As filed with the Securities and Exchange Commission on September 25, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EMPIRE FEDERAL BANCORP, INC.
(Exact name of small business issuer in its charter)
Delaware 6035 [Applied for]
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
123 South Main Street
Livingston, Montana 59047
(406) 222-1981
(Address and telephone number of principal executive offices and place of
business)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
(202) 737-7900
(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes
effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]_____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]__________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Calculation of Registration Fee
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Proposed Maximum Amount of
Securities Being Amount Being Offering Aggregate Offering Registration
Registered Registered(1) Price(1) Price(1) Fee
<S> <C> <C> <C> <C>
Common Stock, $0.01 Par 2,592,100 $10.00 $25,921,000 $8,939
Value
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Cross Reference Sheet showing the location in the Prospectus
of the Items of Form SB-2
<TABLE>
<CAPTION>
<S> <C>
1. Front of Registration Front of Registration Statement;
Statement and Outside Front Outside Front Cover Page
Cover of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back
Cover Pages of Prospectus Cover Page
3. Summary Information and Risk
Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Offering Price Market for Common Stock; The
Conversion -- Stock Pricing
and Number of Shares to be Issued
6. Dilution *
7. Selling Security-Holders *
8. Plan of Distribution The Conversion
9. Legal Proceedings Business of the Association -- Legal
Proceedings
10. Directors, Executive Officers, Management of the Holding Company;
Promoters and Control Persons Management of the Association
11. Security Ownership of Certain
Beneficial *
Owners and Management
12. Description of Securities Description of Capital Stock
13. Interest of Named Experts and Legal and Tax Opinions; Experts
Counsel
14. Disclosure of Commission Position Part II - Item 17
on Indemnification for Securities
Act Liabilities
15. Organization Within Last Business of the Association
Five Years
16. Description of Business Business of the Holding Company;
Business of the Association
17. Management's Discussion and Management's Discussion and Analysis of
Analysis or Plan of Operation Financial Condition and Results of
Operations
18. Description of Property Business of the Association - Properties
<PAGE>
19. Certain Relationships and Management of the Association --Transactions
Related Transactions with the Savings Bank
20. Market Price for Common Equity Outside Front Cover Page; Market for
and Related Stockholder Matters Common Stock; Dividend Policy
21. Executive Compensation Management of the Association --Executive
Compensation; and -- Benefits
22. Financial Statements Financial Statements; