------- ------ ------- ------
Total deposits ..................................... 172,241 7,579 4.40 172,999 6,789 3.92
------- ------- ------- ------
Securities sold under agreements
to repurchase ....................................... 1,260 45 3.56 1,537 50 3.28
FHLB of Seattle advances ............................. 6,965 433 6.21 4,686 243 5.18
------- ------ ------- ------
Total interest-bearing liabilities ................. 180,466 8,057 4.46 179,222 7,082 3.95
------- ------ ------- ------
Non-interest-bearing liabilities ...................... 6,777 5,736
------- -------
Total liabilities .................................. 187,243 184,958
------- -------
Retained earnings ..................................... 19,061 16,626
------- -------
Total liabilities and retained
earnings ..................................... $206,304 $201,584
======== ========
Net interest income ................................... $ 7,955 $ 7,724
======== =======
Interest rate spread .................................. 3.56% 3.61%
Net interest margin ................................... 3.98% 3.94%
Ratio of average interest-earning
assets to average interest-
bearing liabilities .................................. 110.64% 109.27%
(1) Does not include interest on loans 90 days or more past due. Includes loans
originated for sale.
28
Yields Earned and Rates Paid
The following table sets forth for the periods and at the dates indicated,
the weighted average yields earned on the Savings Bank's assets, the weighted
average interest rates paid on the Savings Bank's liabilities, together with the
net yield on interest-earning assets.
At Nine Months Ended Year
March 31, March 31, Ended June 30,
1997 1997 1996 1996 1995
--------- ------------------ -------------------
Weighted average yield on:
Loans receivable ............................................. 8.77% 8.75% 8.59% 8.65% 8.16%
Mortgage-backed and related securities ....................... 7.28 7.42 7.26 7.32 7.04
Investment securities ........................................ 6.54 6.67 7.18 6.99 6.67
FHLB of Seattle stock ........................................ 7.25 7.69 7.25 7.39 6.10
Federal funds sold and overnight
interest-bearing deposits ................................... 1.22 1.55 1.12 2.17 2.22
All interest-earning assets .................................. 8.11 8.17 7.95 8.02 7.56
Weighted average rate paid on:
Passbook savings accounts .................................... 2.89 2.89 2.89 2.89 2.89
NOW accounts ................................................. 1.56 1.56 1.97 1.89 2.26
Money market accounts ........................................ 3.53 3.54 3.70 3.67 3.42
Certificate accounts ......................................... 5.44 5.40 5.59 5.55 4.87
Securities sold under agreements
to repurchase ............................................... 3.50 3.47 3.58 3.56 3.28
FHLB advances ................................................ 5.70 4.88 6.08 6.21 5.18
All interest-bearing liabilities ............................. 4.25 4.27 4.50 4.46 3.95
Interest rate spread spread between
weighted average rate on all
interest-earning assets and all interest-
bearing liabilities) ........................................ 3.86% 3.90% 3.45% 3.56% 3.61%
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets) ..................................... 4.31% 4.40% 3.87% 3.97% 3.94%
29
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of the Savings Bank. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume),
and (iii) the net change attributable to the combined impact of volume and rate.
Nine Months Ended March 31, Year Ended June 30,
1997 Compared to Nine Months 1996 Compared to Year
Ended March 31, 1996 Ended June 30, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ---------------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
------- -------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) .................... $ 154 $ 481 $ 12 $ 647 $ 582 $ 841 $ 51 $ 1,474
Mortgage-backed and related securities .. 52 (362) (11) (321) 134 (357) (14) (237)
Investment securities ................... (80) (194) 18 (256) 73 (152) (7) (86)
FHLB stock .............................. 8 11 1 20 30 10 2 42
Federal funds sold and overnight
interest-bearing deposits .............. 16 (13) (6) (3) (2) 15 -- 13
------- -------- ------- ------- ------- ------- ------- -------
Total net change in income
on interest-earning assets .............. 150 (77) 14 87 817 357 32 1,206
------- -------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Passbook accounts ....................... -- (30) -- (30) -- (160) -- (160)
NOW accounts ............................ (17) 26 (2) 7 35 11 1 47
Money market accounts ................... (88) (20) 6 (102) (115) (67) 11 (171)
Certificate accounts .................... (148) 21 (1) (128) 658 361 50 1,069
Securities sold under agreements
to repurchase .......................... (1) 5 -- 4 4 (9) (1) (6)
FHLB advances ........................... (72) (323) 85 (310) 48 118 23 189
------- -------- ------- ------- ------- ------- ------- -------
Total net change in expense
on interest-bearing liabilities ......... (326) (321) 88 (559) 630 254 84 968
------- -------- ------- ------- ------- ------- ------- -------
Net change in net interest income......... $ 476 $ 244 $ (74) $ 646 $ 187 $ 103 $ (52) $ 238
======= ======= ======= ======= ======= ======= ======= =======
Year Ended June 30,
1995 Compared to Year
Ended June 30, 1994
Increase (Decrease)
Due to
------------------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ -----
Interest-earning assets:
Loans receivable (1) ................. $ (544) $ 1,219 $ (75) $ 602
Mortgage-backed and related securities (20) (212) 1 (231)
Investment securities ................ (46) 144 (5) 93
FHLB stock ........................... (94) 17 (7) (84)
Federal funds sold and overnight
interest-bearing deposits ........... 7 (195) (4) (192)
------- ------- ------ ------
Total net change in income
on interest-earning assets ........... (697) 973 (88) 188
------- ------- ------ ------
Interest-bearing liabilities:
Passbook accounts .................... 3 (97) -- (94)
NOW accounts ......................... 96 (22) (5) 69
Money market accounts ................ (60) (98) 7 (151)
Certificate accounts ................. 218 272 14 504
Securities sold under agreements
to repurchase ....................... 7 (20) (2) (15)
FHLB advances ........................ -- 35 242 277
------- ------- ------ ------
Total net change in expense
on interest-bearing liabilities ...... 264 70 256 590
------- ------- ------ ------
Net change in net interest income ..... $ (961) $ 903 $ (344) $ (402)
======== ======== ======= =======
- ----------
(1) Does not include interest on loans 90 days or more past due. Includes loans
originated for sale.
30
Asset and Liability Management
The Savings Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest rates.
The Savings Bank has sought to reduce the exposure of its earnings to changes in
market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. The principal element in achieving this
objective is to increase the interest-rate sensitivity of the Savings Bank's
interest-earning assets by retaining for its portfolio loans with interest rates
subject to periodic adjustment to market conditions (including commercial
business, agricultural and consumer loans) and, since January 1997, selling
conforming fixed-rate one- to- four family mortgage loans with maturities of
over 15 years. In addition, the Savings Bank maintains an investment portfolio
of U.S. Government and government agency securities with contractual maturities
of generally between one and ten years. The Savings Bank relies on retail
deposits as its primary source of funds. Management believes retail deposits,
compared to brokered deposits, reduce the effects of interest rate fluctuations
because they generally represent a more stable source of funds. As part of its
interest rate risk management strategy, the Savings Bank promotes transaction
accounts and certificates of deposit with terms up to six years.
In order to encourage institutions to reduce their interest rate risk, the
OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data compiled by the FHLB-Seattle, the Savings
Bank receives a report which measures interest rate risk by modeling the change
in NPV over a variety of interest rate scenarios. This procedure for measuring
interest rate risk was developed by the OTS to replace the "gap" analysis (the
difference between interest-earning assets and interest-bearing liabilities that
mature or reprice within a specific time period). 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 change in interest rates with no effect given to any
steps that management might take to counter the effect of that interest rate
movement. Under proposed OTS regulations, an institution with a greater than
"normal" level of interest rate risk will be subject to a deduction from total
capital for purposes of calculating its risk-based capital. An institution with
a "normal" level of interest rate risk is defined as one whose "measured
interest rate risk" is less than 2.0%. Institutions with assets of less than
$300 million and a risk-based capital ratio of more than 12.0%, like the Savings
Bank, are exempt. Based on the Savings Bank's regulatory capital levels at March
31, 1997, the Savings Bank believes that, if the proposed regulation was
implemented at that date, the regulation would not have had a material adverse
effect on the Savings Bank's regulatory capital compliance.
The following table is provided by the FHLB-Seattle and sets forth the
change in the Savings Bank's NPV at March 31, 1997, based on FHLB-Seattle
assumptions, that would occur in the event of an immediate change in interest
rates, with no effect given to any steps that management might take to
counteract that change.
Basis Point ("bp") Estimated Change in
Change in Rates Net Portfolio Value
--------------- -------------------------
(Dollars in thousands)
400 $(11,491) (53.54)%
300 (8,013) (37.34)
200 (4,824) (22.48)
100 (2,169) (10.11)
0 -- --
(100) 1,346 6.27
(200) 1,786 8.32
(300) 3,202 14.92
(400) 5,083 23.68
31
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 1997 would reduce the
Savings Bank's NPV by approximately $4.8 million, or 22.5%, at that date.
Certain assumptions utilized by the FHLB-Seattle in assessing the interest
rate risk of savings associations within its region were utilized in preparing
the preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. In the
event of a change in interest rates, expected rates of prepayments on loans and
early withdrawals from certificates could deviate significantly from those
assumed in calculating the table. The model assumes a parallel change in rates,
whereas actual market interest rates would not necessarily react in a parallel
manner. Further, call provisions of certain securities, which shorten the actual
term to maturity if exercised, are not taken into account in the model.
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are customer deposits,
securities sold under agreements to repurchase, proceeds from principal and
interest payments on and the sale of loans, maturing securities and FHLB
advances. While maturities and scheduled amortization of loans are a predictable
source of funds, deposit flows, mortgage prepayments and maturing securities,
cash flows and anticipated maturities of mortgage-backed bonds and agency
securities all of which are greatly influenced by general interest rates,
economic conditions and competition.
The Savings Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Savings Bank generally maintains sufficient cash
and short-term investments to meet short-term liquidity needs. At March 31,
1997, cash and cash equivalents totaled $5.0 million, or 2.4% of total assets.
The Savings Bank also maintained, an uncommitted credit facility with the
FHLB-Seattle, which provided for immediately available advances up to an
aggregate amount of $$40.8 million, under which $800,000 was outstanding at
March 31, 1997.
OTS regulations require savings institutions 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
Savings Bank's actual short- and long-term liquidity ratios at March 31, 1997
were 2.7% and 8.3%, respectively.
The Savings Bank's primary investing activity is the origination of one-
to- four family mortgage loans within its primary market area. During the nine
months ended March 31, 1997 and the years ended June 30, 1996 and 1995, the
Savings Bank originated $9.0 million, $17.4 million and $16.5 million of such
loans, respectively. At March 31, 1997, the Savings Bank had commitments to
extend credit totaling $11.2 million and undisbursed loans in process totaling
$769,000. The Savings Bank anticipates that it will have sufficient funds
available to meet current loan commitments. Certificates of deposit that are
scheduled to mature in less than one year from March 31, 1997 totaled $77.4
million. Historically, the Savings Bank has been able to retain a significant
amount of its deposits as they mature.
OTS regulations require the Savings Bank to maintain specific amounts of
regulatory capital. As of March 31, 1997, the Savings Bank complied with all
regulatory capital requirements as of that date with tangible, core and
risk-based capital ratios of 10.3%, 10.2% and 21.2%, respectively. For a
detailed discussion of regulatory capital requirements, see "REGULATION --
Federal Regulation of Savings Banks -- Capital Requirements." See also
"HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE."
32
Impact of Accounting Pronouncements and Regulatory Policies
Accounting by Creditors for Impairment of a Loan. See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." The Savings Bank adopted SFAS
No. 114 and SFAS No. 118 effective July 1, 1995, and their adoption did not have
a material effect on the Savings Bank's financial condition or results of
operations.
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 and to exclude unallocated shares from earnings per share
computations. The effect of SOP 93-6 on net income and book value per share in
future periods cannot be predicted due to the uncertainty of the fair value of
the shares at the time they will be committed to be released. See "RISK FACTORS
- -- New Expenses Associated With ESOP and MRP" and "PRO FORMA DATA."
Disclosure of Certain Significant Risks and Uncertainties. In December 1994
the Accounting Standards Executive Committee issued SOP 94-6, "Disclosure of
Certain Significant Risks and Uncertainties." This SOP applies to financial
statements prepared in conformity with GAAP by all nongovernmental entities. The
disclosure requirements in SOP 94-6 focus primarily on risks and uncertainties
that could significantly affect the amounts reported in the financial statements
in the near-term functioning of the reporting entity. The risks and
uncertainties discussed in SOP 94-6 stem from the nature of the entity's
operations, from the necessary use of estimates in the preparation of the
entity's financial statements and from significant concentrations in certain
aspects of the entity's operations. SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995 and did not
have a material impact on the financial condition or results of operations of
the Savings Bank.
Accounting for Stock-Based Compensation. SFAS No. 123, "Accounting for
Stock-Based Compensation," establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement 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 method are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share, as if
this statement had been adopted. The accounting requirements of this statement
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.
Management expects to use the intrinsic value method upon consummation of the
Conversion and the adoption of stock based benefit plans.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The standards
are based on consistent application of a financial-components approach that
focuses on control period. Under the approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings.
33
SFAS No. 125 amends SFAS No. 122. Adoption of this statement on January 1,
1997 did not have a material impact on the Savings Bank's financial position or
results of operations.
Earnings Per Share. SFAS No. 128, "Earnings Per Share," issued in February
1997, establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires the dual presentation of basic and diluted EPS on the
face of the income statement. This statement is effective for financial
statements issued for periods after December 15, 1997 including interim periods;
earlier applications not permitted. This statement requires restatement of all
prior period EPS data presented.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which 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 Savings Bank'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.
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as an Oregon business corporation at the
direction of the Savings Bank on June 9, 1997 for the purpose of becoming a
holding company for the Savings Bank upon completion of the Conversion. As a
result of the Conversion, the Savings Bank will be a wholly-owned subsidiary of
the Holding Company and all of the issued and outstanding capital stock of the
Savings Bank will be owned by the Holding Company.
Business
Prior to the Conversion, the Holding Company has not and will not engage in
any significant activities other than of an organizational nature. Upon
completion of the Conversion, the Holding Company's sole business activity will
be the ownership of the outstanding capital stock of the Savings Bank. 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 Savings Bank with
the payment of appropriate rental fees, as required by applicable law and
regulations.
Since the Holding Company will only hold the outstanding capital stock of
the Savings Bank upon consummation of the Conversion, the competitive conditions
applicable to the Holding Company will be the same as those confronting the
Savings Bank. See "BUSINESS OF THE SAVINGS BANK -- Competition."
34
BUSINESS OF THE SAVINGS BANK
General
The Savings Bank operates, and intends to continue to operate, as a
community oriented financial institution devoted to serving the needs of its
customers. The Savings Bank's business consists primarily of attracting retail
deposits from the general public and using those funds to originate real estate
loans, consumer loans and more recently an increasing amount of agricultural,
commercial business and indirect automobile loans. See "-- Lending Activities."
Market Area
The Savings Bank's primary market area encompasses those regions
surroundings its offices in Baker, Grant, Harney, Malheur, Union, Wallowa and
Wheeler Counties in Oregon and Payette and Washington Counties in Idaho. The
Savings Bank's home office is located in Baker City, Oregon with branches in
Ontario, John Day, Burns, Enterprise and two locations in La Grande. One of the
La Grande branches is being relocated to nearby Island City.
The principal industries of the market area are agriculture and timber
products. The Savings Bank's market area is largely rural, with most of the
farms and ranches being relatively small and family owned. The local economies
are also dependent on retail trade with lumber, recreation and tourism providing
substantial contributions. Major employers in the market area include Boise
Cascade, Ore-Ida, Grande Ronde Hospital, Holy Rosary Hospital, Snake River
Correctional Institute, Powder River Correctional Facility, U.S. Forest Service
and Bureau of Land Management, Oregon Department of Transportation, Treasure
Valley Community College, Eastern Oregon University, local school districts and
local government.
Unemployment rates in the market area are considerably higher than both
state and national unemployment rates and have increased consistently over the
past few years. The market area is characterized as having average growth rates
in population and household levels, while having lower than average levels of
income and housing values, with the cost of living being close to the national
average but remaining significantly less than in major metropolitan areas.
The Savings Bank faces strong competition from many financial institutions
for deposits and loan originations, many of whom are significantly larger than
the Savings Bank. See "-- Competition" and "RISK FACTORS -- Competition."
Lending Activities
General. The Savings Bank's loan portfolio totaled $139.0 million at March
31, 1997, representing 68.0% of total assets at that date. It is the Savings
Bank's policy to concentrate its lending within its primary market area.
Historically, the Savings Bank's primary lending activity has been the
origination of one- to- four family residential mortgage loans and at March 31,
1997, $101.8 million, or 72.0%, of the total loan portfolio, consisted of one-
to- four family, residential mortgage loans. Other loans secured by real estate
include commercial, multi-family and residential real estate loans, which
amounted to $4.8 million, or 3.4% and $1.8 million, or 1.3%, respectively, of
the total loan portfolio at March 31, 1997. To a lesser extent, the Savings Bank
makes mortgage loans for the purpose of constructing primarily single-family
residences. At March 31, 1997, construction loans totaled $853,000, or 1.0% of
the total loan portfolio.
As a result of management's perception of minimal anticipated growth in
residential loan demand within the Savings Bank's primary market area and a
local demand for agricultural, commercial business and consumer loans, the
Savings Bank has significantly increased its origination of agricultural,
indirect dealer automobile and commercial business loans since July 1996.
Commercial business loans include agricultural operating loans and equipment
loans. At March 31, 1997, commercial business loans amounted to $4.1 million, or
2.9%, of the Savings
35
Bank's total loan portfolio and agricultural loans amounted to $2.5 million, or
1.7% of the total loan portfolio, the majority of which consisted of
agricultural operating loans.
Historically, the Savings Bank has been active in the origination of
consumer loans, which primarily consist of home equity loans, secured and
unsecured and, to a lesser extent, automobile loans, credit card loans, home
improvement loans, mobile home loans and loans secured by savings deposits.
Consumer loans amounted to $25.4 million, or 18.0%, of the total loan portfolio
at March 31, 1997. More recently, the Savings Bank has increased its purchase of
dealer-originated automobile contracts. See "RISK FACTORS -- Recent Growth in,
Unseasoned Nature of Agricultural, Commercial Business and Indirect Automobile
Lending" and "-- Certain Lending Risks -- Risks of Agricultural Lending."
Subject to market conditions and other factors, the Savings Bank intends to
expand its purchase of dealer-originated automobile contracts to include
contracts secured by recreational vehicles, trailers, motorcycles and other
vehicles.
36
Loan Portfolio Analysis. The following table sets forth the composition of
the Savings Bank's loan portfolio (excluding loans held-for-sale) at the dates
indicated. The Savings Bank had no concentration of loans exceeding 10% of total
gross loans other than as disclosed below.
At March 31, 1997
-----------------------
Amount Percent
------ -------
Mortgage Loans:
One-to-four-family ............................. $101,792 71.99%
Multi-family ................................... 1,844 1.30
Commercial ..................................... 4,768 3.37
Construction ................................... 853 0.60
Land ........................................... 223 0.16
------- -----
Total mortgage loans .......................... 109,480 77.42
------- -----
Consumer Loans:
Home equity and second mortgage ................ 17,514 12.39
Credit card .................................... 844 0.60
Automobile(1) .................................. 2,064 1.46
Loans secured by deposit accounts .............. 731 0.52
Unsecured ...................................... 1,611 1.14
Other .......................................... 2,627 1.85
------- -----
Total consumer loans .......................... 25,391 17.96
------- -----
Commercial business loans ....................... 4,066 2.88
------- -----
Agricultural loans .............................. 2,466 1.74
------- -----
Total loans .................................. 141,403 100.00%
=======
Less:
Undisbursed portion of loans
in process..................................... 769
Net deferred loan fees.......................... 1,028
Allowance for loan losses...................... 725
-------
Total loans receivable, net.................... $138,881
========
At June 30,
---------------------------------------------------------------------------------
1996 1995 1994 1993
------------------ ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage Loans:
One-to-four-family ............................ $101,199 74.71% $ 93,436 72.95% $ 84,385 73.08% $ 73,578 73.26%
Multi-family .................................. 1,927 1.42 1,935 1.51 2,060 1.78 1,441 1.43
Commercial .................................... 4,724 3.49 5,166 4.03 3,840 3.33 3,528 3.51
Construction .................................. 1,745 1.29 1,798 1.40 3,114 2.70 2,006 2.00
Land .......................................... 14 0.01 15 0.01 32 0.03 46 0.05
-------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans ......................... 109,609 80.92 102,350 79.90 93,431 80.92 80,599 80.25
-------- ------ -------- ------ -------- ------ -------- ------
Consumer Loans:
Home equity and second mortgage ............... 12,751 9.41 12,120 9.46 10,837 9.39 9,860 9.82
Credit card ................................... 791 0.58 712 0.56 426 0.37 263 0.26
Automobile(1) ................................. 1,405 1.04 1,507 1.18 1,382 1.19 1,216 1.21
Loans secured by deposit accounts ............. 593 0.44 589 0.46 626 0.54 703 0.70
Unsecured ..................................... 4,580 3.38 4,404 3.44 3,720 3.22 3,037 3.02
Other ......................................... 2,587 1.91 3,585 2.80 3,297 2.86 3,543 3.53
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans ......................... 22,707 16.76 22,917 17.90 20,288 17.57 18,622 18.54
-------- ------ -------- ------ -------- ------ -------- ------
Commercial business loans ...................... 3,142 2.32 2,822 2.20 1,749 1.51 1,214 1.21
-------- ------ -------- ------ -------- ------ -------- ------
Agricultural loans ............................. -- -- -- -- -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------
Total loans ................................. 135,458 100.00% 128,089 100.00% 115,468 100.00% 100,435 100.00%
====== ====== ====== ======
Less:
Undisbursed portion of loans
in process............................ 1,585 2,145 2,039 1,614
Net deferred loan fees................. 985 1,049 925 753
Allowance for loan losses............. 541 455 403 506
-------- -------- -------- --------
Total loans receivable, net........... $132,347 $124,440 $112,101 $ 97,562
======== ======== ======== ========
- ----------
(1) Includes dealer-originated automobile contracts of $389,000 at March 31,
1997.
37
One- to- Four Family Real Estate Lending. Historically, the Savings Bank
has concentrated its lending activities on the origination of loans secured by
first mortgage loans on existing one- to- four family residences located in its
primary market area. At March 31, 1997, $101.8 million, or 72.0% of the Savings
Bank's total loan portfolio, consisted of such loans, with an average loan
balance of $43,000. The Savings Bank originated $9.0 million, $17.4 million and
$16.5 million of one- to- four family residential mortgage loans during the nine
months ended March 31, 1997 and the years ended June 30, 1996 and 1995,
respectively. One- to- four family originations were 52.9% of total loan
originations during the year ended June 30, 1996 as compared to 31.1% of total
originations for the nine months ended March 31, 1997.
Generally, the Savings Bank's fixed-rate one- to- four family mortgage
loans have maturities of 15 to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, they are originated under terms, conditions and
documentation which permit them to be sold to private investors. Since January
1997, loans with fixed rates and maturities of 15 years or more are generally
sold in the secondary market. See "-- Loan Originations, Sales and Purchases."
The Savings Bank's fixed-rate loans customarily include "due on sale" clauses,
which give the Savings Bank the right to declare a loan immediately due and
payable in the event the borrower sells or otherwise disposes of the real
property subject to the mortgage and the loan is not paid.
At March 31, 1997, $53.5 million, or 37.8% of the total loans before net
items were fixed rate one- to four-family loans and $48.3 million, or 34.2%,
were adjustable rate one-to-four family mortgage ("ARM") loans. The Savings Bank
currently offers an ARM product for its portfolio which adjusts on the
anniversary date of the origination based on the one year Treasury constant
maturity index. The Savings Bank's ARMs are typically based on a 30-year
amortization schedule. The Savings Bank offers discounted or "teaser" ARM loans
where the initial interest rate is 1.5 to 2.0 percentage points below the
prevailing interest rate. The Savings Bank, however, qualifies the borrowers on
its ARM loans based on the fully indexed rate. The Savings Bank's current ARM
loans do not provide for negative amortization and generally provide for annual
and lifetime interest rate adjustment limits of 2% and 6%, respectively.
At March 31, 1997, $35.3 million or 52.8% of the Savings Bank's total ARM
loans had interest rates that adjusted annually based on the COFI. The COFI is a
lagging 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. In
November 1995, the Savings Bank discontinued using the COFI index and began
using the one year Treasury constant maturity index.
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.
The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce the Savings Bank'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 and the increased payments required by the
borrower. See "RISK FACTORS -- Interest Rate Risk." In addition, although ARM
loans allow the Savings Bank to increase the sensitivity of its asset base to
changes in the interest rates, the extent of this interest sensitivity is
limited by the annual and lifetime interest rate adjustment limits. Because of
these considerations, the Savings Bank has no assurance that yields on ARM loans
will be sufficient to offset increases in the Savings Bank's cost of funds. The
Savings Bank believes these risks, which have not had a material adverse effect
on the Savings Bank to date, generally are less than the risks associated with
holding fixed-rate loans in portfolio during a rising interest rate environment.
38
The Savings Bank generally requires title insurance insuring the status of
its lien on all loans where real estate is the primary source of security. The
Savings Bank also requires that fire and casualty insurance (and, if
appropriate, flood insurance) be maintained in an amount at least equal to 80%
of the value of improvements.
The Savings Bank's one- to- four family residential mortgage loans
typically do not exceed 80% of the lower of cost or appraised value of the
security property. Pursuant to underwriting guidelines adopted by the Savings
Bank's Board of Directors, the Savings Bank can lend up to 95% of the lower of
cost or appraised value of the property securing a one- to- four family
residential loan; however, the Savings Bank generally obtains private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the security property.
Agricultural Lending. Agriculture is the major industry in the Savings
Bank's market area and the Savings Bank has been making agricultural loans to
satisfy the demand of its market area. The Savings Bank has particularly
emphasized agricultural operating loans during the past year and intends subject
to market conditions to continue such emphasis. In 1996, the Savings Bank began
originating a significant number of loans to finance agriculture production and
the expense of farming and agricultural related operations. Also, the Savings
Bank has made agricultural loans for the purchase of farmland and equipment and
loans secured by agricultural real estate. At March 31, 1997, agricultural loans
amounted to $2.5 million, or 1.7%, of the total loan portfolio. The Savings Bank
has sought to limit its agricultural lending to borrowers with a strong capital
base, sufficient management depth, proven ability to operate through
agricultural business cycles, reliable cash flow and a willingness to provide
the Savings Bank with the necessary financial reporting.
Agricultural operating loans are made to finance farm operating expenses
(I.E., acquisition of seed, fertilizer, livestock and feed, among other things)
together with, in some cases, family living expenses, over the course of a
growing season and typically are made in amounts of $500,000 or less. However,
the Savings Bank's largest agricultural operating loan at March 31, 1997 had a
commitment of $1.3 million ($744,000 outstanding) and was provided to finance a
cattle ranching operation. This loan was performing in accordance with its terms
at March 31, 1997. Agricultural operating loans generally are made in amounts of
up to 80% of the borrower's anticipated income (not including the value of the
breeding herd in the case of cattle loans) and are secured by a blanket lien on
all crops, livestock, equipment, accounts and products and proceeds thereof. The
variables that effect income during the year are cattle production, the cost of
feed and related expenses and the price to be received or in the case of crops
the acreage of the farm, the crop to be planted, the crop yield and the expected
price to be received for harvested crops. The interest rate is adjusted monthly
based on the prime rate, as published in THE WALL STREET JOURNAL, plus a
negotiated margin of up to 2%. Because such loans are made to finance a farm's
annual operations, they are written on a one-year renewable basis, and renewal
is dependent upon timely repayment of then outstanding advances. The Savings
Bank carefully monitors these loans and prepares monthly variance reports on the
income and expenses. To meet the seasonal operating needs of a farm, borrowers
may qualify for single payment notes, revolving lines of credit or non-revolving
lines of credit.
In underwriting agricultural operating loans, the Savings Bank considers
the cash flow of the borrower based upon the farm or ranch operations expected
income stream as well as the value of collateral used to secure the loan.
Collateral generally consists of cattle or cash crops produced by the farm, such
as grain, grass seed, peas, sugar beets, mint, onions, potatoes, corn and
alfalfa. In addition to considering cash flow and obtaining a blanket security
interest in the farm's cash crop, the Savings Bank may also collateralize an
operating loan with the farm's operating equipment, breeding stock, real estate,
and federal agricultural program payments to the borrower.
The Savings Bank also originates loans to finance the purchase of farm
equipment and expects to pursue this type of lending in the future. Loans to
purchase farm equipment are made for terms of up to seven years. Most such loans
carry rates which adjust at least annually based on a rate equal to the prime
rate, as published in THE WALL STREET JOURNAL, plus a negotiated margin of
between 1% and 3%.
39
Payments on an agricultural real estate loan depend to a large degree on
the results of operations of the related farm, and repayment is also subject to
adverse economic or weather conditions as well as market prices for agricultural
products, which can be highly volatile and are outside the control of the farm
borrower, among other things.
In addition to disease, weather presents one of the greatest risks as hail,
drought, floods, or other conditions, can severely limit or destroy crop yields
and thus impair loan repayments and the value of the underlying collateral. This
risk can be reduced substantially by the farmer with multi-peril crop insurance
which can guarantee set yields to provide certainty of repayment. Because of its
highs cost to the borrower, the Savings Bank encourages but generally does not
require multi-peril crop insurance. Grain and livestock prices also present a
risk as prices may decline prior to sale resulting in a failure to cover
production costs. These risks may be reduced by the use of future set price
contracts, which fixes in advance the price that the farmer will receive for the
harvested crops.
Another risk is the uncertainty of government support programs and other
regulations. Many farmers rely on the income, in part, from support programs to
make loan payments and may default on their loans if these programs are
discontinued or significantly changed. If the support programs were modified or
discontinued, the farmer could produce some income from crop growth on the idle
acreage, albeit, at an amount presumably lower than the support payments.
In addition, the value of collateral securing agricultural real estate
loans may be affected in the coming years by the gradual release of farmland
from the federal government's Conservation Reserve Program, which began in the
mid-1980's and pays farmers to keep their land out of farming production for a
ten-year period. Because such farmland is being released gradually over a ten
year period which began in 1995 and because of the anticipated high economic
costs associated with preparing such farmland for active cultivation that may
discourage renewed farming thereon, management does not anticipate that release
of this land will have any significant effect on the value of its current
collateral.
Finally, many farms are dependent on a limited number of key individuals
whose injury or death may result in an inability to operate the farm
successfully. Therefore, consideration is given to succession, life insurance
and business continuation plans during underwriting.
Construction Lending. On a limited basis, the Savings Bank also offers
construction loans to qualified borrowers for construction of single-family
residences in the Savings Bank's primary market area. Typically, the Savings
Bank limits its construction lending to a local builder for the construction of
a single-family dwelling where a permanent purchase commitment has been obtained
or individuals are building their primary residences. Generally, the Savings
Bank does not lend to contractors for housing construction where the house is
not presold. Construction loans generally have a six-month term with only
interest being paid during the term of the loan, and convert at the end of six
months to permanent financing and are underwritten in accordance with the same
standards as the Savings Bank's mortgages on existing properties. Construction
loans generally have a maximum loan-to-value ratio of 80%. Borrowers must
satisfy all credit requirements which would apply to the Savings Bank's
permanent mortgage loan financing for the subject property.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Savings Bank may be required to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of value
proves to be inaccurate, the Savings Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment. The ability of a developer to sell developed lots or
completed dwelling units will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions. The Savings Bank
has sought to minimize this risk by limiting
40
construction lending to qualified borrowers in the Savings Bank's market area
and by limiting the aggregate amount of outstanding construction loans. At March
31, 1997, construction loans amounted to $853,000, or 1.0%, of the loan
portfolio.
Multi-Family and Commercial Real Estate Lending. The multi-family
residential loan portfolio consists primarily of loans secured by small
apartment buildings and the commercial real estate loan portfolio includes loans
to finance the construction or acquisition of small office buildings, retail
stores, car dealerships and agricultural land. Such loans generally range in
size from $50,000 to $750,000 and the largest was $643,000 at March 31, 1997. At
March 31, 1997, the Savings Bank had $1.8 million of multi-family residential
and $4.8 million of commercial real estate loans, which amounted to 1.3% and
3.4%, respectively of the total loan portfolio at such date. Multi-family and
commercial real estate loans are generally underwritten with loan-to-value
ratios of up to 75% of the lesser of the appraised value or the purchase price
of the property. Such loans generally are made at the prime rate, as published
in THE WALL STREET JOURNAL, for 15 to 20 year terms and they adjust at a rate
equal to this prime rate plus a negotiated margin of 1% to 2%. Because of the
inherently greater risk involved in this type of lending, the Savings Bank
generally limits its multi-family and commercial real estate lending to
borrowers within its market area with which it has had prior experience.
Agricultural real estate loans primarily are secured by first liens on
farmland or buildings thereon located in the Savings Bank's market area,
primarily to the service the needs of the Savings Bank's existing customers.
Such loans are made in amounts of $50,000 to $250,000 with the largest loan of
$82,000 at March 31, 1997. Loans are generally written in amounts up to 50% to
75% of the tax assessed or appraised value of the property for terms of between
10 to 20 years. Such loans have interest rates that generally adjust at least
annually at a rate equal to the prime rate, as published in THE WALL STREET
JOURNAL, plus a negotiated margin of between 1% and 2%. In originating an
agricultural real estate loan, the Savings Bank considers the debt service
coverage of the borrower's cash flow and the appraised value of the underlying
property, as well as the Savings Bank's experience with and knowledge of the
borrower.
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential property
lending. Multi-family residential and commercial real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans typically is dependent on the successful
operation of the real estate project. These risks can be significantly impacted
by supply and demand conditions in the market for office, retail and residential
space, and, as such, may be subject to a greater extent to adverse conditions in
the economy generally. To minimize these risks, the Savings Bank generally
limits itself to its market area or to borrowers with which it has prior
experience or who are otherwise well known to the Savings Bank. In addition, in
the case of commercial mortgage loans made to a partnership or a corporation,
the Savings Bank seeks, whenever possible, to obtain personal guarantees and
annual financial statements of the principals of the partnership or corporation.
The Savings Bank reviews all commercial real estate loans in excess of $200,000
on an annual basis to ensure that the loan meets current underwriting standards.
In addition, the Savings Bank underwrites commercial real estate loans at a rate
of interest significantly above that carried on the loan at the time of
origination to evaluate the borrower's ability to meet principal and interest
payments on the loan in the event of upward adjustments to the interest rate on
the loan.
Consumer and Other Lending. The Savings Bank originates a variety of
consumer loans. Such loans generally have shorter terms to maturity and higher
interest rates than mortgage loans. At March 31, 1997, the Savings Bank's
consumer loans totaled approximately $25.4 million, or 18.0% of the Savings
Bank's total loans. The Savings Bank's consumer loans consist primarily of
secured and unsecured consumer loans, automobile loans, boat loans, recreation
vehicle loans, home improvement and equity loans and deposit account loans. The
growth of the consumer loan portfolio in recent years has consisted primarily of
an increase in home equity loans, which the Savings Bank has more aggressively
marketed. Recently the Savings Bank has significantly increased its origination
of indirect dealer automobile loans, as discussed below.
41
In recent periods, the Savings Bank has emphasized the origination of
consumer loans, and, in particular, automobile loans due to their shorter terms
and higher yields than residential mortgage loans. Consumer loans accounted for
30.4% of the Savings Bank's total loan originations in the nine-months ended
March 31, 1997, and 23.2% and 27.7% in fiscal 1996 and 1995, respectively. The
Savings Bank anticipates that it will continue to be an active originator of
automobile and other consumer loans. Factors that may affect the ability of the
Savings Bank to increase its originations in this area include the demand for
such loans, interest rates and the state of the local and national economy.
The Savings Bank offers open-ended "preferred" lines of credit on either a
secured or unsecured basis to both customers and non-customers. Secured lines of
credit are generally secured by a second mortgage on the borrower's primary
residence. Secured lines of credit have an interest rate that is two percentage
points above the prime lending rate, as published in THE WALL STREET JOURNAL,
while the rate on unsecured lines is three percentage points above this prime
lending rate. In both cases, the rate adjusts monthly. The Savings Bank offers a
maximum line of credit of $50,000, however, the majority of the approved lines
of credit at March 31, 1997 were less than $25,000. The Savings Bank requires
repayment of at least 2% of the unpaid principal balance monthly. At March 31,
1997, approved lines of credit totaled $8.9 million, of which 4.8 million was
outstanding.
The Savings Bank offers closed-end, fixed-rate home equity loans that are
made on the security of primary residences. Loans normally do not exceed 80% of
the appraised or tax assessed value of the residence, less the outstanding
principal of the first mortgage, and have terms of up to 15 years requiring
monthly payments of principal and interest. At March 31, 1997, home equity loans
and second mortgage loans amounted to $17.5 million, or 12.4%, of total loans.
At March 31, 1997, the Savings Bank's automobile loan portfolio amounted to
$2.1 million, or 1.5% of consumer loans at such date. Since January 1997, a
substantial portion of the Savings Bank's automobile loans have been originated
indirectly by a network of approximately five automobile dealers located in the
Baker and La Grande market areas. Indirect automobile loans accounted for
approximately 15% of the Savings Bank's total consumer loan originations during
the three months ended March 31, 1997. The applications for such loans are taken
by employees of the dealer, the loans are written on the dealer's contract
pursuant to the Savings Bank's underwriting standards using the dealer's loan
documents with terms substantially similar to the Savings Bank's. All indirect
loans must be approved by specific loan officers of the Savings Bank who have
experience with this type of lending. In addition to indirect automobile
lending, the Savings Bank also originates automobile loans directly. Subject to
market conditions and other factors, the Savings Bank intends to expand its
purchase of dealer-originated contracts to include contracts secured by
recreational vehicles, trailers, motorcycles, and other vehicles.
Indirect automobile lending may involve greater risks than direct
automobile lending, such as dealer fraud. To mitigate these risks, the Savings
Bank has limited its indirect automobile lending relationships to dealerships
that are established and well known in its market area. However, if a dealership
were to enter into bankruptcy, the Savings Bank may be unable to obtain clear
title to the automobiles because the floor plan lender, who originated a loan to
the dealer to enable the dealer to purchase the automobiles from the
manufacturer or another party, would not assign its lien to the Savings Bank.
The maximum term for the Savings Bank's automobile loans is 72 months. The
Savings Bank may lend up to 100% of the purchase price of the new or used
automobile. The Savings Bank requires all borrowers to maintain automobile
insurance, including collision, fire and theft, with a maximum allowable
deductible and with the Savings Bank listed as loss payee.
The Savings Bank's consumer loans also include unsecured loans and loans
secured by deposit accounts and loans to purchase recreational vehicles, motor
homes, boats and credit card loans. The Savings Bank generally will lend up to
100% of the purchase price of vehicles other than automobiles.
42
At March 31, 1997, unsecured consumer loans amounted to $1.6 million, or
1.1% of total loans. These loans are made for a maximum of 36 months or less
with fixed rates of interest and are offered primarily to existing customers of
the Savings Bank.
The Savings Bank also offers credit card loans through its participation as
a VISA card issuer. The Savings Bank began offering credit cards in December
1992. Management believes that providing credit card services to its customers
helps the Savings Bank remain competitive by offering customers an additional
service. The Savings Bank does not actively solicit credit card business beyond
its customer base and market area and has not engaged in mailing of pre-approved
credit cards. The rate currently charged by the Savings Bank on its credit card
loans is the prime rate, as published in THE WALL STREET JOURNAL, plus 7%, and
the Savings Bank is permitted to change the interest rate quarterly. Processing
of bills and payments is contracted to an outside servicer. At March 31, 1997,
the Savings Bank had a commitment to fund an aggregate of $3.5 million of credit
card loans, which represented the aggregate credit limit on credit cards, and
had $844,000 of credit card loans outstanding, representing 0.6% of its total
loan portfolio. The Savings Bank intends to continue credit card lending and
estimates that at current levels of credit card loans, it makes a small monthly
profit net of service expenses and write-offs.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles and other vehicles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans. At March 31, 1997, the Savings Bank had
$23,000 of consumer loans accounted for on a nonaccrual basis.
Commercial Business Lending. The Savings Bank originates commercial
business loans to small and medium sized businesses in its primary market area.
Commercial business loans are generally made to finance the purchase of seasonal
inventory needs, new or used equipment, and for short-term working capital. Such
loans are generally secured by equipment, accounts receivable and inventory,
although commercial business loans are sometimes granted on an unsecured basis.
Such loans are made for terms of five years or less, depending on the purpose of
the loan and the collateral, with loans to finance operating expenses made for
one year or less, with interest rates that adjust at least annually at a rate
equal to the prime rate, as published in The Wall Street Journal, plus a margin
of between one and three percentage points. At March 31, 1997, the commercial
business loans amounted to $4.1 million, or 2.9%, of the total loan portfolio.
At March 31, 1997, the largest outstanding commercial business loan was a
$160,000 loan to an oil dealership for equipment and a line of credit. The real
estate underlying the oil dealership's facility is not collateral on this loan.
Such loan was performing according to its terms at March 31, 1997. Most of the
Savings Bank's commercial business loans range in size from $5,000 to $250,000.
The Savings Bank is an approved Small Business Administration ("SBA")
lender and at March 31, 1997, had one SBA loan for $131,000. The Savings Bank
intends to continue to originate these loans in amounts up to $250,000 to local
businesses within its market area.
The Savings Bank underwrites its commercial business loans on the basis of
the borrower's cash flow and ability to service the debt from earnings rather
than on the basis of underlying collateral value, and the Savings Bank seeks to
structure such loans to have more than one source of repayment. The borrower is
required to provide the Savings Bank with sufficient information to allow the
Savings Bank to make its lending determination. In most instances, this
information consists of at least three years of financial statements, a
statement of projected cash flows,
43
current financial information on any guarantor and any additional information on
the collateral. Generally, for loans with balances exceeding $100,000, the
Savings Bank requires that borrowers and guarantors provide updated financial
information at least annually.
The Savings Bank's commercial business loans may be structured as term
loans or as lines of credit. Commercial business term loans are generally made
to finance the purchase of assets and have maturities of five years or less.
Commercial business lines of credit are typically made for the purpose of
providing working capital and are usually approved with a term of between six
months and one year.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. The Savings
Bank seeks to minimize these risks through its underwriting guidelines, which
require that the loan be supported by adequate cash flow of the borrower,
profitability of the business, collateral and personal guarantees of the
individuals in the business. In addition, the Savings Bank limits this type of
lending to its market area and to borrowers with which it has prior experience
or who are otherwise well known to the Savings Bank.
Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 1997 regarding the dollar amount of loans maturing in
the Savings Bank's portfolio based on their contractual terms to maturity, but
does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due within one year. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loans losses.
After After
One Year 3 Years 5 Years
Within Through Through Through Over
One Year 3 Years 5 Years 10 Years Ten Years Total
-------- ------- ------- -------- --------- -----
(Dollars in thousands)
Mortgage loans:
One-to four-family ............................ $ 11 $ 311 $ 1,315 $ 7,985 $ 92,170 $101,792
Multi-family .................................. -- 12 -- 698 1,134 1,844
Commercial .................................... 19 123 385 1,453 2,788 4,768
Construction .................................. 853 -- -- -- -- 853
Land .......................................... -- -- -- 157 66 223
-------- -------- -------- -------- -------- --------
883 446 1,700 10,293 96,158 109,480
-------- -------- -------- -------- -------- --------
Consumer loans:
Home equity and second mortgage ............... 78 1,474 2,494 6,505 6,963 17,514
Automobile .................................... 14 541 1,098 378 33 2,064
Credit card ................................... 159 313 170 202 -- 844
Loans secured by deposit accounts ............. 205 492 34 -- -- 731
Unsecured ..................................... 25 259 246 1,002 79 1,611
Other ......................................... 68 438 516 678 927 2,627
-------- -------- -------- -------- -------- --------
549 3,517 4,558 8,765 8,002 25,391
-------- -------- -------- -------- -------- --------
Commercial business loans ...................... 1,578 662 1,826 -- -- 4,066
Agricultural loans ............................. 2,427 39 -- -- -- 2,466
-------- -------- -------- -------- -------- --------
Total ..................................... $ 5,437 $ 4,664 $ 8,084 $ 19,058 $104,160 $141,403
======== ======== ======== ======== ======== ========
44
The following table sets forth the dollar amount of all loans due after
March 31, 1998, which have fixed interest rates and have floating or adjustable
interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Mortgage loans:
One-to four-family...................... $53,942 $47,841
Multi-family........................... 491 1,353
Commercial............................. 1,468 3,281
Construction........................... -- --
Land................................... 223 --
------- -------
56,124 52,475
------- -------
Consumer loans:
Home equity and second mortgage........ 9,882 7,554
Automobile............................. 2,024 26
Credit card............................ -- 685
Loans secured by deposit accounts...... 526 --
Unsecured.............................. 137 1,449
Other.................................. 2,268 289
------- -------
14,837 10,003
------- -------
Commercial business loans............... -- 2,488
Agricultural loans...................... -- 39
------- -------
Total............................... $70,961 $65,005
======= =======
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Savings Bank 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 substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates. Furthermore,
management believes that a significant number of the Savings Bank's residential
mortgage loans are outstanding for a period less than their contractual terms
because of the transitory nature of many of the borrowers who reside in its
primary market area.
Loan Solicitation and Processing. The Savings Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Savings Bank's Board of Directors and
management. The customary sources of loan originations are realtors, walk-in
customers, referrals and existing customers. The Savings Bank also advertises
its loan products by radio and newspaper. The Savings Bank does not employ
commissioned loan originators.
In its marketing, the Savings Bank emphasizes its community ties,
customized personal service and an efficient underwriting and approval process.
The Savings Bank uses professional fee appraisers. The Savings Bank generally
requires hazard, title and, to the extent applicable, flood insurance on all
security property.
Mortgage loan applications are initiated, underwritten and preliminarily
approved by loan officers before they are recommended for final review and
approval. All one- to- four family and commercial real estate loans in excess of
$135,000 but less than $175,000 (or between $200,000 and $250,000 in the case of
commercial business loans) must be approved by the Executive Board Loan
Committee, which consists of the Savings Bank's President, Senior Vice President
of Customer Services and either the La Grande Branch Manager or Loan Center
Manager. Loans over those amounts
45
and less than $1 million require the approval of the Board Loan Committee, which
consists of three members of the Board of Directors, and loans over $1 million
require the unanimous approval of the Board of Directors.
Loan Originations, Sales and Purchases. Historically, the Savings Bank's
primary lending activity has been the origination of one- to four-family
residential mortgage loans. During the nine months ended March 31, 1997,
however, the Savings Bank has increased substantially its origination of
consumer, commercial business and agricultural loans. During the nine months
ended March 31, 1997, consumer loans increased by $2.7 million (11.8%),
commercial business loans by $924,000 (29.4%), and agricultural loans by $2.5
million (no agricultural loans were outstanding as of March 31, 1996). See "RISK
FACTORS -- Recent Growth in, Unseasoned Nature of Agricultural, Commercial
Business and Indirect Automobile Lending."
Beginning in January 1997, the Savings Bank began selling conforming
conventional fixed-rate one- to four-family residential mortgage loans with
maturities of over 15 years, servicing released to private investors. A large
portion of the Savings Bank's residential mortgage loans do not conform to
secondary market sales guidelines because of excess acreage, drinking wells
located on the property, and other characteristics common to properties located
in the Savings Bank's primary market area. The Savings Bank generally sells
these loans without recourse. In most instances, sales of fixed rate loans are
made against forward commitments, which alleviates the Savings Bank's exposure
to pipeline risk. Pipeline risk is the risk that the value of the loan will
decline during the period between the time the loan is originated and the time
of sale because of changes in market interest rates. By retaining the servicing,
the Savings Bank receives fees for performing the traditional services of
processing payments, accounting for loan funds, and collecting and paying real
estate taxes, hazard insurance and other loan-related items, such as private
mortgage insurance. At March 31, 1997, the Savings Bank's servicing portfolio
was $1.4 million. In addition, the Savings Bank retains certain amounts in
escrow for the benefit of investors. The Savings Bank is able to invest these
funds but is not required to pay interest on them. At March 31, 1997, such
escrow balances totaled $78,000.
46
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
Nine Months Ended Year
March 31, Ended June 30,
---------------------- ----------------------
1997 1996 1996 1995
---- ---- ---- ----
(In thousands)
Loans originated:
Mortgage loans:
One-to four family ....................................... $ 8,966 $11,932 $17,416 $16,508
Multi-family ............................................. -- -- 514 --
Commercial ............................................... -- 325 908 123
Construction ............................................. 2,216 2,856 3,958 6,800
Land ..................................................... 173 27 27 --
Consumer .................................................. 8,769 5,548 7,642 9,854
Commercial business loans ................................. 8,698 1,367 2,484 2,316
Agricultural loan ......................................... 2,346 -- -- --
------- ------- ------- -------
Total loans originated ................................. 28,822 22,055 32,949 35,601
Loans purchased:
One-to four family mortgage ............................... 183 47 256 145
Dealer-originated automobile contracts .................... 389 -- -- --
------- ------- ------- -------
Total loans purchased ................................. 572 47 256 145
Loans sold:
Total whole loans sold ................................... 1,149 652 759 1,470
------- ------- ------- -------
Total loans sold ...................................... 1,149 652 759 1,470
Loan principal repayments .................................. 21,711 16,712 24,539 21,937
------- ------- ------- -------
Net increase in loans receivable, net ...................... $ 6,534 $ 4,738 $ 7,907 $12,339
======= ======= ======= =======
Loan Commitments. The Savings Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 45 days from
approval, depending on the type of transaction. At March 31, 1997, the Savings
Bank had loan commitments of $11.2 million. See Note 13 of Notes to the
Consolidated Financial Statements.
Loan Fees. In addition to interest earned on loans, the Savings Bank
receives income from fees in connection with loan originations, loan
modification, late payments and for miscellaneous service related to its loan.
Income from these activities varies from period to period depending upon the
volume and type of loans made and competitive conditions.
The Savings Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. In accordance with applicable accounting
procedures, loan origination fees and discount points in excess of loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. Discounts and premiums on
loans purchased are accredit and amortized in the same manner. The Savings Bank
recognized $144,000, $195,000 and $158,000 of deferred loan fees during the nine
months ended March 31, 1997 and the years ended June 30, 1996 and 1995,
respectively, in connection with loan refinancings, payoffs, sales and ongoing
amortization of outstanding loans.
Nonperforming Assets and Delinquencies. Generally, all payments on the
Savings Bank's loans are due on the first day of the month but borrowers are
allowed to pay up to the 16th day of the month before the Savings Bank initiates
collection procedures. When a borrower fails to make a required payment on a
loan, the Savings Bank
47
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Contacts are generally made 16 days after the due date. In most cases,
deficiencies are cured promptly. If a delinquency continues, additional contact
is made through a telephone call around the 20th day. While the Savings Bank
generally prefers to work with borrowers to resolve such problems, the Savings
Bank will institute foreclosure or other proceedings after the 90th day of
delinquency, as necessary, to minimize any potential loss.
Loans are placed on nonaccrual status when the loans becomes contractually
past due 90 days or more. Interest payments received on nonaccrual loans are
applied to principal if collection of principal is doubtful or reflected as
interest income on a cash basis. Loans may be reinstated to accrual status when
current and collectibility of principal and interest is no longer doubtful.
The Savings Bank's Board of Directors is informed monthly of the status of
all loans delinquent more than 30 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Savings Bank.
The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans at the dates indicated.
At March 31, At June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to four-family .................................... $ 167 $ 111 $ 47 $ 15 $ 128
Consumer loans ......................................... 23 52 20 26 2
-------- -------- -------- -------- --------
Total ............................................. 190 163 67 41 130
Accruing loans which are contractually
past due 90 days or more ............................... -- -- -- -- --
-------- -------- -------- -------- --------
Total ............................................. -- -- -- -- --
Total of nonaccrual and 90 days past due loans .......... 190 163 67 41 130
Foreclosed real estate .................................. -- 13 -- -- --
Other repossessed assets ................................ 10 34 -- 18 --
-------- -------- -------- -------- --------
Total nonperforming assets ......................... $ 200 $ 210 $ 67 $ 59 $ 130
======== ======== ======== ======== ========
Restructured loans ...................................... $ -- $ -- $ -- $ 18 $ --
======== ======== ======== ======== ========
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net ............................... 0.14% 0.12% 0.05% 0.04% 0.13%
Nonaccrual and 90 days or more past due
loans as a percentage of total assets .................. 0.09% 0.08% 0.03% 0.02% 0.07%
Nonperforming assets as a
percentage of total assets ............................. 0.10% 0.10% 0.03% 0.03% 0.07%
Loans receivable, net ................................... $138,881 $132,347 $124,440 $112,101 $ 97,562
Total assets ............................................ $204,213 $203,457 $205,400 $196,736 $193,334
48
Interest income that would have been recorded for the nine months ended
March 31, 1997 and the year ended June 30, 1996 had nonaccruing loans been
current in accordance with their original terms, and the amount of interest
included in interest income on such loans for such periods was, in both cases,
immaterial.
Real Estate Acquired in Settlement of Loans. See Note 1 of Notes to
Consolidated Financial Statements regarding the Savings Bank's accounting for
foreclosed real estate. At March 31, 1997, the Savings Bank had no foreclosed
real estate.
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 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 classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can 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 monitored by the Savings Bank.
The aggregate amounts of the Savings Bank's classified and special mention
assets, and of the Savings Bank's general and specific loss allowances at the
dates indicated, were as follows:
At June 30,
At March 31, -----------------
1997 1996 1995
------------ ---- ----
(In thousands)
Loss .................................... $ 7 $ -- $ 4
Doubtful ................................ 22 11 8
Substandard assets ...................... 796 905 912
Special mention ......................... 838 582 287
General loss allowances ................. 718 541 451
Specific loss allowances ................ 7 -- 4
At March 31, 1997, substandard assets consisted of 24 one-to-four family
mortgage loans, eight secured consumer loans, two unsecured consumer loans and
six VISA credit card accounts.
At March 31, 1997, special mention assets consisted of 16 one-to-four
family mortgage loans, 13 secured consumer loans, three unsecured consumer loans
and 14 VISA credit card accounts.
Allowance for Loan Losses. The Savings Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
49
In originating loans, the Savings Bank 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 Savings Bank increases its allowance
for loan losses by charging provisions for loan losses against the Savings
Bank's income.
Allowances for losses on specific problem loans and real estate owned are
charged to earnings when it is determined that the value of these loans and
properties, in the judgement of management, is impaired. In addition to specific
reserves, the Savings Bank also maintains general provisions for loan losses
based on evaluating known and inherent risks in the loan portfolio, including
management's continuing analysis of the factors and trends underlying the
quality of the loan portfolio. These factors include changes in the size and
composition of the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans for which
full collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans. The
ultimate recovery of loans is susceptible to future market factors beyond the
Savings Bank's control, which may result in losses or recoveries differing
significantly from those provided in the consolidated financial statement. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Savings bank's valuation allowance on loans and
real estate owned. Generally, a provision for losses is charged against income
quarterly to maintain the allowance for loan losses.
At March 31, 1997, the Savings Bank had an allowance for loan losses of
$725,000. Management believes that the amount maintained in the allowances at
March 31, 1997 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to make
such determinations, 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, while the Savings Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Savings Bank's loan
portfolio, will not request the Savings Bank 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 Savings Bank's financial
condition and results of operations.
50
The following table sets forth an analysis of the Savings Bank's allowance
for possible loan losses for the periods indicated.
Nine Months
Ended
March 31, Year Ended June 30,
------------------ ----------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period ............... $ 541 $ 455 $ 455 $ 403 $ 506 $ 382
------ ------ ------ ------ ------ ------
Provision (credit) for loan losses ............. 216 91 115 67 (90) 175
Recoveries:
Mortgage loans:
Multi-family ................................. -- 9 12 5 4 --
Consumer loans:
Credit card .................................. 4 1 1 -- -- --
Other ........................................ 3 -- 1 -- 8 --
------ ------ ------ ------ ------ ------
Total recoveries ............................ 7 10 14 5 12 --
------ ------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
Multi-family ................................. 5 -- -- -- 21 37
Consumer loans:
Credit card .................................. 26 25 41 -- 1 --
Automobile ................................... -- -- -- -- -- 2
Unsecured .................................... -- -- -- -- -- 10
Other ........................................ 8 -- 2 20 3 2
------ ------ ------ ------ ------ ------
Total charge-offs ........................... 39 25 43 20 25 51
------ ------ ------ ------ ------ ------
Net charge-offs ............................. (32) (15) (29) (15) (13) (51)
------ ------ ------ ------ ------ ------
Allowance at end of period ................. $ 725 $ 531 $ 541 $ 455 $ 403 $ 506
====== ====== ====== ====== ====== ======
Allowance for loan losses as a
percentage of total loans
outstanding at the end of the period .......... 0.52% 0.41% 0.41% 0.37% 0.36% 0.52%
====== ====== ====== ====== ====== ======
Net charge-offs as a percentage
of average loans outstanding
during the period ............................. 0.02% 0.01% 0.02% 0.01% 0.01% 0.05%
====== ====== ====== ====== ====== ======
Allowance for loan losses as
a percentage of nonperforming
loans at end of period ........................ 381.58% 424.80% 331.90% 679.10% 982.93% 389.23%
====== ====== ====== ====== ====== ======
For additional discussion regarding the provisions for loan losses in
recent periods, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Results of Operations -- Comparison of Operating
Results for the Nine Months Ended March 31, 1997 and the Year Ended June 30,
1996 -- Provision for Loan Losses," "-- Results of Operations -- Comparison of
Operating Results for the Years Ended June 30, 1996 and 1995 -- Provision for
Loan Losses."
51
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. 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 At June 30,
March 31, ----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- -------------- ---------------- --------------- --------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Category in Category in Category in Category in Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
One-to four-family ....... $357 77.42% $354 80.92% $284 $79.90% $244 80.92 $232 80.25%
Non-mortgage loans ........ 173 16.84 174 18.06 162 19.08 155 18.54 270 19.05
Commercial business ....... 105 2.88 -- -- -- -- -- -- -- --
Agricultural loans ........ 61 1.74 -- -- -- -- -- -- -- --
Credit cards ............. 24 0.60 9 0.58 5 0.56 -- -- -- --
Loans secured by deposit
accounts ................ 5 0.52 4 0.44 4 0.46 4 0.54 4 0.70
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total allowance
for loan losses ..... $725 100.00% $541 100.00% $455 100.00% $403 100.00% $506 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
52
Investment Activities
The Savings Bank 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
Savings Bank may also invest a portion of its assets in commercial paper and
corporate debt securities. Savings institutions like the Savings Bank are also
required to maintain an investment in FHLB stock. The Savings Bank is required
under federal regulations to maintain a minimum amount of liquid assets. See
"REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
The Savings Bank purchases investment securities with excess liquidity
arising when investable funds exceed loan demand. The Savings Bank's investment
securities purchases have been limited to U.S. Government and government agency
securities with contractual maturities of between one and ten years and
mortgage-backed and related securities issued by the FNMA, FHLMC and GNMA with
maturities of up to 30 years.
At March 31, 1997, the Savings Bank held securities classified as
available-for-sale and held-to-maturity under SFAS 115. There were no trading
securities at March 31, 1997. During the nine months ended March 31, 1997, the
Savings Bank reclassified, under SFAS No. 115 guidelines, $2.4 million of
trading securities (at fair value) to available-for-sale as management had not
purchased such securities with the principal intent of selling them in the near
term. See Note 1 of Notes to Consolidated Financial Statements. Trading of
investment securities is not part of the Savings Bank's operating strategy.
The Savings Bank's investment policies generally limit investments to U.S.
Government and government agency securities, municipal bonds, certificates of
deposits, marketable corporate debt obligations, mortgage-backed and related
securities and certain types of mutual funds. The Savings Bank's investment
policy does not permit engaging directly in hedging activities or purchasing
high risk mortgage derivative products or non-investment grade corporate bonds.
Investments are made based on certain considerations, which include the interest
rate, yield, settlement date and maturity of the investment, the Savings Bank'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 Savings Bank's credit and interest rate risk and
risk-based capital is also considered.
At March 31, 1997, the Savings Bank did not have any securities which had
an aggregate book value in excess of 10% of the Savings Bank's retained earnings
at that date.
53
The following table sets forth the amortized cost and fair value of the
Savings Bank's securities, by accounting classification and by type of security,
at the dates indicated.
At June 30,
At March 31, ------------------------------------------------------
1997 1996 1995
---------------------- ------------------------------------------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value(1) Total Value(1) Total Value(1) Total
-------- ----- -------- ----- -------- -----
(In thousands)
Held to Maturity:
U.S. Government agency obligations........... $ -- --% $ -- --% $19,232 28.21%
Mortgage-backed and related securities....... 15,302 30.03 17,011 28.84 42,245 61.98
------- ------ ------- ------ ------- ------
Total held to maturity securities.............. 15,302 30.03 17,011 28.84 61,477 90.19
Available for Sale:
U.S. Government agency obligations............. 15,857 31.12 19,900 33.74 2,903 4.26
Mortgage-backed and related securities......... 19,745 38.75 19,451 32.98 -- --
Other.......................................... 50 0.10 50 0.08 -- --
------- ------ ------- ------ ------- ------
Total available for sale securities.......... 35,652 69.97 39,401 66.80 2,903 4.26
Trading:
Mortgage-backed and related securities......... -- -- 2,569 4.36 3,786 5.55
------- ------ ------- ------ ------- ------
Total.......................................... $50,954 100.00% $58,981 100.00% $68,166 100.00%
======= ====== ======= ====== ======= ======
- ----------
(1) The market value of the Savings Bank's investment portfolio amount to
$51.0 million, $58.8 million and $68.6 million at March 31, 1997 and
June 30, 1996 and 1995, respectively. At March 31, 1997, the market
value of the principal components of the Savings Bank's investment
securities portfolio was as follows: U.S. Government securities, $15.9
million; mortgage-backed and related securities, $35.1 million.
The following table sets forth the maturities and weighted average
yields of the debt and mortgage-backed and related securities in the
Savings Bank's investment securities portfolio at March 31, 1997.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
-------------- -------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollars in thousands)
Held to Maturity:
Mortgage-backed and related securities..... $ -- --% $ -- --% $ -- --% $15,302 6.89% $15,302
Available for Sale:
U.S. Government agency obligations......... -- 9,831 6.29 6,025 6.70 -- -- 15,856
Mortgage-backed and related securities..... -- 262 6.65 254 6.53 19,230 8.13 19,746
Other...................................... -- 50 8.38 -- -- -- -- 50
---- ------- ------ ------- -------
Total available for sale securities.... -- 10,143 6,279 19,230 35,652
Total....................................... $ -- $10,143 $6,279 $34,532 $50,954
==== ======= ====== ======= =======
54
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Savings
Bank's lending and other investment activities. In addition, the Savings Bank
also generates funds internally from loan principal repayments and prepayments
and maturing investment securities. 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 from the FHLB-Seattle and repurchase agreements may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources. Presently, the Savings Bank has no other borrowing
arrangements.
Deposit Accounts. A substantial number of the Savings Bank's depositors
reside in Oregon. The Savings Bank's deposit products include a broad selection
of deposit instruments, including NOW accounts, demand deposit accounts, money
market accounts, regular passbook savings, statement savings accounts and term
certificate accounts. Deposit account terms vary with the principal difference
being the minimum balance deposit, early withdrawal penalties and the interest
rate. The Savings Bank reviews its deposit mix and pricing weekly. The Savings
Bank does not utilize brokered deposits, nor has it aggressively sought jumbo
certificates of deposit. The Savings Bank has also begun to seek business
checking accounts in connection with its community banking activities.
The Savings Bank believes it is competitive in the type of accounts and
interest rates it offers on its deposit products. The Savings Bank does not seek
to pay the highest deposit rates but a competitive rate. The Savings Bank
determines the rates paid based on a number of conditions, including rates paid
by competitors, rates on U.S. Treasury securities, rates offered on various
FHLB-Seattle lending programs, and the deposit growth rate the Savings Bank is
seeking to achieve.
In the unlikely event the Savings Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the Savings
Bank.
55
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at March 31, 1997.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(In thousands)
- --% N/A Non-interest-bearing $ 6,282 $ 10 3.51%
1.56 N/A NOW accounts 27,261 10 15.22
3.53 N/A Money market accounts 16,785 1,000 9.37
2.89 N/A Passbook savings accounts 24,005 5 13.40
Certificates of Deposit
-----------------------
6.18 3-5 years Fixed-term, fixed-rate 18,623 1,000 10.39
6.24 2 1/2 years Fixed-term, fixed-rate 3,026 1,000 1.69
4.60 3 1/2 years Fixed-term, fixed-rate 2,718 1,000 1.52
5.41 1 1/2 years Fixed-term, fixed-rate 469 1,000 0.26
4.27 91 day Fixed-term, fixed-rate 1,930 1,000 1.08
4.84 182 day Fixed-term, fixed-rate 9,819 1,000 5.48
7.25 3 year Fixed-term, fixed-rate 5,739 1,000 3.20
5.50 15 month Fixed-term, fixed-rate 6,060 1,000 3.38
5.14 1 year Fixed-term, variable-rate 27,634 1,000 15.42
5.50 2 1/2 year Fixed-term, variable-rate 13,256 1,000 7.40
4.60 18 month Fixed-term, adjustable-rate 1,693 5 0.94
5.98 6 year Fixed-term, adjustable-rate 748 0 0.42
5.23 Varies Various term, fixed-rate 3,478 1,000 1.94
5.62 Varies Jumbo certificates 9,633 100,000 5.38
-------- ------
TOTAL $179,158 100.00%
======== ======
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of March 31, 1997.
Jumbo certificates of deposit have principal balances of $100,000 or more and
generally have negotiable interest rates.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Three months or less......................... $1,960
Over three through six months................ 2,633
Over six through twelve months............... 2,679
Over twelve months........................... 2,361
------
Total.................................... $9,633
======
56
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Savings Bank between the dates indicated.
At June 30,
At March 31, --------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total Decrease Amount Total
-------- ------ ---------- -------- ------ -------- ------- ------
(Dollars in thousands)
Non-interest-bearing........................ $ 6,282 3.51% $1,388 $ 4,894 2.77% $ 990 $ 3,904 2.26%
NOW checking................................ 27,261 15.22 735 26,526 15.02 (728) 27,254 15.79
Passbook savings accounts................... 24,004 13.40 (964) 24,969 14.14 (1,582) 26,551 15.39
Money market deposit........................ 16,785 9.37 1,900 14,885 8.43 1,357 13,528 7.84
Fixed-rate certificates which mature:
Within 1 year............................. 77,440 43.22 7,624 69,816 39.53 7,647 62,169 36.03
After 1 year, but within 3 years.......... 19,258 10.75 (6,097) 25,354 14.36 (3,294) 28,648 16.60
After 3 years, but within 5 years......... 6,652 3.71 (619) 7,271 4.12 745 6,526 3.78
Certificates maturing thereafter.......... 1,476 0.82 (1,428) 2,904 1.63 (1,085) 3,989 2.31
-------- ------ ------ -------- ------ ------ -------- ------
Total.................................. $179,158 100.00% $2,539 $176,619 100.00% $4,050 $172,569 100.00%
======== ====== ====== ======== ====== ====== ======== ======
Time Deposits by Rates. The following table sets forth the amount of time
deposits in the Savings Bank categorized by rates at the dates indicated.
At At June 30,
March 31, -------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
2.00 - 3.99% ................ $ 952 $ 979 $ 12,936
4.00 - 4.99% ................ 21,618 25,383 22,112
5.00 - 5.99% ................ 58,210 53,156 44,758
6.00 - 6.99% ................ 16,342 16,475 9,868
7.00% and over .............. 7,704 9,352 11,658
-------- -------- --------
Total ....................... $104,826 $105,345 $101,332
======== ======== ========
Time Deposits by Maturities. The following table sets forth the amount of
time deposits in the Savings Bank categorized by maturities at March 31, 1997.
Amount Due
-------------------------------------------------------------------------------
After After
One to Two to Three
Less Than Two Three to Four After
One Year Years Years Years 4 Years Total
-------- -------- -------- -------- -------- --------
(In thousands)
2.00 - 3.99% ............ $ 824 $ 37 $ 12 $ 79 $ -- $ 952
4.00 - 4.99% ............ 18,593 2,063 403 304 255 21,618
5.00 - 5.99% ............ 42,582 4,861 8,012 884 1,871 58,210
6.00 - 6.99% ............ 8,811 1,565 1,759 1,689 2,518 16,342
7.00% and over .......... 6,630 243 303 516 12 7,704
-------- -------- -------- -------- -------- --------
Total ................... $ 77,440 $ 8,769 $ 10,489 $ 3,472 $ 4,656 $104,826
======== ======== ======== ======== ======== ========
57
Deposit Activity. The following table set forth the deposit activity of the
Savings Bank for the periods indicated.
Nine Months Ended Year
March 31, Ended June 30,
---------------------- ----------------------
1997 1996 1996 1995
--------- --------- --------- ---------
(In thousands)
Beginning balance .......... $ 176,619 $ 172,569 $ 172,569 $ 177,107
--------- --------- --------- ---------
Net withdrawals
before interest credited . (2,946) (477) (3,529) (11,328)
Interest credited .......... 5,485 5,739 7,579 6,790
--------- --------- --------- ---------
Net increase (decrease)
in deposits .............. 2,539 5,262 4,050 (4,538)
--------- --------- --------- ---------
Ending balance ............. $ 179,158 $ 177,831 $ 176,619 $ 172,569
========= ========= ========= =========
Borrowings. The Savings Bank utilizes advances from the FHLB-Seattle to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Seattle functions as a central reserve bank providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Seattle, the Savings Bank 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 that are obligations of, or guaranteed by, the U.S.
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 Savings Bank is currently authorized to borrow from the FHLB up to
an amount equal to 20% of total assets. The Savings Bank intends to increase the
amount of its FHLB advances in order to fund certain investments as part of its
asset/liability management. For additional information concerning the Savings
Bank's proposed increase in borrowings, See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Comparison of
Financial Condition at March 31, 1997 and June 30, 1996."
The Savings Bank also uses retail repurchase agreements due generally
within one day as a source of funds. At March 31, 1997, retail repurchase
agreements totaling $1.4 million with an average interest rate of 3.5% for the
nine months ended March 31, 1997 and were secured by a pledge of certain FNMA
and FHLMC mortgage-backed and related securities with a book value of $2.0
million. See Note 7 of the Notes to the Consolidated Financial Statements.
58
The following table sets forth certain information regarding borrowings by
the Savings Bank at the end of and during the periods indicated:
At or For the
Nine Months
Ended At or For the
March 31, Year Ended June 30,
-------------------- --------------------
1997 1996 1996 1995
---- ---- ---- ----
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase ........................ $ 1,459 $ 1,432 $ 1,432 $ 1,956
FHLB advances ........................... 2,850 9,100 9,100 11,000
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase ........................ 1,396 1,215 1,260 1,537
FHLB advances ......................... 861 7,939 6,965 4,686
Approximate weighted average rate paid on:
Securities sold under agreements
to repurchase ........................ 3.50% 3.57% 3.56% 3.28%
FHLB advances ........................... 4.88 6.08 6.21 5.18
Competition
The Savings Bank faces strong competition in its primary market area for
the attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions, other thrifts operating
in its market area. As of March 31, 1997, there were five commercial banks and
two other thrifts operating in the Savings Bank's primary market area.
Particularly in times of high interest rates, the Savings Bank has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. The Savings
Bank's competition for loans comes from commercial banks, thrift institutions,
credit unions and mortgage bankers. Such competition for deposits and the
origination of loans may limit the Savings Bank's growth in the future. See
"RISK FACTORS -- Competition."
Subsidiary Activities
The Savings Bank has two subsidiaries, Pioneer Development Corporation
("PDC") and Pioneer Bank Investment Corporation ("PBIC"). PDC's primary interest
is to purchase land sale contracts. PBIC's primary interest is to hold the
Savings Bank's non-conforming assets. At March 31, 1997, the Savings Bank's
equity investment in PDC and PBIC was $1.6 million and $70,000, respectively,
including loans to PDC and PBIC with outstanding balances of $515,000 and
$140,000, respectively, at March 31, 1997.
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 Savings Bank's investment in its subsidiaries did not exceed these
limits at March 31, 1997.
59
Properties
The following table sets forth certain information regarding the
Savings Bank's offices at March 31, 1997, all of which are owned.
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In thousands)
Main Office:
2055 First Street 1980 10,700 $54,839
Baker City, Oregon 97814
Branch Offices:
La Grande Branch 1975 6,758 43,188
1215 Adams Avenue
La Grande, Oregon 97850
La Grande Branch 1983 3,655 9,889
1601 Adams Avenue
La Grande, Oregon 97850
Ontario Branch 1961 3,700 26,334
225 SW Fourth Avenue
Ontario, Oregon 97914
John Day Branch 1973 2,420 13,226
150 West Main Street
John Day, Oregon 97845
Burns Branch 1975 2,567 12,246
77 W. Adams Street
Burns, Oregon 97720
Enterprise Branch 1976 3,360 19,396
205 West Main Street
Enterprise, Oregon 97828
The Savings Bank is constructing a new office at 3100 Island Avenue, Island
City (La Grande), Oregon, and will relocate its existing office at 1601 Adams
Avenue, La Grande, Oregon, to that location. The property at 1601 Adams Avenue
is under contract of sale.
The Savings Bank uses the services of an in-house data processing system
monitored by its Senior Vice President/Support Services. At March 31, 1997, the
Savings Bank had seven proprietary automated teller machines four of which were
located in existing branches. At March 31, 1997, the net book value of the
Savings Bank's office properties and the Savings Bank's fixtures, furniture and
equipment was $4.6 million or 2.3% of total assets.
60
Personnel
As of March 31, 1997, the Savings Bank had 93 full-time and six part-time
employees, none of whom is represented by a collective bargaining unit. The
Savings Bank believes its relationship with its employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. The Savings Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Savings Bank.
MANAGEMENT OF THE HOLDING COMPANY
Directors shall be elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
The Holding Company's Board of Directors consists of seven persons divided into
three classes, each of which contains approximately one third of the Board. One
class, consisting of Messrs. Dan L. Webber, John A. Lienkaemper and John Gentry,
has a term of office expiring at the first annual meeting of stockholders; a
second class, consisting of Messrs. Albert H. Durgan and Edward H. Elms, has a
term of office expiring at the second annual meeting of stockholders; and a
third class, consisting of Messrs. Stephen R. Whittemore and Charles Rouse, 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 executive
officers of the Holding Company are:
Name Position
---- --------
John Gentry Chairman of the Board
Dan L. Webber President and Chief Executive Officer
Jerry F. Aldape Senior Vice President/Support Services and
Corporate Secretary
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
For information concerning the principal occupations, employment and
compensation of the directors and executive officers of the Holding Company
during the past five years, see "MANAGEMENT OF THE SAVINGS BANK -- Biographical
Information."
MANAGEMENT OF THE SAVINGS BANK
Directors and Executive Officers
The Board of Directors of the Savings Bank is presently composed of six
members who are elected for terms of three years, approximately one third of
whom are elected annually in accordance with the Bylaws of the Savings Bank. The
executive officers of the Savings Bank 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 Savings
Bank.
61
Directors
Current
Director Term
Name Age (1) Position with Savings Bank Since Expires
- ---- ------- -------------------------- ------- -------
John Gentry 49 Chairman of the Board 1992 1998
John A. Lienkaemper 60 Director 1980 1998
Albert H. Durgan 66 Director 1986 1999
Edward H. Elms 49 Director 1987 1999
Stephen R. Whittemore 47 Director 1984 2000
Charles Rouse 51 Director 1992 2000
Executive Officers Who Are Not Directors
Name Age (1) Position with Savings Bank
- ---- ------- --------------------------
Dan L. Webber 56 President and Chief Executive Officer
Jerry F. Aldape 48 Senior Vice President/Support Services and Corporate Secretary
Don S. Reay 50 Senior Vice President/Customer Services
Nadine J. Johnson 48 Vice President and Treasurer/Controller
- ----------
(1) As of March 31, 1997.
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his current occupation for the last five years.
There are no family relationships among or between the Directors or executive
officers.
John Gentry has been President and General Manager of Gentry Ford Sales,
Inc., an automobile dealership located in Ontario, Oregon, since 1972. Prior to
that time, he served as Vice President of that company between 1972 and 1985.
Mr. Gentry is a member of the Ontario Chamber of Commerce, the Ontario Optimist
Club. He is a past president of the Oregon Auto Dealers Association and the
Ontario Chamber of Commerce and has previously served on the Ontario Golf Board
and the City Budget Committee.
John A. Lienkaemper has been a consultant and U.S. Safety Coordinator for
The Loewen Group, which owns and operates funeral homes, cemeteries, and
crematories, since 1993. Prior to that, Mr. Lienkaemper was a consultant for
Malletta-Verton Partnership, a funeral home operator, from 1989 to 1993. Prior
to 1989, he owned and operated Lienkaemper Chapels located in Nyssa, Ontario and
Vale, Oregon. He is a member of the Lions Club, the Al Kadar Shrine Temple,
Portland, Oregon, the Coast Guard Auxiliary, Ontario, Oregon, Ontario Executive
Group and the St. Paul Lutheran Church.
Albert H. Durgan is retired from the Savings Bank after 34 years of
service. He was a member of the Baker City Rotary Club and the Salvation Army
Advisory Council and was the VFW Kids Parade Coordinator.
Edward H. Elms has been the owner of P&E Distributing Company, a beverage
distributor, located in Baker City, Oregon, for 28 years and the co-owner of
Heritage Chevrolet, a car dealership, Baker City, Oregon, since 1996. He is a
member of the Baker City Rotary Club, the Baker City Chamber of Commerce, the
Baker City Public Works Advisory Counsel, the Baker City Eagles Lodge, the
National Auto Dealers Association, the Oregon Auto Dealers Association and the
Rock Mountain Elk Association.
62
Stephen R. Whittemore has been the owner of BesTruss, an engineered roof
systems company, since 1996 and has been a partner in Wallowa Lake Tram since
1983. Prior to that, he was the owner of La Grande Lumber Company, a distributor
of building materials, from 1971 to 1996.
Charles Rouse has been self-employed as a property developer and manager
since 1995. Prior to that, he was the owner of Rouse's Home Furnishings, Baker
City, Oregon, from 1985 to 1995. Mr. Rouse is past Chairman of the Oregon Trail
Preservation Fund Committee and the Baker City Retail Business Recruitment
Committee, Secretary of the Oregon Trail Advisory Council and Chairman of its
Facilities Subcommittee, and a member of the Baker City Progress Board.
Dan L. Webber has served as the Savings Bank's President and Chief
Executive Officer since 1993. Prior to his employment with the Savings Bank, Mr.
Webber was a Regional Senior Vice President of Pacific First Bank, Seattle,
Washington, from 1983 to 1992. He is a member of the Historic Baker City Board
of Directors, the Salvation Army Advisory Board, the Baker City Progress Board
and a member and Chairman of the Oregon Savings League.
Jerry F. Aldape has served as the Savings Bank's Senior Vice President
since 1994 and Corporate Secretary since 1997. Prior to his employment with the
Savings Bank, Mr. Aldape was Controller/Financial Advisor/Consultant/Personnel
Officer with Insight Distributing, Inc., Sandpoint, Idaho, from 1993 to 1994.
From 1992 to 1993, Mr. Aldape was Personnel Manager and Director of
Non-instructional Services with the Bonner County School District #82,
Sandpoint, Idaho. He was a member the Board of Directors of the Festival at
Sandpoint, the Bonner County Crisis Line and is a member of the Baker/Malheur
Counties Regional Strategies, the Baker City Rotary Club, Pheasants Forever and
Trouts Unlimited.
Don S. Reay has served as the Savings Bank's Senior Vice President/Customer
Services since 1995. Prior to his employment with the Savings Bank, Mr. Reay
held various positions with First Interstate Bankin Eastern Oregon from 1966 to
1995. He is a member of the Board of Directors of the Eastern Oregon Livestock
Show.
Nadine J. Johnson has served as the Savings Bank's Vice President,
Treasurer/Controller since 1995. Prior to her employment with the Savings Bank,
Ms. Johnson was the Director of Finance with the Oregon Special Olympics,
Portland, Oregon, from 1994 to 1995. From 1989 to 1994, she was an Accounting
Manager with Bank America Business Credit, San Diego, California. Ms. Johnson is
former Chairman of the Finance Committee of the Baker County Community
Development Corp., Finance Coordinator of the Blue Mountain Area Oregon Special
Olympics and former Regional Supervisor of the Southern California Region of
United States Pony Club.
Meetings and Committees of the Board of Directors
The business of the Savings Bank is conducted through meetings and
activities of the Board of Directors and its committees. During the nine months
ended March 31, 1997, the Board of Directors held 9 regular 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 Personnel Committee, consisting of Directors Rouse (Chairman),
Lienkaemper, Durgan, Whittemore and Elms, is responsible for all personnel
issues, including recommending compensation levels for all employees and senior
management to the Board of Directors. The Personnel Committee meets at least
twice a year and met three times during the nine months ended March 31, 1997.
The Audit Committee, consisting of Directors Whittemore (Chairman),
Lienkaemper, Elms, Rouse and Mr. Donald F. Guyer, Director Emeritus of the
Savings Bank, receives and reviews all reports prepared by the Savings Bank's
external auditor and the internal audit function. The Audit Committee generally
meets at least four times a year and met four times during the nine months ended
March 31, 1997.
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The Compliance/Internal Audit Committee, consisting of Messrs. Aldape
(Chairman), Webber, Reay and Ms. Johnson, and other officers of the Savings Bank
oversees compliance and the internal audit function. The Compliance/Internal
Audit Committee meets at least quarterly and met seven times during the nine
months ended March 31, 1997.
The full Board of Directors acts as a Nominating Committee for the annual
selection of management's nominees for election as directors. The full Board of
Directors met once in its capacity as Nominating Committee during the nine
months ended March 31, 1997.
The Savings Bank also maintains standing Asset/Liability Management,
Investment, Asset Classification, Community Reinvestment Act ("CRA"), Property,
Appraiser Review, Pricing, Donation, EDP Steering and Retirement Trustees
Committees.
Directors' Compensation
Fees. Currently, directors receive a fee of $1,075 per month and an
additional $125 per month for service on the Board of Directors of PDC. The
Chairman of the Board of the Savings Bank receives an additional directors' fee
of $6 per month. Directors' fees (including fees paid to Directors Emeriti)
totalled $97,000 for the nine months ended March 31, 1997. Following
consummation of the Conversion, directors' fees will continue to be paid by the
Savings Bank to members for service on its Board of Directors. Beginning in the
fourth calendar quarter of 1997, directors of the Holding Company will receive
directors' fees of $1,000 per quarter and the Chairman of the Board of Directors
of the Holding Company will receive a director fee of $1,250 per quarter.
Director's Emeritus Plan. The Savings Bank maintains the Directors Plan
which confers director emeritus status on a director who retires at or after
attaining age 72 with 10 or more years of service. Under the Directors Plan, a
director emeritus receives a fee equal to the greater or $800 or 65% of the fee
payable to regular Board members for attendance at monthly Board meetings. The
fee is payable for the life of the director emeritus. As a condition of the
receipt of benefits under the Directors Plan, a director emeritus is expected to
be available to advise and consult with the management of the Bank, represent
and promote the interests of the Savings Bank in its primary market areas, serve
on Board committees and refrain from business activities which are competitive
with or contrary to the interests of the Savings Bank. An additional feature of
the Directors Plan provides that, in the event of a change in control of the
Holding Company or the Savings Bank (as defined in the Directors Plan), each
active director would be treated as a director emeritus on the effective date of
the change of control. Within 30 days of such date, each director emeritus would
receive a payment equal to seven times the annual fees payable to the director
at the effective time of the change in control. Assuming a change in control had
occurred at March 31, 1997, the aggregate amount payable under the Plan to all
directors would be approximately $348,000.
Executive Compensation
Summary Compensation Table. The following information is furnished for Mr.
Webber for the nine months ended March 31, 1997.
Annual Compensation(1)
Name and ------------------------------------- Other Annual All Other
Position Year Salary Bonus Compensation Compensation(2)
- -------- ---- ------ ----- ------------ ---------------
Dan L. Webber 1996 $74,619 $9,750 $ -- $5,625
President and Chief
Executive Officer
(footnotes on following page)
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- ----------
(1) Compensation information for the years ended June 30, 1995 and 1994 has
been omitted as the Savings Bank was not a public company nor a subsidiary
thereof at such time.
(2) Consists of employer 401(k) contributions.
Employment Agreements. In connection with the Conversion, the Holding
Company and the Savings Bank (collectively, the "Employers") will enter into
employment agreements ("Employment Agreements") with Messrs. Webber, Aldape and
Reay (individually, the "Executive") each for terms of 30 months, respectively.
Under the Employment Agreements, the initial salary levels for Messrs. Webber,
Aldape and Reay will be $101,460, $70,176 and $63,036, respectively, which
amounts will be paid by the Savings Bank and may be increased at the discretion
of the Board of Directors or an authorized committee of the Board. On each
anniversary of the commencement date of the Employment Agreements, the term of
each agreement may be extended for an additional year at the discretion of the
Board. The agreement is terminable by the Employers at any time, by the
Executive if the Executive is assigned duties inconsistent with his initial
position, duties, responsibilities and status, or upon the occurrence of certain
events specified by federal regulations. In the event that an Executive's
employment is terminated without cause or upon the Executive's voluntary
termination following the occurrence of an event described in the preceding
sentence, the Savings Bank would be required to honor the terms of the agreement
through the expiration of the current term, including payment of current cash
compensation and continuation of employee benefits.
The Employment Agreements also provide 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, an Executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement 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 maximum value of the severance benefits under the Employment Agreements
is 2.99 times the Executive's average annual compensation during the five-year
period preceding the effective date of the change in control (the "base
amount"). The Employment Agreements provide that the value of the maximum
benefit may be distributed, at the Executive's election, (i) in the form of a
lump sum cash payment equal to 2.99 times the Executive's base amount or (ii) a
combination of a cash payment and continued coverage under the Employers'
health, life and disability programs for a 30-month period following the change
in control, the total value of which does not exceed 2.99 times the Executive's
base amount. Assuming that a change in control had occurred at March 31, 1997
and that each Executive elected to receive a lump sum cash payment, Messrs.
Webber, Aldape and Reay would be entitled to payments of approximately $254,000,
$175,000 and $158,000, respectively. Section 280G of the Internal Revenue Code
of 1986, as amended ("Code"), provides that severance payments that equal or
exceed three times the individual's base amount 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.
The Employment 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 an Executive voluntarily terminates employment, except in the
event of a change in control.
Severance Agreements. In connection with the Conversion, the Holding
Company and the Savings Bank will enter into severance agreements with two
senior officers of the Savings Bank who will not receive employment
65
agreements. On each anniversary of the commencement date of the severance
agreements, the term of each agreement may be extended for an additional year at
the discretion of the Board. It is anticipated that the severance agreements
will have an initial term of eighteen months.
The severance agreements will provide for severance payments and
continuation of employee benefits in the event of involuntary termination of
employment in connection with any change in control of the Employers in the same
manner as provided for in the employment agreements. Severance payments and
benefits also will be provided on a similar basis in connection with a voluntary
termination of employment where, subsequent to a change in control, an officer
is assigned duties inconsistent with his position, duties, responsibilities and
status immediately prior to such change in control. The term "change in control"
is defined in the agreement 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.
Assuming that a change in control had occurred at March 31, 1997, and
excluding any other benefits due under the severance agreements, the aggregate
value of the benefits payable under the severance agreements would have been
approximately $192,000.
Employee Severance Compensation Plan. In connection with the Conversion,
the Board of Directors of the Savings Bank intends to adopt the Pioneer Bank
Employee Severance Compensation Plan to provide benefits to eligible employees
in the event of a change in control of the Holding Company or the Savings Bank.
Eligible employees are employees with a minimum of two years of service with the
Savings Bank. In general, all employees (except for officers who enter into
separate employment or severance agreements with the Holding Company and the
Savings Bank) will be eligible to participate in the Severance Plan. Under the
Severance Plan, in the event of a change in control of the Holding Company or
the Savings Bank, eligible employees, other than officers of the Savings Bank,
who are terminated or who terminate employment (but only upon the occurrence of
events specified in the Severance Plan) within 12 months of the effective date
of a change in control will be entitled to a payment based on years of service
with the Savings Bank with a minimum payment equal to four weeks of compensation
and a maximum payment equal to 26 weeks of compensation. However, the maximum
payment for any eligible employee would be equal to 26 weeks of their then
current compensation. In addition, Vice Presidents of the Savings Bank and
Assistant Vice Presidents/Managers of the Savings Bank would be eligible to
receive a severance payment equal to 12 and nine months, respectively, of their
current compensation. Assuming that a change in control had occurred at March
31, 1997 and the termination of all eligible employees, the maximum aggregate
payment due under the Severance Plan would be approximately $911,000.
Benefits
General. The Savings Bank currently pays 100% of the premiums for medical,
life and disability insurance benefits for full-time employees, subject to
certain deductibles.
401(k) Plan. The Savings Bank maintains the Pioneer Bank, FSB Profit
Sharing 401(k) Plan ("401(k) Plan") for the benefit of eligible employees of the
Savings Bank. The 401(k) Plan is intended to be a tax-qualified plan under
Sections 401(a) and 401(k) of the Code. Employees of the Savings Bank who have
completed six months of employment are eligible to participate in the 401(k)
Plan. Participants may contribute from 1%-20% of their annual compensation to
the 401(k) Plan through a salary reduction election. The Savings Bank matches
participant contributions on a discretionary basis. In addition to employer
matching contributions, the Savings Bank may contribute a discretionary amount
to the 401(k) Plan in any plan year which is allocated to individual
participants in the proportion that their annual compensation bears to the total
compensation of all participants during the plan
66
year. Participants are at all times 100% vested in salary reduction
contributions. With respect to employer matching and discretionary employer
contributions, participants vest in such contributions at the rate of 20% per
year beginning with the completion of two years of participation with full
vesting occurring after six years of participation. For the nine months ended
March 31, 1997, the Savings Bank incurred total contribution-related expenses of
$92,000 in connection with the 401(k) Plan.
Generally, the investment of 401(k) Plan assets is directed by plan
participants. In connection with the Conversion, the investment options
available to participants will be expanded to include the opportunity to direct
the investment of up to 100% of their 401(k) Plan account balance to purchase
shares of the Common Stock. A participant in the 401(k) Plan who elects to
purchase Common Stock in the Conversion through the 401(k) Plan will receive the
same subscription priority and be subject to the same individual purchase
limitations as if the participant had elected to make such purchase using other
funds. See "THE CONVERSION -- Limitations on Purchases of Shares."
Deferred Compensation Plan. The Savings Bank maintains a non-tax-qualified
deferred compensation plan for the benefit of a select group of senior
management personnel. Officers and employees who are designated as plan
participants may defer up to 100 percent of their base salary, bonuses,
commissions and amounts that would otherwise constitute excess contributions to
the Savings Bank's tax-qualified retirement plan. However, the maximum annual
deferral is limited to $100,000. In addition to employee deferrals, the Savings
Bank may make additional discretionary contributions on behalf of any
participant. All contributions are deemed invested at the direction of the
participant in a series of mutual funds and participants are deemed to earn
whatever income, gains and losses are attributable to such funds. However, the
employees have no direct interest in the underlying mutual funds, and all
benefits under the plan are payable from general assets of the Savings Bank or
from assets contributed to a "Rabbi" trust maintained in connection with the
plan. At termination of employment, the employee may receive benefits under the
plan in the form of a lump sum distribution or in a series of installment
payments over a period not exceeding 10 years.
Employee Stock Ownership Plan. The Board of Directors has authorized the
adoption by the Savings Bank of an ESOP for employees of the Savings Bank to
become effective upon the completion of the Conversion. The ESOP is intended to
satisfy the requirements for an employee stock ownership plan under the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Employees of the Holding Company and the Savings Bank who have been credited
with at least six months of service 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
Savings Bank's contributions to the ESOP and dividends payable 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." To
the extent that the ESOP is unable to acquire 8% of the Common Stock issued in
the Conversion, such additional shares will be acquired following the Conversion
through open market purchases.
In any plan year, the Savings Bank 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 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.
67
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 at the rate
of 20% per year, beginning upon the completion of two years of participation. A
participant is fully vested at retirement, in the event of disability or upon
termination of the ESOP. Benefits are distributable upon a participant's
retirement, early retirement, death, disability, or termination of employment.
The Savings Bank's contributions to the ESOP are not fixed, so benefits payable
under the ESOP cannot be estimated.
It is anticipated that Messrs. Webber, Aldape and Winegar and Ms. Johnson
will be appointed by the Board of Directors of the Savings Bank 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 unallocated shares 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.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is recorded
at the fair market value of the ESOP shares when committed to be released to
participants' accounts. See "PRO FORMA DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of
Operations -- Comparison of Operating Results for the Nine Months Ended March
31, 1997 and 1996."
If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease. However, on a per
share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the regulations
of the IRS and the Department of Labor issued thereunder. The Savings Bank
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 Savings Bank expects that a
favorable determination letter will be received by the ESOP.
1997 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. Under current OTS regulations, 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.
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 an incentive to contribute to the success of the Holding Company and
the Savings Bank, 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 Savings Bank. 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 (380,650 shares based on the
issuance of 3,806,500 shares at the maximum of the Estimated Valuation Range).
Shares
68
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 Board 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 the Board of
Directors. Subject to applicable OTS regulations, the Board 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. All options granted to nonemployee directors will be NQOs. The per
share exercise price of all options will equal at least 100% of the fair market
value of a share of Common Stock on the date the option is granted.
Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the Conversion, (i) no officer or
employees could receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30% of the number of
shares reserved for issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant. Under OTS regulations, if
the Stock Option plan is implemented within the first year following
consummation of the Conversion the minimum vesting period will be five years.
All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options also will be exercisable
following a change in control (as defined in the Stock Option Plan) of the
Holding Company or the Savings Bank to the extent authorized or not prohibited
by applicable law or regulations. OTS regulations currently provide that if the
Stock Option Plan is implemented prior to the first anniversary of the
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Savings Bank.
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
nontransferable except by will or the laws of descent or distribution.
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 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.
69
Although no specific award determinations have been made at this time, the
Holding Company and the Savings Bank anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations. The
size of individual awards will be determined prior to submitting the Stock
Option Plan for stockholder approval, and disclosure of anticipated awards will
be included in the proxy materials for such meeting.
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 Savings
Bank, subject to shareholder approval. The MRP will enable the Holding Company
and the Savings Bank 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 Savings Bank. The MRP will comply with all applicable regulatory
requirements. However, the MRP will not be approved or endorsed by the OTS.
Under current OTS regulations, the approval of a majority vote of the Holding
Company's outstanding shares is required prior to the implementation of the MRP
within one year of the consummation of the Conversion.
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 (152,260 shares
based on the issuance of 3,806,650 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 or the Savings Bank
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.
The Board of Directors of the Holding Company will administer the MRP,
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 or the Savings Bank to the MRP Trust. 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.
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock payable ratably over a specified vesting 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. Under OTS regulations, if the
MRP is implemented within the first year following consummation of the
Conversion, the minimum vesting period will be five years. All unvested MRP
awards will vest in the event of the recipient's death or disability. Unvested
MRP awards will also vest following a change in control (as defined in the MRP)
of the Holding Company or the Savings Bank to the extent authorized or not
prohibited by applicable law or regulations. OTS regulations currently provide
that, if the MRP is implemented prior to the first anniversary of the
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Savings Bank.
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 at this time, the
Holding Company and the Savings Bank anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations. Under
current OTS regulations, if the MRP is implemented within one year of the
consummation of the Conversion, (i) no officer or
70
employees could receive an award covering in excess of 25%, (ii) no nonemployee
director could receive in excess of 5% and (iii) nonemployee directors, as a
group, could not receive in excess of 30% of the number of shares reserved for
issuance under the MRP. The size of individual awards will be determined prior
to submitting the MRP for stockholder approval, and disclosure of anticipated
awards will be included in the proxy materials for such meeting.
Transactions with the Savings Bank
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and must not involve more than the normal risk of repayment or present
other unfavorable features. The Savings Bank's policy is not to make any new
loans or extensions of credit to the Savings Bank's executive officers and
directors at different rates or terms than those offered to the general public.
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 person and his
related interests, are in excess of the greater of $25,000 or 5% of the Savings
Bank'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 Banks -- Transactions with
Affiliates." The aggregate amount of loans by the Savings Bank to its executive
officers and directors was $326,000 at March 31, 1997, or approximately 0.6% of
pro forma stockholders' equity (based on the issuance of the maximum of the
Estimated Valuation Range).
REGULATION
General
The Savings Bank 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 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 Savings Bank'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 Savings Bank's mortgage documents. The Savings Bank 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 Savings Bank'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 Savings Bank 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 and the Securities and Exchange Commission
("SEC").
Federal Regulation of Savings Banks
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
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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 Savings Bank, 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 Savings Bank is in
compliance with this requirement with an investment in FHLB-Seattle stock of
$2.8 million at March 31, 1997. Among other benefits, the FHLB-Seattle 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. The FDIC maintains two separate insurance funds: the BIF
and the SAIF. As insurer of the Savings Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
The Savings Bank's deposit accounts are insured by the FDIC under the SAIF
to the maximum extent permitted by law. The Savings Bank 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 institution's capital ("well capitalized," "adequately
capitalized" or "undercapitalized"), which are defined in the same manner as the
regulations establishing the prompt corrective action system under the FDIA as
discussed below. The matrix so created results in nine assessment risk
classifications, with rates that until September 30, 1996 ranged from 0.23% for
well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. The
Savings Bank's assessments expensed for the nine months ended March 31, 1997
equaled $1.4 million (including the FDIC SAIF assessment of $1.1 million).
Pursuant to the Deposit Insurance Fund ("DIF") Act, which was enacted on
September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Savings Bank, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Savings Bank.
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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 Savings Bank.
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. 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%.
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 various mandatory and discretionary
restrictions on its operations.
At March 31, 1997, the Savings Bank 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;
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(v) asset growth; and (vi) compensation, fees and benefits. The federal banking
agencies recently adopted final regulations and Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines"). 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. If the OTS determines that the Savings Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the
Savings Bank to submit to the agency an acceptable plan to achieve compliance
with the standard. OTS 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 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 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 either an institution qualify as a
domestic building and loan association under the Code or 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; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting 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 loans; and stock issued by Federal Home Loan Mortgage Corporation or
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 March 31, 1997, the qualified thrift investments of the Savings
Bank were approximately 87.5% of its portfolio assets.
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. An
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institution that fails 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's 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 Banks -- 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 Savings Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank'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, subject to an
amortization schedule, 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
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 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-
75
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. A savings association with
assets of less than $300 million and risk-based capital ratios in excess of 12%
is not subject to the interest rate risk component, unless the OTS determines
otherwise. 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.
See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a table
that sets forth in terms of dollars and percentages the OTS tangible, core and
risk-based capital requirements, the Savings Bank's historical amounts and
percentages at March 31, 1997 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 Savings Bank 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 depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. A Tier 3 savings association has capital below the
minimum capital requirement (either before or after the proposed capital
distribution). A Tier 3 savings association may not make any capital
distributions without prior approval from the OTS.
The Savings Bank currently meets 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 Savings Bank'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 March 31, 1997, the Savings Bank's limit on loans
to one borrower was $3.2 million. At March 31, 1997, the Savings Bank's largest
aggregate committed loan relationship to one borrower was $1.3 million, of which
$900,000 was outstanding.
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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 guarantee and similar types of
transactions. Any loan or extension of credit by the Savings Bank to an
affiliate must be secured by collateral in accordance with Section 23A.
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 with respect to all
FDIC-insured banks. The Savings Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations generally 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. Generally, Regulation O also places individual and aggregate limits
on the amount of loans the Savings Bank may make to such persons based, in part,
on the Savings Bank'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 federal CRA, 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 regulatory applications to establish a new
branch office that will accept deposits, relocate an existing office, or merge
or consolidate with, or acquire the assets or assume the liabilities of,
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a federally regulated financial institution, among others. The CRA requires
public disclosure of an institution's CRA rating. The Savings Bank received an
"outstanding" rating as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. 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 $27,500 per day, or
$1.1 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 under the
HOLA. 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 those
of 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
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 savings and loan holding
company.
Qualified Thrift Lender Test. The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Banks--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 Savings Bank will report their income
on a fiscal year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other
78
corporations with some exceptions, including particularly the Savings Bank's
reserve for bad debts discussed below. 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 Savings Bank or the Holding
Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings
Bank which met certain definitional tests primarily related to their assets and
the nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Savings Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on the
Savings Bank's actual loss experience, or a percentage equal to 8% of the
Savings Bank's taxable income, computed with certain modifications and reduced
by the amount of any permitted additions to the non-qualifying reserve. Due to
the Savings Bank's loss experience, the Savings Bank generally recognized a bad
debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Savings Bank has
previously recorded a deferred tax liability equal to the bad debt recapture and
as such the new rules will have no effect on the net income or federal income
tax expense. For taxable years beginning after December 31, 1995, the Savings
Bank's bad debt deduction will be determined under the experience method using a
formula based on actual bad debt experience over a period of years or, if the
Savings Bank is a "large" association (assets in excess of $500 million) on the
basis of net charge-offs during the taxable year. The new rules allow an
institution to suspend bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only home
purchase or home improvement loans are included and the institution can elect to
have the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax year.
The unrecaptured base year reserves will not be subject to recapture as long as
the institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Savings Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess Distributions
will be included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank'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 Savings
Bank'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
Savings Bank's bad debt reserve. The amount of additional taxable income created
from 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 Savings Bank makes a "nondividend distribution,"
then approximately one and one-half times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state and local taxes). See "REGULATION"
and "DIVIDEND POLICY" for limits on the payment of dividends by the Savings
Bank. The Savings Bank 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
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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 Savings Bank'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 0.12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Savings Bank, whether or not an
Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Holding Company may exclude from its
income 100% of dividends received from the Savings Bank 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 Savings Bank will not file a consolidated
tax return, except that if the Holding Company or the Savings Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
Audits. The Savings Bank's federal income tax returns have not been audited
within the past five years.
State Taxation
The Savings Bank is subject to an Oregon corporate excise tax at a
statutory rate of 6.6% of income. The Savings Bank's state income tax returns
have not been audited during the past five years.
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THE CONVERSION
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY THE
MEMBERS OF THE SAVINGS BANK ENTITLED TO VOTE THEREON AND TO THE SATISFACTION OF
CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
General
On February 25, 1997, the Board of Directors of the Savings Bank
unanimously adopted the Plan of Conversion, pursuant to which the Savings Bank
will be converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank to be held as a wholly-owned subsidiary of the
Holding Company, a newly formed Oregon corporation. 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 SAVINGS BANK'S PROXY STATEMENT
AND IS AVAILABLE TO MEMBERS OF THE SAVINGS BANK UPON REQUEST. The Plan of
Conversion is also filed as an exhibit to the Registration Statement. See
"ADDITIONAL INFORMATION." The OTS has approved the Plan of Conversion subject to
its approval by the members of the Savings Bank entitled to vote on the matter
at a Special Meeting called for that purpose to be held on _____, 1997, and
subject to the satisfaction of certain other conditions imposed by the OTS in
its approval.
If the Board of Directors of the Savings Bank decides for any reason, such
as possible delays resulting from overlapping regulatory processing or policies
or conditions that could adversely affect the Savings Bank's or the Holding
Company's ability to consummate the Conversion and transact its business as
contemplated herein and in accordance with the Savings Bank'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 Savings Bank
will promptly refund all subscriptions or orders received together with accrued
interest, will withdraw the Holding Company's registration statement from the
SEC and will take all steps necessary to complete 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 Savings Bank
determines not to complete the Conversion, the Savings Bank will issue and sell
the common stock of the Savings Bank. There can be no assurance that the OTS
would approve the Conversion if the Savings Bank decided to proceed without the
Holding Company. The following description of the Plan of Conversion 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 of Conversion as described below will apply to
the Conversion of the Savings Bank from mutual to stock form of organization and
the sale of the Savings Bank'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 Savings
Bank. Pursuant to the Plan of Conversion, 2,813,500 to 3,806,500 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 Savings Bank 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 Savings Bank will
convert from a federally chartered mutual savings bank to a federally chartered
stock savings bank; (ii) the Common Stock will be 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 and trusts of 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
Savings Bank to be issued
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in connection with the Conversion. The Conversion will be effected only upon
completion of the sale of at least $28,135,000 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 December 31, 1995); (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of ________, 1997); and (iv) Other Members (depositors of the Savings Bank as
of _____, 1997). 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 subscribed for in the Subscription and Direct
Community Offering may be offered for sale in the Syndicated Community Offering.
Regulations require that the Syndicated Community Offering be completed within
45 days after completion of the fully extended Subscription Offering unless
extended by the Savings Bank 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 Savings Bank 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 Savings Bank.
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 Savings Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Savings Bank'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 Direct Community or Syndicated
Community Offerings 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 Savings Bank 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
Savings Bank would be required to charge all Conversion expenses against current
income.
Orders for shares of Common Stock will not be filled until at least
2,813,500 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
completed within 45 days after the last day of the fully extended Subscription
Offering and the OTS consents to an extension of time to complete 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 Savings Bank'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 completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at the Savings Bank's passbook rate from the date
payment is received until the Conversion is terminated.
Purposes of Conversion
The Board of Directors and management believe that the Conversion is in the
best interests of the Savings Bank, its members and the communities it serves.
The Savings Bank's Board of Directors has formed the Holding Company to serve as
a holding company, with the Savings Bank as its subsidiary, upon the
consummation of the Conversion. By converting to the stock form of organization,
the Holding Company and the Savings Bank will be structured in the form used by
holding companies of commercial banks and by a growing number of savings
institutions. Management of the Savings Bank believes that the Conversion offers
a number of advantages which will be important to the future growth and
performance of the Savings Bank. The capital raised in the Conversion
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is intended to support the Savings Bank's current lending and investment
activities and may also support possible future expansion and diversification of
operations, although there are no current specific plans, arrangements or
understandings, written or oral, regarding any such expansion or
diversification. The Conversion is also expected to afford the Savings Bank's
members and others the opportunity to become stockholders of the Holding Company
and participate more directly in, and contribute to, any future growth of the
Holding Company and the Savings Bank. The Conversion will also enable the
Holding Company and the Savings Bank to raise additional capital in the public
equity or debt markets should the need arise, although there are no current
specific plans, arrangements or understandings, written or oral, regarding any
such financing activities.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank
Voting Rights. Savings members and borrowers will have no voting rights in
the converted Savings Bank or the Holding Company and therefore will not be able
to elect directors of the Savings Bank or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings members of the
Savings Bank. Subsequent to the Conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Savings Bank 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 Savings Bank'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 Savings Bank.
Tax Effects. The Savings Bank 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 Savings Bank
in its mutual or stock form by reason of the Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Savings Bank immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank in
its mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Savings Bank 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 of Conversion 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 Savings
Bank, whose findings are not binding on the IRS, has issued a letter indicating
that the Subscription Rights do not have any value, based on the fact that such
rights are acquired by the recipients without 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 and Other
Members who exercise their Subscription Rights. The Savings Bank 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
83
their own tax advisors as to the tax consequences in the event the Subscription
Rights are deemed to have a fair market value.
The Savings Bank has also received an opinion from Deloitte & Touche LLP,
Portland, Oregon, that, assuming the Conversion does not result in any federal
income tax liability to the Savings Bank, its account holders, or the Holding
Company, implementation of the Plan of Conversion will not result in any Oregon
income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Deloitte & Touche LLP and the letter
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
Savings Bank in its present mutual form, each depositor in the Savings Bank
would receive a pro rata share of any assets of the Savings Bank 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 deposit
account to the total value of all deposit accounts in the Savings Bank at the
time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the Savings
Bank, including certificates of deposit ("Savings Account(s)"), shall not be
entitled to share in any residual assets in the event of liquidation of the
Savings Bank. However, pursuant to OTS regulations, the Savings Bank 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 Savings Bank subsequent
to the Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Savings Bank.
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 Savings Bank subsequent to December 31, 1995 or _____ __,
1997 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 December
31, 1995 or _____ __, 1997 or (ii) the amount of the "qualifying deposit" in
such Savings Account on December 31, 1995 or ______ __, 1997, 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 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 Savings Bank (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
84
purchase of assets with assumptions of Savings Accounts and other liabilities or
similar transactions with another federally insured institution in which the
Savings Bank 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.
In the unlikely event the Savings Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the Savings
Bank.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Common Stock have been
issued to 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 of Conversion. 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 Savings Bank as of December 31, 1995 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $200,000 of Common
Stock, one-tenth of one percent 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 the 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 such person's 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 Savings Bank in the one year period preceding
December 31, 1995 are subordinated to the Subscription Rights of other Eligible
Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 10% 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 as of _____ __, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $200,000 of Common
Stock, one-tenth of one percent 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 deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all 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 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.
85
Category 4: Other Members. Each depositor of the Savings Bank as of the
Voting Record Date (_____, 1997) will receive nontransferable Subscription
Rights to purchase up to $200,000 of Common Stock in the Conversion to the
extent shares are available following subscriptions by Eligible Account Holders,
the Savings Bank's ESOP and Supplemental Eligible Account Holders. In the event
of an oversubscription in this category, the available shares will be allocated
proportionately based on the amount of the respective subscriptions.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR 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 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 SAVINGS BANK AND THE HOLDING COMPANY.
The Holding Company and the Savings Bank will make reasonable attempts to
provide a Prospectus and related offering materials to holders of Subscription
Rights. However, the Subscription Offering and all Subscription Rights under the
Plan of Conversion will expire at ____ __.m., Pacific Time, on the Expiration
Date, whether or not the Savings Bank has been able to locate each person
entitled to such Subscription Rights. ORDERS FOR COMMON STOCK IN THE
SUBSCRIPTION OFFERING RECEIVED IN HAND BY THE SAVINGS BANK AFTER THE EXPIRATION
DATE WILL NOT BE ACCEPTED. The Subscription Offering may be extended by the
Holding Company and the Savings Bank up to ______ __ , 1997 without the OTS's
approval. OTS regulations require that the Holding Company complete the sale of
Common Stock within 45 days after the close of the Subscription Offering. If the
Direct Community Offering and the Syndicated Community Offerings are not
completed by _____ __, 1997 (or ______ __, 1997, if the Subscription Offering is
fully extended), all funds received will be promptly returned with interest at
the Savings Bank's passbook rate (___% per annum as of the date hereof) 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 and trusts of natural persons residing in the Local Community.
Purchasers in the Direct Community Offering are eligible to purchase up to
$200,000 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 the
satisfaction of all orders received in the Subscription Offering. The Direct
Community Offering may terminate on or at any time subsequent to the Expiration
Date, but no later than 45 days after the close of the Subscription Offering,
unless extended by the Holding Company and the Savings Bank, with approval of
the OTS. Any extensions beyond 45 days after the close of the fully extended
Subscription Offering would require a resolicitation of orders, wherein
subscribers for the maximum numbers of shares of Common Stock would be, and
certain other large Subscribers in the discretion of the Holding Company and the
Savings Bank may 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 Savings Bank's passbook rate, or be
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 SAVINGS BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE
OR IN PART. IF AN ORDER IS REJECTED IN PART,
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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.
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 SAVINGS BANK 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 $200,000. See "-- Plan of Distribution for
the Subscription, Direct Community and Syndicated Community Offerings" for a
description of the commission to be paid to any 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 Savings Bank'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 ____ __.m., Pacific
Time, on ________ __, 1997, 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 Syndicated Community Offering may run concurrent to
the Subscription and Direct Community Offering or subsequent thereto.
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In the event the Savings Bank 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 Savings Bank, 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 ___________, 1997 (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 Savings Bank
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 of Conversion reside. However, the Holding Company and the Savings Bank
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 Savings Bank 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 Savings
Bank 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 Savings Bank 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.
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
The Holding Company and the Savings Bank have retained Webb to consult with
and to advise the Savings Bank 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
Savings Bank 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 Savings Bank'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 Purchase Price of the shares of Common
Stock sold in the Subscription and Direct Community Offerings excluding shares
purchased by the ESOP and officers and directors of the Savings Bank. 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 Savings Bank 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 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.
88
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 main office of the Savings
Bank. 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 Savings Bank 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 Savings Bank
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 Savings Bank (which may be given by completing the
appropriate blanks in the Stock Order Form), must be received by the Savings
Bank by Noon, Pacific 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 Savings Bank 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 Savings Bank 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 Savings Bank, 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 (December 31,
1995) and/or the Supplemental Eligibility Record Date (______ __, 1997) and/or
the Voting Record Date (________ __, 1997) 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 an office of the Savings Bank, (ii) by check, bank draft, or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Savings Bank. 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 Savings Bank'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 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
89
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 Savings Bank to withdraw the amount of the
Purchase Price from his or her deposit account, the Savings Bank will do so as
of the effective date of Conversion. The Savings Bank 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 Savings
Bank'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 Savings Bank 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 Savings Bank 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 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 Savings Bank 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 Savings Bank IRA to purchase Common
Stock should contact the Stock Information Center at the Savings Bank 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 Savings Bank 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
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the Conversion be based upon an estimated pro
forma value of the Holding Company and the Savings Bank 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 Savings Bank
and the Holding Company have retained Keller to prepare an appraisal of the pro
forma market value of the Holding Company and the Savings Bank as converted, as
well as a business plan. Keller will receive a fee expected to total
approximately $22,000 for its appraisal services and assistance in the
preparation of a business plan, plus reasonable out-of-pocket expenses incurred
in connection with the appraisal not to exceed $800. The Savings Bank 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.
Keller has prepared an appraisal of the estimated pro forma market value of
the Holding Company and the Savings Bank as converted taking into account the
formation of the Holding Company as the holding company for the Savings Bank.
For its analysis, Keller undertook substantial investigations to learn about the
Savings Bank's
90
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 Savings Bank's Form AC Application for Approval of
Conversion and the Holding Company's Form S-1 Registration Statement.
Furthermore, Keller visited the Savings Bank's facilities and had discussions
with the Savings Bank'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 Savings Bank's assets and liabilities was performed
in connection with the evaluation.
In estimating the pro forma market value of the Holding Company and the
Savings Bank as converted, 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 Savings Bank's primary market area, the Savings Bank's financial
performance and condition in relation to publicly-traded institutions that
Keller deemed comparable to the Savings Bank, 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 Savings Bank 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 $884,000 at the midpoint of the Estimated
Valuation Range, an assumed after-tax rate of return on the net Conversion
proceeds of 3.64%, purchases by the ESOP of 8% of the Common Stock sold in the
Conversion and purchases in the open market by the MRP of a number of shares
equal to 4% of the Common 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 different results.
On the basis of the foregoing, Keller has advised the Holding Company and
the Savings Bank that, in its opinion, as of June 4, 1997, the aggregate
estimated pro forma market value of the Holding Company and the Savings Bank as
converted and, therefore, the Common Stock was within the valuation range of
$28,135,000 to $38,065,000 with a midpoint of $33,100,000. 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 $28,135,000 to $38,065,000 with a
midpoint of $33,100,000. Assuming that the shares are sold at $10.00 per share
in the Conversion, the estimated number of shares would be between 2,813,500 and
3,806,500 with a midpoint of 3,310,000. The Purchase Price of $10.00 was
determined by discussion among the Boards of Directors of the Savings Bank 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, (ii) desired liquidity
in the Common Stock subsequent to the Conversion, and (iii) the expense of
issuing shares for purposes of Oregon franchise taxes. 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 Savings Bank, 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 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 determine its estimate of
the pro forma market value of the Holding Company and the Savings Bank as
converted, as of the close of the Subscription Offering.
91
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 Savings Bank 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 discussed herein. In the
event the total amount of shares issued is less than 2,813,500 or more than
4,377,475 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $28,135,000 or more than $43,774,750,
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 Savings Bank 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 of Conversion will terminate.
In formulating its appraisal, Keller relied upon the truthfulness, accuracy
and completeness of all documents the Savings Bank furnished to 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 Savings Bank and the Holding
Company or independently value the assets or liabilities of the Holding Company
and the Savings Bank. 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 PLAN OF 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.
Limitations on Purchases of Shares
The Plan of Conversion provides for certain 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. With the
exception of the ESOP, which is expected to subscribe for 8% of the shares of
Common Stock issued in the Conversion, the Plan of Conversion provides for the
following purchase limitations: (i) No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member, including, in each case, all persons on
a joint account, may purchase shares of Common Stock with an aggregate purchase
price of more than $200,000, (ii) no person (including all persons on a joint
account), either alone or together with associates of or persons acting in
concert with such person, may purchase in the Direct Community Offering, if any,
or in the Syndicated Community Offering, if any, shares of Common Stock with an
aggregate purchase price of more than $200,000, and (iii) no person, either
alone or together with associates of or persons acting in concert with such
person, may purchase in the aggregate more than the overall maximum purchase
limitation of 1% of the total number of shares of Common Stock issued in the
Conversion (exclusive of any shares issued pursuant to an increase in the
Estimated Valuation Range of up to 15%). For purposes of the Plan of Conversion,
the directors are not deemed to be acting in concert
92
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 Savings Bank'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 Savings Bank and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
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, persons who
subscribed for the maximum number of shares of Common Stock will be, and other
large subscribers in the discretion of the Holding Company and the Savings Bank
may be, given the opportunity to increase their subscriptions 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 of Conversion to mean
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. In general, a person who acts in concert with another party shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion to
mean (i) any corporation or organization (other than the Savings Bank or a
majority-owned subsidiary of the Savings Bank) 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 Savings Bank 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 of Conversion to mean an
executive officer of the Savings Bank, including its Chairman of the Board,
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
Savings Bank and the Holding Company and by NASD members. See "-- Restrictions
on Transferability by Directors and Officers and NASD Members."
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; or (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 of any 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. Upon ten days' written 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
93
three following the conversion, provided that certain regulatory conditions are
met and that the repurchase would not adversely affect the financial condition
of the association. Any repurchases of common stock by the Holding Company would
be subject to these regulatory restrictions unless the OTS would provide
otherwise.
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 or the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased 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 Savings Bank 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 of 1933, as amended ("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.
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 the material provisions of federal
law and regulations and the OBCA, as well as the Articles 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 Articles of Incorporation and Bylaws of the Holding Company. See "ADDITIONAL
INFORMATION" as to how to obtain a copy of these documents.
94
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 the Savings Bank (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).
The Articles of Incorporation of the Holding Company essentially extends
the restrictive period for 10% acquisitions of Holding Company stock from three
to five years following completion of the Conversion. See "-- Change of Control
- -- Restrictions on Acquisitions of Securities."
Change of Control
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, 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.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include the
acquiror being one of the two largest stockholders. The determination of control
may be rebutted by submission to the OTS, prior to the acquisition of stock or
the occurrence of any other circumstances giving rise to such determination, of
a statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock must file
with the OTS a certification form that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which would result in a determination or rebuttable
determination of control without prior notice to or approval of the OTS, as
applicable. There are also rebuttable presumptions in the regulations
concerning whether a group "acting in concert" exists, including presumed
action in concert among members of an "immediate family."
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
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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 Articles of Incorporation and
Bylaws and in Oregon Law
A number of provisions of the Holding Company's Articles 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 Articles 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 the incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Articles of Incorporation and
Bylaws of the Holding Company is necessarily general and reference should be
made in each case to such Articles of Incorporation and Bylaws, which are
incorporated herein by reference. See "ADDITIONAL INFORMATION" as to where to
obtain a copy of these documents.
Authorized Shares of Capital Stock. The Articles of Incorporation of the
Holding Company authorizes the issuance of up to 250,000 shares of preferred
stock ("Preferred Stock"). Preferred Stock with voting rights could be issued
and would then represent an additional class of stock required to approve any
proposed acquisition. This Preferred Stock, together with authorized but
unissued shares of the Holding Company's Common Stock (the Articles of
Incorporation also authorizes the issuance of up to 8,000,000 shares of Common
Stock), could represent additional capital required to be purchased by an
acquiror. Issuance of such additional shares may dilute the voting interest of
the Holding Company's stockholders. Issuance of voting Preferred Stock to
persons opposed to a proposed acquisition might prevent or deter an acquisition.
Classified Board of Directors and Removal of Directors. Article XII of the
Articles of Incorporation of the Holding Company states that the Board of
Directors is to be divided into three classes which shall be as nearly equal in
number as possible. The directors of the Holding Company in each class will hold
office following their initial appointment to office for terms of one year, two
years and three years, respectively, and, upon reelection, will serve for
staggered three year terms. Each class currently consists of one third of the
number of directors. Each director will serve until his or her successor is
elected and qualified. Article XIII of the Articles of Incorporation of the
Holding Company provides that a director of the Holding Company may be removed
by the affirmative vote of the holders of at least 80% of the outstanding shares
entitled to vote at an election of directors. The requirement that directors may
be removed only upon an 80% vote makes it difficult for the stockholders of the
Holding Company to remove directors of the Holding Company, even if the
stockholders believe such removal would be beneficial to the Holding Company.
A classified Board of Directors could make it more difficult for
stockholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Since the terms of only one-third of the incumbent directors expire
each year, at least two annual elections are required for the stockholders to
change a majority, whereas a majority of a non-classified Board may be
changed in one year. In the absence of the provisions of the Articles of
Incorporation classifying the Board, all of the directors would be elected
each year. The provision for a staggered Board of Directors affects every
election of directors and is not triggered by the occurrence of a particular
event, such as a hostile merger. Thus, a staggered Board of Directors makes
it more difficult for stockholders to change the majority of directors
even when the only reason for the change is the performance of such
directors.
Stockholder Vote Required to Approve Business Combinations With Interested
Shareholder. Article XV of the Holding Company's Articles of Incorporation
provides that the Holding Company shall not engage in any
96
"business combination" with any "Interested Shareholder" for a period of three
years following the date that the shareholder became an "Interested
Shareholder," unless: (i) prior to that date the Board of Directors of the
Holding Company approved either the "business combination" or the
transaction which resulted in the shareholder becoming an "interested
Shareholder," (ii) upon consummation of the transaction which resulted in the
shareholder becoming an "Interested Shareholder," the "Interested
Shareholder" owned at least 85% of the voting stock of the Holding Company
outstanding at the time the transaction commenced (excluding those shares
owned by persons who are directors and also officers of the Holding Company
and shares held by employee stock benefit plans in which the employee
participants do not have the right to determine confidentially whether such
shares will be tendered in a tender or exchange offer), or (iii) on or
subsequent to the date that the shareholder became an "Interested Shareholder,"
the "business combination" is approved by the Board of Directors of the Holding
Company and authorized at an annual or special meeting of shareholders, and not
by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock not owned by the "Interested Shareholder."
For purposes of Article XV of the Articles of Incorporation, the term
"Interested Shareholder" is defined to include any individual, corporation,
partnership, unincorporated association or other entity is the owner of 15% or
more of the outstanding voting stock of the Holding Company or is an affiliate
or associate of a corporation that owns 15% or more of the outstanding voting
stock of the Holding Company and such person was the owner of 15% or more of the
outstanding voting stock of such corporation. The term "business combination,"
when used in reference to the Holding Company and any "Interested Shareholder"
of the Holding Company, means (i) any merger or plan of exchange of the Holding
Company or subsidiary thereof with the "Interested Shareholder" or any other
corporation if the merger or plan of exchange is caused by the "Interested
Shareholder" and as a result of the merger or plan of exchange, the provisions
of Article XV of the Articles of Incorporation are not applicable to the
surviving corporation, (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition, in one transaction or a series of transactions,
to or with an "Interested Shareholder," whether as part of a dissolution or
otherwise, of the assets of the Holding Company or any direct or indirect
majority-owned subsidiary thereof where the assets have an aggregate market
value equal to 10% or more of either the aggregate market value of all the
assets of the Holding Company on a consolidated basis or the aggregate market
value of all of the outstanding stock of the Holding Company, (iii) any
transaction which results in the issuance or transfer by the Holding Company or
by any direct or indirect majority-owned subsidiary thereof of any shares of the
Holding Company (except for certain exchanges or distributions made pro rata to
all of the same class of stock), (iv) any transaction involving the Holding
Company or any direct or indirect majority-owned subsidiary thereof which has
the effect, directly or indirectly, of increasing the proportionate share of any
class or series of shares, or securities convertible thereto, of the Holding
Company or any such subsidiary which is owned by the "Interested Shareholder,"
or (v) the receipt by the "Interested Shareholder" of the benefit, either direct
or indirect, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the Holding Company any direct or indirect
majority-owned subsidiary thereof.
Restrictions on Acquisitions of Securities. The Articles of Incorporation
provides that for a period of five years from the effective date of the
Conversion, no person may acquire directly or indirectly acquire the beneficial
ownership of more than 10% of any class of equity security of the 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 Articles 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 Articles of Incorporation provides for further
restrictions on voting rights of shares owned in excess of 10% of any class of
equity security of the Holding Company beyond five years after the Conversion
of the Savings Bank. Specifically, the Articles of Incorporation provides that
if, at any time after five years from the Savings Bank's conversion to stock
form, 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
97
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 Company's "Continuing Directors." Under the
Holding Company's Articles of Incorporation, the restriction on voting
shares beneficially owned in violation of the foregoing limitations is
imposed automatically. In order to prevent the imposition of such
restrictions, the Board of Directors must take affirmative action approving in
advance a particular offer to acquire or acquisition. Unless the Board took such
affirmative action, the provision would operate to restrict the voting by
beneficial owners of more than 10% of the Holding Company's Common Stock in a
proxy contest.
Board Consideration of Certain Nonmonetary Factors in the Event of an Offer
by Another Party. The Articles of Incorporation of the Holding Company directs
the Board of Directors, in evaluating a Business Combination or a tender or
exchange offer, to consider, in addition to the adequacy of the amount to be
paid in connection with any such transaction, certain specified factors and any
other factors the Board deems relevant, including (i) the social and economic
effects of the transaction on the Holding Company and its subsidiaries,
employees, depositors, loan and other customers, creditors and other elements of
the communities in which the Holding Company and its subsidiaries operate or are
located; (ii) the business and financial condition and earnings prospects of the
acquiring party or parties; and (iii) the competence, experience and integrity
of the acquiring party or parties and its or their management. By having the
standards in the Articles of Incorporation of the Holding Company, the Board of
Directors may be in a stronger position to oppose any proposed business
combination, tender or exchange offer if the Board concludes that the
transaction would not be in the best interest of the Holding Company, even if
the price offered is significantly greater than the then market price of any
equity security of the Holding Company.
Provisions Relating to Meetings of Stockholders. The OBCA provides that a
special meeting of stockholders may be called by a corporation's board of
directors or by the holders of at least 10% of all votes entitled to be cast on
any issue to be considered at the proposed special meeting.
Article X of the Holding Company's Articles of Incorporation provides that
there will be no cumulative voting by stockholders for the election of the
Holding Company's directors. The absence of cumulative voting rights effectively
means that the holders of a majority of the shares voted at a meeting of
stockholders may, if they so choose, elect all directors of the Holding Company,
thus precluding a small group of stockholders from controlling the election of
one or more representatives to the Holding Company's Board of Directors.
Restriction on Maximum Number of Directors and Filling of Vacancies on the
Board of Directors. The OBCA requires that the board of directors of a
corporation shall consist of one or more members and that the number of
directors shall be set by a corporation's bylaws or articles of incorporation.
Article XII of the Holding Company's Articles of Incorporation provides that the
number of directors of the Holding Company (exclusive of directors, if any, to
be elected by the holders of any currently authorized but unissued shares of
Preferred Stock of the Holding Company) shall not be less than five or more than
25, as shall be provided from time to time in accordance with the Holding
Company's Bylaws. Its current Bylaws fix the number of directors at seven.
Additionally, the power to determine the number of directors within these
numerical limitations and the power to fill vacancies, whether occurring by
reason of an increase in the number of directors or by resignation, is vested in
the Board of Directors. The effect of such provisions may be to prevent a person
or entity from immediately acquiring control of the Holding Company through
an increase in the number of the Holding Company's directors and election of
the control person's or group's nominees to fill the newly created vacancies,
thus allowing existing management to continue in office.
Advance Notice Requirements for Nomination of Directors and Presentation of
New Business at Meetings of Stockholders. Article XI of the Articles of
Incorporation of the Holding Company generally provides that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice not less
than 30 nor more than 60 days in advance of the meeting. Management believes
that it is in the best interests of the Holding Company and its stockholders to
provide
98
sufficient time to enable management to disclose to stockholders
information about a dissident slate of nominations for directors. This advance
notice requirement may also give management time to solicit its own proxies in
an attempt to defeat any dissident slate of nominations, should management
determine that doing so is in the best interests of stockholders generally.
Similarly, adequate advance notice of shareholder proposals will give management
time to study such proposals and to determine whether to recommend to the
stockholders that such proposals be adopted. In certain instances, such
provisions could make it more difficult to oppose management's nominees or
proposals, even if stockholders believe such nominees or proposals are in their
best interests.
Supermajority Voting Requirement for Amendment of Certain Provisions of the
Articles of Incorporation and Bylaws. Article XX of the Holding Company's
Articles of Incorporation provides that specified provisions contained in the
Articles of Incorporation may not be repealed or amended except upon the
affirmative vote of the holders of not less than 80% of the outstanding shares
of the Holding Company's stock entitled to vote generally in the election of
directors. This requirement exceeds the majority vote of the outstanding stock
that would otherwise be required by the OBCA for the repeal or amendment of such
provisions of the Articles of Incorporation. The specific provisions covered by
Article XX are (i) Article X governing the calling of special meetings of
stockholders and the absence of cumulative voting right, (ii) Article XI
requiring written notice to the Holding Company of nominations for the election
of directors and new business proposals, (iii) Article XII governing the number
of members of the Holding Company's Board of Directors, (iv) Article XIII
providing the mechanism for removing directors, (v) Article XIV governing the
acquisition of 10% or more of any class of equity security of the Holding
Company, (vi) Article XV governing the requirement for the approval of certain
business combinations involving "Related Persons," (vii) Article XVI governing
evaluation of business combinations; (viii) Article XVII pertaining to the
elimination of the liability of the directors to the Holding Company and its
stockholders for monetary damages, with certain exceptions, for breaches of
fiduciary duty, (ix) Article XVII providing for the indemnification of
directors, officers, employees, and agents of the Holding Company; and (x)
Article XIX and Article XX governing the required shareholder vote for amending
the Articles of Incorporation and Bylaws of the Holding Company. This latter
provision is intended to prevent the holders of less than 80% of the outstanding
stock of the Holding Company from circumventing any of the foregoing provisions
by amending the Articles of Incorporation to delete or modify one of such
provisions. Thus, the holders of more than 20% of the Holding Company's voting
stock may prevent amendments to the Holding Company's Articles of Incorporation
or Bylaws even if they were favored by the holders of a majority of the voting
stock.
Purpose and Takeover Defensive Effects of the Holding Company's Articles of
Incorporation and Bylaws. The Board of Directors of the Savings Bank 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 Savings Bank 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 Savings Bank and 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 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
99
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 the 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 the 300 thereby allowing for Exchange Act deregistration.
Despite the belief of the Savings Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's Articles
of Incorporation and Bylaws, these provisions may also have the effect of
discouraging a future takeover attempt which would not be approved by the
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 Savings Bank 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
provisions to the Holding Company's Articles of Incorporation or Bylaws
regarding the acquisition of its equity securities that would be permitted for a
Oregon business corporation. The Holding Company and the Savings Bank 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 restriction on acquisition of the Holding
Company contained in the Articles of Incorporation and Bylaws and Holding
Company, federal law and Oregon 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 8,000,000 shares of Common Stock
having a par value of $.01 per share and 250,000 shares of Preferred Stock
having a par value of $.01 per share. The Holding Company currently expects to
issue up to 3,806,500 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 with, 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.
100
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 Oregon law or as are otherwise
presented to them by the Board of Directors. Except as discussed in "CERTAIN
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 "CERTAIN RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federally chartered mutual savings bank, corporate powers and control
of the Savings Bank are vested in its Board of Directors, who elect the officers
of the Savings Bank and who fill any vacancies on the Board of Directors.
Subsequent to Conversion, voting rights will be vested exclusively in the owners
of the shares of capital stock of the Savings Bank, 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 Savings Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Savings Bank, the Holding Company, as holder of the Savings Bank's capital
stock would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Savings Bank (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 Savings Bank -- Liquidation Account"),
all assets of the Savings Bank 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. Holders of the Common Stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares which may be
issued. The Common Stock is not subject to redemption.
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 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 which
101
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
Articles of Incorporation and Bylaws and by the rules and regulations of various
regulatory agencies. See "REGULATION" and "CERTAIN 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 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 Offerings have been opined upon by Breyer & Aguggia and the Oregon tax
consequences of the Offerings have been opined upon by Deloitte & Touche LLP,
Portland, Oregon. Breyer & Aguggia and Deloitte & Touche LLP 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 Savings Bank as of March 31,
1997 and the nine months ended March 31, 1997 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The consolidated balance sheet of the Savings Bank as of June 30, 1996 and the
consolidated statements of income, equity and cash flows for the years ended
June 30, 1996 and 1995 included in this Prospectus have been audited by Coopers
& Lybrand L.L.P., as stated in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
report to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Savings Bank, as converted and
its letter with respect to subscription rights and to the use of its name and
statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (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 and at
its regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New York 10048.
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
Registration Statement also is available through the SEC's World Wide Web site
on the Internet (http://www.sec.gov).
102
The Savings Bank has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Savings Bank's Special
Meeting and certain other information. This Prospectus omits certain information
contained in such Application. The Application, including the proxy 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, Pacific Telesis Tower, 1 Montgomery Street,
Suite 400, San Francisco, California 94101.
Copies of the Holding Company's Articles of Incorporation and Bylaws may be
obtained by written request to the Savings Bank.
103
Index To Consolidated Financial Statements
Pioneer Bank, a Federal Savings Bank and Subsidiaries
Page
----
Independent Auditors' Report - Deloitte & Touche LLP ................. F-1
Report of Independent Accountants - Coopers & Lybrand L.L.P .......... F-2
Consolidated Balance Sheets as of March 31, 1997
and June 30, 1996 ................................................... F-3
Consolidated Statements of Income for the
Nine Months Ended March 31, 1997
and the Years Ended June 30, 1996 and 1995 .......................... 21
Consolidated Statements of Equity for the
Nine Months Ended March 31, 1997 and for the
Years Ended June 30, 1996 and 1995 .................................. F-4
Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 1997
and the Years Ended June 30, 1996 and 1995 .......................... F-5
Notes to Consolidated Financial Statements ........................... F-7
* * *
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 herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
104
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Pioneer Bank, a Federal Savings Bank
Baker City, Oregon
We have audited the accompanying consolidated balance sheet of Pioneer Bank, a
Federal Savings Bank, (the "Bank") and subsidiaries as of March 31, 1997, and
the related consolidated statement of income, equity and cash flows for the
nine-month period then ended. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pioneer Bank, a Federal Savings
Bank, and subsidiaries as of March 31, 1997, and the results of their operations
and their cash flows for the nine-month period then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
May 22, 1997
F-1
[Coopers & Lybrand Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Pioneer Bank, a Federal Savings Bank
Baker City, Oregon
We have audited the accompanying consolidated balance sheet of Pioneer Bank, a
Federal Savings Bank, and subsidiaries as of June 30, 1996, and the related
consolidated statements of income, equity and cash flows for the years ended
June 30, 1996 and 1995. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pioneer Bank, a
Federal Savings Bank, and subsidiaries as of June 30, 1996, and their
consolidated results of operations and cash flows for the years ended June 30,
1996 and 1995, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
COOPERS & LYBRAND LLP
Boise, Idaho
August 2, 1996
F-2
PIONEER BANK, A FEDERAL SAVINGS BANK, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND JUNE 30, 1996
- --------------------------------------------------------------------------------
ASSETS 1997 1996
Cash and due from banks $ 1,182,255 $ 825,106
Interest-bearing deposits 3,793,206 2,591,228
------------- -------------
Total cash and cash equivalents 4,975,461 3,416,334
Securities:
Available for sale, at fair value (amortized cost: $35,850,256
and $39,477,319) 35,651,533 39,401,276
Held to maturity, at amortized cost (fair value: $15,391,851
and $16,782,384) 15,302,393 17,010,617
Trading, at fair value -- 2,569,348
Loans receivable, net of allowance for loan losses of $725,089
and $540,986 138,880,914 132,347,110
Loans held for sale 428,200 --
Accrued interest receivable 1,324,637 1,336,025
Premises and equipment, net 4,640,848 4,373,200
Stock in Federal Home Loan Bank of Seattle, at cost 2,763,300 2,609,200
Other assets 245,380 393,932
------------- -------------
TOTAL ASSETS $ 204,212,666 $ 203,457,042
============= =============
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Interest-bearing $ 68,049,713 $ 66,379,911
Noninterest-bearing 6,282,277 4,894,075
Time certificates 104,825,937 105,345,220
------------- -------------
Total deposits 179,157,927 176,619,206
Securities sold under agreements to repurchase 1,430,853 1,432,078
Accrued expenses and other liabilities 1,119,465 1,311,225
Advances from Federal Home Loan Bank of Seattle 800,000 2,650,000
Advances from borrowers for taxes and insurance 678,208 1,440,289
------------- -------------
Total liabilities 183,186,453 183,452,798
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 15)
EQUITY:
Retained earnings 21,148,510 20,050,916
Unrealized loss on securities available for sale, net of tax (122,297) (46,672)
------------- -------------
Total equity 21,026,213 20,004,244
------------- -------------
TOTAL LIABILITIES AND EQUITY $ 204,212,666 $ 203,457,042
============= =============
See notes to consolidated financial statements.
F-3
PIONEER BANK, A FEDERAL SAVINGS BANK, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
NINE-MONTH PERIOD ENDED MARCH 31, 1997 AND
YEARS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
Unrealized
Gain (Loss)
on Securities
Retained Available
Earnings for Sale Total
BALANCE, JULY 1, 1994 $ 15,612,945 $ (135,829) $ 15,477,116
Net income 2,258,842 -- 2,258,842
Unrealized gain on securities available for sale,
net of tax -- 75,727 75,727
------------ ------------ ------------
BALANCE, JUNE 30, 1995 17,871,787 (60,102) 17,811,685
Net income 2,179,129 -- 2,179,129
Unrealized gain on securities available for sale,
net of tax -- 13,430 13,430
------------ ------------ ------------
BALANCE, JUNE 30, 1996 20,050,916 (46,672) 20,004,244
Net income 1,097,594 -- 1,097,594
Unrealized loss on securities available for sale,
net of tax -- (75,625) (75,625)
------------ ------------ ------------
BALANCE, MARCH 31, 1997 $ 21,148,510 $ (122,297) $ 21,026,213
============ ============ ============
See notes to consolidated financial statements.
F-4
PIONEER BANK, A FEDERAL SAVINGS BANK, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIOD ENDED MARCH 31, 1997 AND
YEARS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,097,594 $ 2,179,129 $ 2,258,842
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 271,012 299,611 243,569
Amortization of deferred loan fees, net (195,002) (301,429) (184,965)
Provision for loan losses 216,063 115,397 66,548
Deferred income taxes (90,605) 33,562 223,100
Amortization and accretion of premiums and
discounts (21,680) (35,281) (18,395)
Federal Home Loan Bank of Seattle dividends (154,100) (184,400) (142,166)
Net unrealized (gain) loss on trading securities 2,151 71,274 (279,545)
Loss on sale of fixed assets 21,514 -- --
Other -- 1,859 10,681
Change in assets and liabilities:
Trading securities 180,675 1,165,434 161,053
Loans held for sale (428,200) -- --
Accrued interest receivable 11,388 (42,117) (36,712)
Other assets 148,552 22,981 (339,957)
Accrued expenses and other liabilities (54,435) (40,760) 92,988
------------ ------------ ------------
Net cash provided by operating activities 1,004,927 3,285,260 2,055,041
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (27,245,000) (31,984,744) (34,464,721)
Loan principal repayments 21,284,824 24,538,000 22,416,000
Loans purchased (572,000) (256,000) (145,000)
Proceeds from maturity of securities available for sale 5,000,000 3,000,000 --
Principal repayments of securities available for sale 2,053,409 1,662,503 --
Purchase of securities available for sale (1,000,000) (4,000,000) --
Maturity of securities held to maturity -- 3,000,000 1,200,000
Principal repayments of securities held to maturity 1,667,726 4,323,112 4,258,665
Purchase of securities held to maturity -- -- (50,000)
Purchase of premises and equipment (560,174) (866,893) (1,018,174)
Proceeds from sale of premises and equipment -- 8,000 --
------------ ------------ ------------
Net cash provided by (used in)
investing activities 628,785 (576,022) (7,803,230)
------------ ------------ ------------
(Continued)
F-5
PIONEER BANK, A FEDERAL SAVINGS BANK, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIOD ENDED MARCH 31, 1997 AND
YEARS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net of withdrawals $ 2,538,721 $ 4,050,601 $ (4,537,941)
Increase (decrease) in securities sold under
agreements to repurchase (1,225) 270,593 (735,010)
Decrease in advances from borrowers for taxes
and insurance (762,081) (107,806) (2,345)
Proceeds from Federal Home Loan Bank of
Seattle advances
Repayment of Federal Home Loan Bank of
Seattle advances (1,850,000) (8,350,000) 11,000,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities (74,585) (4,136,612) 5,724,704
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,559,127 (1,427,374) (23,485)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,416,334 4,843,708 4,867,193
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR (PERIOD) $ 4,975,461 $ 3,416,334 $ 4,843,708
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year (period) for:
Interest on deposits and other borrowings $ 5,615,984 $ 8,087,606 $ 6,986,005
Income taxes 885,677 945,000 1,734,850
Noncash investing activities:
Transfer of loans to foreclosed real estate -- 46,539 16,789
Unrealized gain (loss) on securities available for
sale, net of tax (75,625) 13,430 75,727
Transfer of trading securities to available for
sale securities, at fair value 2,386,522 -- --
Loans originated for sale 1,577,000 759,754 991,273
Proceeds from sales of loans 1,148,800 759,754 991,273
See notes to consolidated financial statements. (Concluded)
F-6
PIONEER BANK, A FEDERAL SAVINGS BANK, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE-MONTH PERIOD ENDED MARCH 31, 1997 AND
YEARS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business - Pioneer Bank, a Federal Savings Bank
(the "Bank"), is a federally chartered mutual savings bank engaged in the
business of accepting savings and demand deposits and providing mortgage,
consumer, commercial, commercial real estate loans, and to a lesser extent,
agricultural loans to its members and others.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Bank and its wholly-owned subsidiaries, Pioneer
Development Corporation and Pioneer Bank Investment Corporation. All
significant intercompany balances and transactions between the Bank and its
subsidiaries have been eliminated.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
assumptions that result in estimates that affect the reported amounts of
certain assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of related revenues and expenses during the reporting period.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to change in the near term
relate to the determination of the allowance for loan losses.
Cash and Cash Equivalents - For purposes of classification in the
consolidated balance sheets and cash flows, the Bank considers all deposits
and investment securities with an original term to maturity of three months
or less to be cash equivalents. Cash equivalents consist of currency on
hand and due from banks and interest-bearing deposits with financial
institutions.
Securities - The Bank accounts for securities in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES.
Securities are classified as held to maturity where the Bank has the
ability and positive intent to hold them to maturity. Securities held to
maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts to maturity. Securities bought and held principally
for the purpose of sale in the near term are classified as trading
securities and are carried at fair value. Securities not classified as
trading, or as held to maturity, are classified as available for sale.
Unrealized holding gains and losses on securities available for sale are
excluded from earnings and are reported net of tax as a separate component
of equity until realized. Unrealized losses on securities resulting from an
other than temporary decline in fair value are recognized in earnings when
incurred. Realized and unrealized gains and losses are determined using the
specific identification method.
Loans Receivable - Loans are stated at unpaid principal less net deferred
loan origination fees. Interest income on loans is recognized based on the
principal and the stated interest rates and includes the amortization of
net deferred loan origination fees based on the level yield method over the
life of the loans. Net deferred loan origination fees on loans held for
sale are recognized in earnings when sold. Recognition of interest income
is discontinued and accrued interest is reversed when a loan is placed on
F-7
nonaccrual status. A loan is generally placed on nonaccrual status when the
loan becomes contractually past due more than 90 days. Delinquent interest
on loans past due 90 days or more is charged off or an allowance
established by a charge to income equal to all interest previously accrued.
Interest payments received on nonaccrual loans are applied to principal if
collection of principal is doubtful. Loans are removed from nonaccrual
status only when the loan is deemed current and collectibility of principal
and interest is no longer doubtful.
Loans Held for Sale - To mitigate interest rate sensitivity, from time to
time certain fixed rate loans are identified as held for sale in the
secondary market. Accordingly, such loans are classified as held for sale
in the consolidated balance sheets and are carried at the lower of
aggregate cost or net realizable value.
Allowance for Loan Losses - Allowances for losses on specific problem loans
and real estate owned are charged to earnings when it is determined that
the value of these loans and properties, in the judgment of management, is
impaired. In addition to specific reserves, the Bank also maintains general
provisions for loan losses based on evaluating known and inherent risks in
the loan portfolio, including management's continuing analysis of the
factors and trends underlying the quality of the loan portfolio. These
factors include changes in the size and composition of the loan portfolio,
actual loan loss experience, current and anticipated economic conditions,
detailed analysis of individual loans for which full collectibility may not
be assured, and determination of the existence and realizable value of the
collateral and guarantees securing the loans. The ultimate recovery of
loans is susceptible to future market factors beyond the Bank's control,
which may result in losses or recoveries differing significantly from those
provided in the consolidated financial statements.
The Bank accounts for impaired loans in accordance with SFAS No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by SFAS No.
118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION
AND DISCLOSURES. These statements address the disclosure requirements and
allocations of the allowance for loan losses for certain impaired loans. A
loan within the scope of these statements is considered impaired when,
based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual
terms of the loan agreement, including scheduled interest payments.
When a loan has been identified as being impaired, the amount of the
impairment is measured by using discounted cash flows, except when it is
determined that the sole source of repayment for the loan is the operation
or liquidation of the underlying collateral. In such case, impairment is
measured at current fair value of the collateral, reduced by estimated
selling costs. When the measurement of the impaired loan is less than the
recorded investment in the loan (including accrued interest, net deferred
loan fees or costs, and premium or discount), loan impairment is recognized
by establishing or adjusting an allocation of the allowance for loan
losses. SFAS No. 114, as amended, does not change the timing of charge-offs
of loans to reflect the amount ultimately expected to be collected. At
March 31, 1997 and at June 30, 1996, respectively, the Bank had no loans
deemed to be impaired as defined by SFAS No. 114.
Loan Servicing Fees - Fees earned for servicing loans for the Federal Home
Loan Mortgage Corporation ("FHLMC") are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
F-8
Federal Home Loan Bank Stock - The Bank's investment in Federal Home Loan
Bank ("FHLB") of Seattle stock is carried at cost, which reasonably
approximates its fair value. As a member of the FHLB system, the Bank is
required to maintain a minimum level of investment in FHLB stock based on
specified percentages of its outstanding mortgages, total assets or FHLB
advances. At March 31, 1997, the Bank's minimum investment requirement was
approximately $1,432,400. The Bank may request redemption at par value of
any stock in excess of the amount the Bank is required to hold. Stock
redemptions are granted at the discretion of the FHLB of Seattle.
Foreclosed Real Estate - Real estate acquired through foreclosure is stated
at the lower of cost (principal balance of the former mortgage loan plus
costs of obtaining title and possession) or estimated fair value at the
time of foreclosure less estimated selling costs. Costs of development and
improvement of property are capitalized, and holding costs and market
adjustments are charged to expense as incurred. Foreclosed real estate is
included in other assets.
Premises and Equipment - Premises and equipment are stated at cost.
Depreciation is recognized on the straight-line method over the estimated
useful lives of the assets ranging from 3 to 40 years. Major renewals and
betterments are capitalized and repairs are expensed. Gains or losses from
disposals of premises and equipment are reflected in other expenses.
Income Taxes - The Bank uses the asset and liability method of accounting
for income taxes under which deferred tax assets and liabilities are
recognized for temporary differences between tax and financial reporting
bases of assets and liabilities based on enacted tax rates. A valuation
allowance is established to reduce deferred tax assets to the amount that
management believes will more likely than not be realized. The change in
the deferred tax assets and liabilities together with income taxes
currently payable are reflected as provision for income taxes in the
consolidated financial statements.
2. SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair
value of securities classified as available for sale and held to maturity
for the period ended March 31, 1997 and the year ended June 30, 1996 are
summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1997 Cost Gains Losses Value
Available for sale:
U.S. government and government
agency obligations:
Maturing after one year through five years $ 10,040,824 $ 1,710 $ (161,308) $ 9,881,226
Maturing after five years through ten years 6,194,550 4,065 (173,240) 6,025,375
------------ ------------ ------------ ------------
16,235,374 5,775 (334,548) 15,906,601
------------ ------------ ------------
Mortgage-backed and related securities:
GNMA maturing after one year through
five years 202,958 -- (14,751) 188,207
FHLMC maturing after one year through
five years 69,399 3,928 -- 73,327
GNMA maturing after five years through
ten years 273,387 -- (19,911) 253,476
GNMA maturing after ten years 12,670,647 454,965 (43,532) 13,082,080
FHLMC maturing after ten years 89,634 4,196 -- 93,830
FNMA maturing after ten years 6,308,857 17,290 (272,135) 6,054,012
------------ ------------ ------------ ------------
19,614,882 480,379 (350,329) 19,744,932
------------ ------------ ------------ ------------
Total available for sale $ 35,850,256 $ 486,154 $ (684,877) $ 35,651,533
============ ============ ============ ============
F-9
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1997 Cost Gains Losses Value
Held to maturity:
Mortgage-backed and related securities held to maturity:
GNMA maturing after ten years $13,216,550 $ 153,686 $ (24,777) $13,345,459
FNMA maturing after ten years 1,717,431 -- (29,603) 1,687,828
FHLMC maturing after ten years 368,412 -- (9,848) 358,564
----------- ----------- ----------- -----------
Total held to maturity $15,302,393 $ 153,686 $ (64,228) $15,391,851
=========== =========== =========== ===========
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1996 Cost Gains Losses Value
Available for sale:
U.S. government and government agency
obligations:
Maturing within one year $ 5,000,453 $ 5,047 $ -- $ 5,005,500
Maturing after one year through five years 8,034,566 13,819 (163,385) 7,885,000
Maturing after five years through ten years 7,199,553 7,917 (147,730) 7,059,740
----------- ----------- ----------- -----------
20,234,572 26,783 (311,115) 19,950,240
----------- ----------- ----------- -----------
Mortgage-backed and related securities:
GNMA maturing after one year through
five years 47,721 -- (3,238) 44,483
FHLMC maturing after five years through
ten years 88,847 3,748 -- 92,595
GNMA maturing after five years through
ten years 531,239 -- (36,109) 495,130
GNMA maturing after ten years 11,686,335 510,949 (39,809) 12,157,475
FHLMC maturing after ten years 99,796 4,051 -- 103,847
FNMA maturing after ten years 6,788,809 24,121 (255,424) 6,557,506
----------- ----------- ----------- -----------
19,242,747 542,869 (334,580) 19,451,036
----------- ----------- ----------- -----------
Total available for sale $39,477,319 $ 569,652 $ (645,695) $39,401,276
=========== =========== =========== ===========
Held to maturity:
Mortgage-backed and related securities:
GNMA maturing after ten years $14,719,324 $ -- $ (216,889) $14,502,435
FNMA maturing after ten years 1,897,221 1,810 (9,952) 1,889,079
FHLMC maturing after ten years 394,072 -- (3,202) 390,870
----------- ----------- ----------- -----------
Total held to maturity $17,010,617 $ 1,810 $ (230,043) $16,782,384
=========== =========== =========== ===========
Expected maturities of mortgage-backed and related securities will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties.
Mortgage-backed and related securities totaling $6,039,219 and $6,819,012
were pledged against public funds at March 31, 1997 and June 30, 1996,
respectively.
F-10
3. LOANS RECEIVABLE
Loans receivable are summarized as follows:
March 31, June 30,
1997 1996
Mortgage loans:
One-to-four family $101,791,973 $101,198,727
Multi-family 1,844,098 1,927,310
Commercial 4,768,603 4,724,338
Construction 852,852 1,744,150
Land 222,733 14,249
------------ ------------
Total mortgage loans 109,480,259 109,608,774
------------ ------------
Consumer loans:
Unsecured 1,610,402 4,580,116
Home equity and second mortgage 17,514,040 12,751,043
Auto loans 2,064,403 1,404,888
Credit card 844,145 790,875
Loans secured by savings deposits 730,714 593,450
Other secured 2,627,025 2,586,527
------------ ------------
Total consumer loans 25,390,729 22,706,899
------------ ------------
Commercial business 4,066,100 3,142,111
Agricultural 2,466,095 --
------------ ------------
Total commercial business and agricultural 6,532,195 3,142,111
Total loans 141,403,183 135,457,784
Less:
Net deferred loan fees 1,028,465 984,623
Undisbursed portion of loans in process 768,715 1,585,065
Allowance for loan losses 725,089 540,986
------------ ------------
Total loans receivable, net $138,880,914 $132,347,110
============ ============
The weighted average interest rate on loans at March 31, 1997 and June 30,
1996 was 8.77% and 8.74%, respectively.
The unpaid principal balance of loans serviced for the FHLMC, which is not
included in the consolidated financial statements, was $1,388,249 at March
31, 1997 and $1,891,598 at June 30, 1996, respectively.
F-11
Allowance for loan loss activity is summarized as follows:
Nine-Month
Period Ended Year Ended Year Ended
March 31, June 30, June 30,
1997 1996 1995
Balance, beginning of year (period) $ 540,986 $ 455,059 $ 403,487
Provision for loan losses 216,063 115,397 66,548
Net charge-offs (31,960) (29,470) (14,976)
--------- --------- ---------
$ 725,089 $ 540,986 $ 455,059
========= ========= =========
Nonaccrual loans were $190,124 and $163,000 at March 31, 1997 and June 30,
1996, respectively. Interest income that would have been recorded under the
original terms of nonaccrual loans totaled $15,511, $3,520 and $2,189 for
the nine-month period ended March 31, 1997 and for the years ended June 30,
1996 and 1995, respectively.
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
March 31, June 30,
1997 1996
Loans receivable $ 805,727 $ 739,185
Mortgage-backed and related securities 218,232 244,168
U.S. government and government agencies 300,678 352,672
---------- ----------
$1,324,637 $1,336,025
========== ==========
5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
March 31, June 30,
1997 1996
Land $ 783,835 $ 783,835
Buildings and improvements 3,712,853 3,657,902
Furniture, fixtures and equipment 1,630,625 1,946,086
Construction in process 339,995 11,481
---------- ----------
6,467,308 6,399,304
Less accumulated depreciation 2,026,762 2,226,406
---------- ----------
4,440,546 4,172,898
Land held for development 200,302 200,302
---------- ----------
$4,640,848 $4,373,200
========== ==========
F-12
6. DEPOSITS
Savings deposits are summarized as follows:
At March 31, 1997 At June 30, 1996
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Interest Interest
Rate Balance Percent Rate Balance Percent
Non-interest bearing -- % $ 6,282,277 3.51% -- % $ 4,894,075 2.77%
NOW checking 1.56 27,260,167 15.22 1.51 26,525,915 15.02
Passbook savings accounts 2.89 24,004,738 13.40 2.89 24,969,160 14.14
Money market deposit 3.53 16,784,808 9.37 3.53 14,884,836 8.43
Fixed-rate certificates 5.44 104,825,937 58.50 5.61 105,345,220 59.64
------ ------------ ------ ------ ------------ ------
4.13% $179,157,927 100.00% 4.26% $176,619,206 100.00%
====== ============ ====== ====== ============ ======
At March 31, 1997, fixed-rate certificates maturities are as follows:
Within one year $ 77,440,477
One year to two years 8,768,344
Two years to three years 10,488,973
Three years to four years 3,471,516
Four years to five years 3,180,550
Thereafter 1,476,077
------------
$104,825,937
============
The aggregate amount of fixed-rate certificates with a minimum denomination
of $100,000, was approximately $9,633,083 at March 31, 1997 and $9,272,076
at June 30, 1996. Deposit accounts in excess of $100,000 are not insured by
the Federal Deposit Insurance Corporation ("FDIC").
Interest expense on deposits is summarized as follows:
Nine-Month
Period Ended Year Ended Year Ended
March 31, June 30, June 30,
1997 1996 1995
NOW checking $ 317,950 $ 532,392 $ 704,491
Passbook savings accounts 525,987 735,392 895,462
Money market deposit 403,551 530,403 483,244
Fixed-rate certificates 4,237,508 5,780,854 4,706,552
---------- ---------- ----------
$5,484,996 $7,579,041 $6,789,749
========== ========== ==========
F-13
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is
summarized as follows:
Nine-Month
Period Ended Year Ended Year Ended
March 31, June 30, June 30,
1997 1996 1995
Average balance $1,396,032 $1,259,696 $1,537,273
Maximum month end balance $1,458,603 $1,432,417 $1,956,279
Average interest rate at year (period) end 3.50% 3.53% 3.34%
Mortgage-backed and related securities pledged
as collateral for securities sold
under agreements to repurchase at year (period) end:
Amortized cost $2,047,781 $2,263,096 $2,613,356
Fair value $2,072,354 $2,295,440 $2,682,814
The average balance is computed on a monthly average method. All agreements
mature the following business day. The Bank maintains control of the
securities pledged as collateral.
8. FHLB OF SEATTLE BORROWINGS
As a member of the FHLB of Seattle, the Bank maintains an available credit
line in the amount equal to 20% of total assets, less current outstanding
advances, subject to collateralization requirements. At March 31, 1997 and
June 30, 1996, FHLB of Seattle variable rate advances amounted to $800,000
and $2,650,000, respectively. All amounts outstanding are due within one
year.
Borrowings are collateralized in aggregate, as provided for in the
Advances, Security, and Deposit Agreement with the FHLB of Seattle, by
certain mortgages or deeds of trust, securities of the U.S. Government and
agencies thereof and cash on deposit with the FHLB of Seattle. At March 31,
1997, the minimum book value of eligible collateral pledged approximated
120% of borrowings.
Financial data pertaining to the weighted average cost, the level of FHLB
of Seattle borrowings and the related interest expense are summarized as
follows:
Nine-Month
Period Ended Year Ended Year Ended
March 31, June 30, June 30,
1997 1996 1995
Weighted average interest rate at year (period) end 5.70% 5.85% 6.38%
Weighted monthly average interest rate during
the year (period) 4.88% 6.21% 5.18%
Monthly average FHLB of Seattle borrowings $ 861,513 $ 6,965,657 $ 4,686,076
Maximum FHLB borrowings at any month end $ 2,850,000 $ 9,100,000 $ 11,000,000
F-14
9. INCOME TAXES
A reconciliation of the tax provision based on statutory corporate tax
rates on pre-tax income and the provision shown in the accompanying
consolidated statements of income is summarized as follows:
Nine-Month Period Ended Year Ended Year Ended
March 31, 1997 June 30, 1996 June 30, 1995
--------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
Federal income taxes at statutory rate $ 628,000 34.0% $1,204,292 34.0% $1,281,992 34.0%
State income taxes at statutory rate, net of
related federal tax effect 85,000 4.6 143,351 4.0 164,245 4.4
Other, net 36,669 2.0 15,264 0.5 65,487 1.7
---------- ---- ---------- ---- ---------- ----
$ 749,669 40.6% $1,362,907 38.5% $1,511,724 40.1%
========== ==== ========== ==== ========== ====
Provision for income taxes is summarized as follows:
Nine-Month
Period Ended Year Ended Year Ended
March 31, June 30, June 30,
1997 1996 1995
Current provision:
Federal $ 694,114 $ 1,100,602 $ 1,066,924
State 146,160 228,743 221,700
----------- ----------- -----------
840,274 1,329,345 1,288,624
Deferred provision (benefit) (90,605) 33,562 223,100
----------- ----------- -----------
$ 749,669 $ 1,362,907 $ 1,511,724
=========== =========== ===========
The components of net deferred income tax assets and liabilities are
summarized as follows:
March 31, June 30,
1997 1996
Deferred tax assets:
Deferred loan fees $ 211,293 $ 293,714
Unrealized securities losses 120,556 79,070
Vacation accrual 75,208 65,973
Other 142,179 141,924
----------- -----------
Total deferred tax assets 549,236 580,681
----------- -----------
Deferred tax liabilities:
FHLB stock dividends (692,720) (660,825)
Accumulated depreciation (65,342) (84,824)
Allowance for loan losses (260,379) (394,842)
----------- -----------
Total deferred tax liabilities (1,018,441) (1,140,491)
----------- -----------
Net deferred tax liability $ (469,205) $ (559,810)
=========== ===========
F-15
For the fiscal year ended June 30, 1996 and years prior, the Bank
determined bad debt expense to be deducted from taxable income based on 8%
of taxable income before such deduction or based on the experience method
as provided by the Internal Revenue Code ("IRC"). In August 1996, the
provision in the IRC allowing the 8% of taxable income deduction was
repealed. Accordingly, the Bank is required to use the experience method to
record bad debt expense for the current period and prospectively, and must
also recapture the excess reserve accumulated from use of the 8% method
ratably over a six-taxable-year period for all years subsequent to 1987.
The income tax provision from 1987 to 1996 included an amount for the tax
effect of such reserves. During the nine-month period ended March 31, 1997,
the Bank recaptured approximately $260,000 of bad debt deductions taken in
prior periods. At March 31, 1997, remaining bad debt deductions to be
recaptured approximated $1,300,000.
As a result of the bad debt deductions taken in years prior to 1988,
retained earnings include accumulated earnings of approximately $2,500,000,
on which federal income taxes have not been provided. If, in the future,
this portion of retained earnings is used for any purpose other than to
absorb losses on loans or on property acquired through foreclosure, federal
income taxes may be imposed at the then prevailing corporate tax rates. The
Bank does not contemplate that such amounts will be used for any purpose
which would create a federal income tax liability; therefore, no provision
has been made.
10. REGULATORY MATTERS AND CAPITAL REQUIREMENTS
Regulatory Capital - The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk weighted assets, of Tier I capital to total assets, and
tangible capital to tangible assets (set forth in the table below).
Management believes that as of March 31, 1997, the Bank meets all capital
adequacy requirements to which it is subject as of March 31, 1997.
As of March 31, 1997, the most recent notification from the Office of
Thrift Supervision ("OTS") categorized the Bank as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
"well capitalized," the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
There are no conditions or events, since the notification, that management
believes have changed the institution's category.
F-16
The Bank's actual and required capital amounts and ratios are presented in
the table below:
Categorized as
"Well Capitalized" Under
For Capital Adequacy Prompt Correction
Actual Purposes Action Provision
---------------------- --------------------- --------------------------
As of March 31, 1997 Amount Ratio Amount Ratio Amount Ratio
Total Capital
(To risk weighted assets) $ 21,635,599 21.2% $ 8,173,920 8.0 % $ 10,217,400 10.0%
Core or Tier I Capital
(To risk weighted assets) $ 20,910,510 20.5% N/A N/A $ 6,130,440 6.0%
Core Capital
(To total assets) $ 20,910,510 10.2% $ 6,122,909 3.0 % $ 10,198,733 5.0%
Tangible Capital
(To tangible assets) $ 20,910,510 10.3% $ 3,061,454 1.5 % N/A N/A
To Be Categorized as
"Well Capitalized" Under
For Capital Adequacy Prompt Correction
Actual Purposes Action Provision
------------------------- ---------------------- ------------------------
As of June 30, 1996 Amount Ratio Amount Ratio Amount Ratio
Total Capital
(To risk weighted assets) $ 20,382,222 21.45% $ 7,602,800 8.00% $ 9,503,500 10.00%
Core or Tier I Capital
(To risk weighted assets) $ 19,841,236 20.87% N/A N/A $ 5,702,100 6.00%
Core Capital
(To total assets) $ 19,841,236 9.76% $ 6,098,741 3.00% $ 10,164,700 5.00%
Tangible Capital
(To tangible assets) $ 19,841,236 9.76% $ 3,049,370 1.50% N/A N/A
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles (GAAP), to regulatory
tangible and risk-based capital at March 31, 1997:
Equity $ 21,026,213
Unrealized securities losses 122,297
Equity of non-includable subsidiaries (238,000)
------------
Tangible capital 20,910,510
General valuation allowance 725,089
------------
Total capital $ 21,635,599
============
Regulatory Matters - On August 23, 1993, the OTS issued a regulation which
would add an interest rate risk component to the risk-based capital
standards (the "final IRR rule"). Institutions with a greater than normal
interest rate risk exposure will be required to take a deduction from the
total capital available to meet their risk-based capital requirement. That
deduction is equal to one-half of the difference between the institution's
actual measured exposure and the normal level of exposure as defined by the
regulation. Although no such deduction was required as a result of the
Bank's most recent regulatory examination, a deduction may be required as a
result of future examinations. The final IRR rule has been postponed and it
is not practicable to determine when it will become effective.
F-17
At periodic intervals, the OTS and the FDIC routinely examine the Bank as
part of their legally prescribed oversight of the thrift industry. Based on
these examinations, the regulators can direct that the Bank's financial
statements be adjusted in accordance with their findings. A future
examination by the OTS or the FDIC could include a review of certain
transactions or other amounts reported in the Bank's 1997 financial
statements. In view of the uncertain regulatory environment in which the
Bank operates, the extent, if any, to which a forthcoming regulatory
examination may ultimately result in adjustments to the 1997 financial
statements cannot presently be determined.
On September 30, 1996, the United States Congress passed and the President
signed into law the omnibus appropriations package, including the Bank
Insurance Fund/Savings Association Insurance Fund (BIF/SAIF) and Regulatory
Burden Relief packages. Included in this legislation was a requirement for
SAIF-insured institutions to recapitalize the SAIF insurance fund through a
one-time special assessment to be paid within 60 days of the first of the
month following enactment. As the Bank is insured by the SAIF, this
assessment resulted in a pre-tax charge to other expenses for the
nine-month period ended March 31, 1997 of $1,146,387 based on the March 31,
1995 SAIF deposit assessment base of $174,488,122.
11. EMPLOYEE BENEFIT PLAN
The Bank and its subsidiaries sponsor a contributory defined contribution
plan pursuant to Section 401(k) of the IRC covering substantially all
employees. Under the plan, the Bank made contributions limited to 6.67% of
participating employees' salaries. Contributions and Plan administration
expenses aggregated to $94,622, $133,886, and $119,704 for the nine-month
period ended March 31, 1997 and the years ended June 30, 1996 and 1995,
respectively.
12. TRANSACTIONS WITH AFFILIATES
Loans - Certain directors and executive officers of the Bank and
subsidiaries are customers of, and have had transactions with, the Bank in
the ordinary course of business, and the Bank expects to have similar
transactions in the future.
An analysis of activity with respect to loans receivable from directors and
executive officers of the Bank and its subsidiaries for the nine-month
period ended March 31, 1997 and the years ended June 30, 1996 and 1995 is
summarized as follows:
Nine-Month
Period Ended Year Ended Year Ended
March 31, June 30, June 30,
1997 1996 1995
Beginning balance $ 204,451 $ 414,472 $ 506,744
Additions 133,125 203,700 64,320
Reductions (11,523) (413,721) (156,592)
--------- --------- ---------
Ending balance $ 326,053 $ 204,451 $ 414,472
========= ========= =========
At March 31, 1997, all loans to directors and executive officers of the
Bank and its subsidiaries were current.
F-18
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
The Bank is a party to certain financial instruments with off-balance sheet
risk to meet the financing needs of customers. Commitments to extend credit
are $11,164,041 and $7,613,627 at March 31, 1997 and June 30, 1996,
respectively.
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 by the customer. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates creditworthiness on an individual customer basis.
The Bank originates residential real estate loans and, to a lesser extent,
commercial and consumer loans. Greater than 90% of all loans in the Bank's
portfolio are secured by properties located in communities of eastern
Oregon.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of book value and estimated fair value of financial instruments
is summarized as follows:
March 31, 1997 June 30, 1996
------------------------ ------------------------
Balance Balance
Sheet Estimated Sheet Estimated
(Dollars in Thousands) Amount Fair Value Amount Fair Value
Financial assets:
Cash and cash equivalents $ 4,975 $ 4,975 $ 3,416 $ 3,416
Securities 50,954 51,043 58,981 58,753
Loans held for sale 428 428 -- --
Loans receivable, net of allowance
for loan losses 138,881 140,592 132,347 133,072
FHLB stock 2,763 2,763 2,609 2,609
Financial liabilities:
Demand and savings deposits 74,332 74,332 71,274 71,274
Time certificates of deposit 104,826 105,168 105,345 106,280
Securities sold under agreements
to repurchase 1,431 1,431 1,432 1,432
FHLB advances 800 800 2,650 2,650
Financial assets and liabilities other than investment securities are not
traded in active markets. Estimated fair values require subjective
judgments and are approximate. The above estimates of fair value are not
necessarily representative of amounts that could be realized in actual
market transactions, nor of the underlying value of the Bank. Changes in
the following methodologies and assumptions could significantly affect the
estimates.
Financial Assets - The estimated fair value approximates the book value of
cash and cash equivalents. For securities, the fair value is based on
quoted market prices. The fair value of loans is estimated by discounting
future cash flows using current rates at which similar loans would be made.
The fair value of loans held for sale and FHLB stock approximates the
carrying amounts.
F-19
Financial Liabilities - The estimated fair value of demand and savings
deposits, securities sold under agreements to repurchase, and FHLB advances
approximates carrying amounts. The fair value of time certificates of
deposit is estimated by discounting the future cash flows using current
rates offered on similar instruments. The value of long-term relationships
with depositors is not reflected.
Off-Balance Sheet Financial Instruments - Commitments to extend credit
represent all off-balance-sheet financial instruments. The fair value of
these commitments is not significant. See Note 13 to the consolidated
financial statements.
15. CONTINGENCIES
The Bank is a defendant in legal proceedings arising in the normal course
of business. In the opinion of management, the disposition of litigation
will not have a material effect on the Bank's financial position, results
of operations, or liquidity.
16. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
The Board of Directors of the Bank adopted a Plan of Conversion on May 22,
1997, to convert from a federal chartered mutual savings bank to a federal
capital stock savings bank with the concurrent formation of a holding
company, subject to approval by the regulatory authorities and members of
the Bank. The conversion is expected to be accomplished through amendment
of the Bank's federal mutual charter and the sale of the holding company's
common stock in an amount equal to the consolidated pro forma market value
of the holding company and the Bank after given effect to the conversion. A
subscription of the shares of common stock will be offered initially to the
Bank's depositors, employee benefit plans and to certain other eligible
subscribers. It is anticipated that any shares not purchased in the
subscription offering will be offered in a community offering, and then any
remaining shares offered to the general public in a syndicated community
offering.
At the time of the conversion, the Bank will establish a liquidation
account in an amount equal to its capital as of the last date of the
consolidated statement of financial condition appearing in the final
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the
Bank after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore
an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation of the Bank, each eligible account holder
will be entitled to receive a distribution from the liquidation account in
an amount proportionate to the current adjusted qualifying balances for
accounts then held.
Subsequent to the conversion, the Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the effect
thereof would cause stockholders' equity to be reduced below applicable
regulatory capital maintenance requirements or is such declaration and
payment would otherwise violate regulatory requirements.
* * * * * *
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 Oregon Trail Financial Corp. or Pioneer Bank, a Federal Savings
Bank. 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 Oregon Trail Financial Corp. or Pioneer Bank, a Federal
Savings Bank 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..................................................
Oregon Trail Financial Corp...................................
Pioneer Bank, a Federal Savings Bank..........................
Use of Proceeds...............................................
Dividend Policy...............................................
Market for Common Stock.......................................
Capitalization................................................
Historical and Pro Forma Regulatory Capital Compliance........
Pro Forma Data................................................
Shares to be Purchased by Management Pursuant
to Subscription Rights......................................
Pioneer Bank, a Federal Savings Bank 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 Savings Bank..................................
Management of the Holding Company.............................
Management of the Savings Bank................................
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.......................................................
Additional Information........................................
Index to Consolidated Financial Statements....................
Until the later of _______, 1997, or __ 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.
OREGON TRAIL FINANCIAL CORP.
[Logo]
(Proposed Holding Company for
Pioneer Bank, A Federal Savings Bank)
2,813,500 to 3,806,500 Shares of
Common Stock
----------
Prospectus
----------
CHARLES WEBB & COMPANY, INC.,
a Division of Keefe, Bruyette & Woods, Inc.
________ __, 1997
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution(1)
Legal fees and expenses..................................... $150,000
Securities Marketing Firm legal fees........................ 35,000
EDGAR, printing, postage, copying and mailing............... 110,000
Appraisal/business plan fees and expenses................... 22,800
Accounting fees............................................. 85,000
Securities marketing fees................................... 421,000(1)
Data processing fees and expenses........................... 7,500
SEC filing fee.............................................. 13,266
OTS filing fee.............................................. 8,400
Blue sky legal fees and expenses............................ 5,000
Other expenses.............................................. 25,794
--------
Total.................................................... $883,760
========
- ----------
(1) Webb will receive a fee of 1.5% of stock sold, excluding ESOP shares (8%)
and insider purchases totaling $2.2 million. Amount shown is based on
midpoint of Estimated Valuation Range.
Item 14. Indemnification of Officers and Directors
Indemnification of Officers and Directors of Oregon Trail Financial
Corp.
Article XVIII of the Articles of Incorporation of Oregon Trail
Financial Corp. requires indemnification of directors, officers and
employees to the fullest extent permitted by Oregon law.
Sections 60.387 to 60.414 of the Oregon Business Corporation Act
define areas for indemnity coverage, as follows:
60.387 DEFINITIONS FOR 60.387 TO 60.414. As used in ORS 60.387 to 60.414:
(1) "Corporation" includes any domestic or foreign predecessor entity of a
corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction.
(2) "Director" means an individual who is or was a director of a
corporation or an individual who, while a director of a corporation, is or was
serving at the corporations' request as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. A director is
considered to be serving an employee benefit plan at the corporation's request
if the director's duties to the corporation also impose duties on or otherwise
involve services by the director to the plan or to participants in or
beneficiaries of the plan. "Director" includes, unless the context requires
otherwise, the estate or personal representative of a director.
(3) "Expenses" include counsel fees.
(4) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine, including an excise tax assessed with respect to an employee
benefit plan or reasonable expenses incurred with respect to a proceeding.
(5) "Officer" means an individual who is or was an officer of a corporation
or an individual who, while an officer of a corporation, is or was serving at
the corporation's request as a director, officer, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. An officer is considered to be
serving an employee benefit plan at the corporation's request if the officer's
duties to the corporation also impose duties on or include services by the
officer to the employee benefit plan or to participants in or beneficiaries of
the plan. "Officer" includes, unless the context requires otherwise, the estate
or personal representative of an officer.
(6) "Party" includes an individual who was, is or is threatened to be made
a named defendant or respondent in a proceeding.
II-1
(7) "Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal.
60.391 AUTHORITY TO INDEMNIFY DIRECTORS. (1) Except as provided in
subsection (4) of this section, a corporation may indemnify an individual made a
party to a proceeding because the individual is or was a director against
liability incurred in the proceeding if:
(a) The conduct of the individual was in good faith;
(b) The individual reasonably believed that the individual's conduct was in
the best interests of the corporation, or at least not opposed to its best
interests; and
(c) In the case if any criminal proceeding, the individual had no
reasonable cause to believe the individual's conduct was unlawful.
(2) A director's conduct with respect to an employee benefit plan for a
purpose the director reasonably believed to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of paragraph (b) of subsection (1) of this section.
(3) The termination of a proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this section.
(4) A corporation may not indemnify a director under this section:
(a) In connection with a proceeding by or in the right of the corporation
in which the director was adjudged liable to the corporation; or
(b) In connection with any other proceeding charging improper personal
benefit to the director in which the director was adjudged liable on the basis
that personal benefit was improperly received by the director.
(5) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with a proceeding.
60.394 MANDATORY INDEMNIFICATION. Unless limited by its articles of
incorporation, a corporation shall indemnify a director who was wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the director was a party because of being a director of the corporation
against reasonable expenses incurred by the director in connection with the
proceeding.
60.397 ADVANCE FOR EXPENSES. (1) A corporation may pay for or reimburse the
reasonable expenses incurred by a director who is a party to a proceeding in
advance of final disposition of the proceeding if:
(a) The director furnishes the corporation a written affirmation of the
director's good faith belief that the director has met the standard of conduct
described in ORS 60.391; and
(b) The director furnishes the corporation a written undertaking, executed
personally or on the director's behalf, to repay the advance if it is ultimately
determined that the director did not meet the standard of conduct.
(2) The undertaking required by paragraph (b) of subsection (1) of this
section must be an unlimited general obligation of the director but need not be
secured and may be accepted without reference to financial ability to make
repayment.
(3) Any authorization of payments under this section may be made by
provision in the articles of incorporation, or bylaws, by a resolution of the
shareholders or the board of director or by contract.
60.401 COURT-ORDERED INDEMNIFICATION. Unless the corporation's articles of
incorporation provide otherwise, a director of the corporation who is a party to
a proceeding may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. On receipt of an
application, the court after giving any notice the court considers necessary may
order indemnification if it determines:
(1) The director is entitled to mandatory indemnification under ORS 60.394,
in which case the court shall also order the corporation to pay the director's
reasonable expenses incurred to obtain court-ordered indemnification; or
(2) The director is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not the director met the
standard of conduct set forth in ORS 60.391 or as adjudged liable as described
in ORS 60.391(4), whether the liability is based on a judgment, settlement or
proposed settlement or otherwise.
II-2
60.404 DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION. (1) A
corporation may not indemnify a director under ORS 60.391 unless authorized in
the specific case after a determination has been made that indemnification of
the director is permissible in the circumstances because the director has met
the standard of conduct set forth in ORS 60.391.
(2) A determination that indemnification of a director is permissible shall
be made:
(a) By the board of directors by majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
(b) If a quorum cannot be obtained under paragraph (a) of this subsection,
by a majority vote of a committee duly designated by the board of directors
consisting solely of two or more directors not at the time parties to the
proceeding. However, directors who are parties to the proceeding may participate
in designation of the committee;
(c) By special legal counsel selected by the board of directors or its
committee in the manner prescribed in paragraph (a) or (b) of this subsection
or, if a quorum of the board of directors cannot be obtained under paragraph (a)
of this subsection and a committee cannot be designated under paragraph (b) of
this subsection, the special legal counsel shall be selected by majority vote of
the full board of directors, including directors who are parties to the
proceeding; or
(d) By the shareholders.
(3) Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as the
reasonableness of expenses shall be made by those entitled under paragraph (c)
of subsection (2) of this section to select counsel.
60.407 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS. Unless a
corporation's articles of incorporation provide otherwise:
(1) An officer of the corporation is entitled to mandatory indemnification
under ORS 60.394, and is entitled to apply for court-ordered indemnification
under ORS 60.401, in each case to the same extent as a director under ORS 60.394
and 60.401.
(2) The corporation may indemnify and advance expenses under ORS 60.387 to
60.411 to an officer, employee or agent of the corporation to the same extent as
to a director.
60.411 INSURANCE. A corporation may purchase and maintain insurance on
behalf of an individual against liability asserted against or incurred by the
individual who is or was a director, officer, employee or agent of the
corporation or who, while a director, officer, employee or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. The corporation may purchase and maintain the insurance even if the
corporation has no power to indemnify the individual against the same liability
under ORS 60.391 to 60.394.
60.414 APPLICATION OF ORS 60.387 TO 60.411. (1) The indemnification and
provisions for advancement of expenses provided by ORS 60.387 to 60.411 shall
not be deemed exclusive of any other rights to which directors, officers,
employees or agents may be entitled under the corporation's articles of
incorporation or bylaws, any agreement, general or specific action of its board
of directors, vote of shareholders or otherwise, and shall 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. Specifically and not by way of limitation, a corporation shall have the
power to make or agree to make any further indemnification, including
advancement of expenses, of:
(a) Any director as authorized by the articles of incorporation, any bylaws
approved, adopted or ratified by the shareholders or any resolution or agreement
approved, adopted or ratified, before or after such indemnification or agreement
is made, by the shareholders, provided that no such indemnification shall
indemnify any director from or on account of acts or omissions for which
liability could not be eliminated under ORS 60.047(2)(d); and
(b) Any officer, employee or agent who is not a director as authorized by
its articles of incorporation or bylaws, general or specific action of its board
of directors or agreement. Unless the articles of incorporation, or any such
agreement or resolution provide otherwise, any determination as to any further
indemnify under this paragraph shall be made in accordance with ORS 60.404.
II-3
(2) If articles of incorporation limit indemnification or advance of
expenses, any indemnification and advance of expenses are valid only to the
extent consistent with the articles of incorporation.
(3) ORS 60.387 to 60.411 does not limit a corporation's power to pay or
reimburse expenses incurred by a director in connection with the director's
appearance as a witness in a proceeding at a time when the director has not been
made a named defendant or respondent to a proceeding. (Last amended by Ch. 883,
L. '91, eff. 9-29-91.)
Item 15. Recent Sales of Unregistered Securities.
Not Applicable
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among Oregon Trail Financial Corp.,
Pioneer Bank, a Federal Savings Bank and Charles Webb & Co.
1.2 -- Engagement Letter between Pioneer Bank, a Federal Savings Bank and
Charles Webb & Co.
2 -- Plan of Conversion of Pioneer Bank, a Federal Savings Bank (attached
as an exhibit to the Proxy Statement included herein as Exhibit 99.5)
3.1 -- Articles of Incorporation of Oregon Trail Financial Corp.
3.2 -- Bylaws of Oregon Trail Financial Corp.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 -- Form of Federal Tax Opinion of Breyer & Aguggia (a)
8.2 -- Form of State Tax Opinion of Deloitte & Touche LLP (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 Severance Agreement For Certain Senior Officers
10.3 -- Proposed Form of Employee Stock Ownership Plan
10.4 -- Pioneer Bank, a Federal Savings Bank 401(k) Plan (a)
10.5 -- Proposed Form of Pioneer Bank, a Federal Savings Bank Employee
Severance Compensation Plan
10.6 -- Pioneer Bank Director Emeritus Plan (a)
21 -- Subsidiaries of Oregon Trail Financial Corp.
23.1 -- Consent of Deloitte & Touche LLP
II-4
23.2 -- Consent of Coopers & Lybrand LLP
23.3 -- Consent of Breyer & Aguggia (contained in opinion included as Exhibit
5)
23.4 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion (contained
in opinion included as Exhibit 8.1)
23.5 -- Consent of Keller & Company, Inc.
24 -- Power of Attorney (contained in signature page to the Registration
Statement)
99.1 -- Order and Certification Form (contained in the marketing materials
included 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 Pioneer Bank, a
Federal Savings Bank
- ----------
(a) To be filed by amendment.
Financial Statements and Schedules
Pioneer Bank, a Federal Savings Bank and Subsidiary
Pages
Independent Auditors' Report - Deloitte & Touche LLP................... F-1
Report of Independent Accountants - Coopers & Lybrand LLP.............. F-2
Consolidated Balance Sheets as of March 31, 1997
and June 30, 1996 .................................................... F-3
Consolidated Statements of Income for the
Nine Months Ended March 31, 1997
and the Years Ended June 30, 1996 and 1995 ........................... 21
Consolidated Statements of Equity for the
Nine Months Ended March 31, 1997 and for the
Years Ended June 30, 1996 and 1995 ................................... F-4
Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 1997
and the Years Ended June 30, 1996 and 1995 ........................... F-5
Notes to Consolidated Financial Statements............................. F-7
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
II-5
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. 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 and 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 changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") (and, where
applicable, each filing of any employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
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 Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant 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 Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Baker City, Oregon on
the 25th day of June, 1997.
OREGON TRAIL FINANCIAL CORP.
By: /s/ Dan L. Webber
--------------------------
Dan L. Webber
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Oregon Trail Financial Corp.,
do hereby severally constitute and appoint Daniel L. Webber, 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 Daniel L. Webber may deem
necessary or advisable to enable Oregon Trail Financial Corp. 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 S-1 relating to the offering of Oregon Trail Financial Corp.'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 Daniel L. Webber
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/ Dan L. Webber President and Chief Executive June 25, 1997
- ------------------------- Officer
Dan L. Webber (Principal Executive Officer)
/s/ Jerry F. Aldape Senior Vice President, Chief June 25, 1997
- ------------------------- Financial Officer and Secretary
Jerry F. Aldape (Principal Financial Officer)
/s/ Nadine J. Johnson Vice President and Treasurer/ June 25, 1997
- ------------------------- Controller
Nadine J. Johnson (Principal Accounting Officer)
/s/ John Gentry Chairman of the Board June 25, 1997
- -------------------------
John Gentry
/s/ Albert H. Durgen Director June 25, 1997
- -------------------------
Albert H. Durgen
/s/ Edward H. Elms Director June 25, 1997
- -------------------------
Edward H. Elms
/s/ John A. Lienkaemper Director June 25, 1997
- -------------------------
John A. Lienkaemper
/s/ Charles Rouse Director June 25, 1997
- -------------------------
Charles Rouse
/s/ Stephen R. Whittemore Director June 25, 1997
- -------------------------
Stephen R. Whittemore
As filed with the Securities and Exchange Commission on June 25, 1997
Registration No. 333-_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
OREGON TRAIL FINANCIAL CORP.
(Exact name of registrant as specified in charter)
Oregon 6035 [Applied For]
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
2055 First Street
Baker City, Oregon 97814
(541) 523-6327
(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 Oregon Trail Financial
Corp., Pioneer Bank, a Federal Savings Bank and Charles Webb &
Co.
1.2 -- Engagement Letter between Pioneer Bank, a Federal Savings Bank
and Charles Webb & Co.
2 -- Plan of Conversion of Pioneer Bank, a Federal Savings Bank
(attached as an exhibit to the Proxy Statement included herein as
Exhibit 99.5)
3.1 -- Articles of Incorporation of Oregon Trail Financial Corp.
3.2 -- Bylaws of Oregon Trail Financial Corp.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 -- Form of Federal Tax Opinion of Breyer & Aguggia (a)
8.2 -- Form of State Tax Opinion of Deloitte & Touche LLP (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 Severance Agreement For Certain Senior Officers
10.3 -- Proposed Form of Employee Stock Ownership Plan
10.4 -- Pioneer Bank, a Federal Savings Bank 401(k) Plan (a)
10.5 -- Proposed Form of Pioneer Bank, a Federal Savings Bank Employee
Severance Compensation Plan
10.6 -- Pioneer Bank Director Emeritus Plan (a)
21 -- Subsidiaries of Oregon Trail Financial Corp.
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Coopers & Lybrand LLP
23.3 -- Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 5)
23.4 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion
(contained in opinion included as Exhibit 8.1)
23.5 -- Consent of Keller & Company, Inc.
24 -- Power of Attorney (contained in signature page to the
Registration Statement)
99.1 -- Order and Acknowledgement Form (contained in the marketing
materials included 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 Pioneer Bank, a
Federal Savings Bank
- ---------------------
(a) To be filed by amendment.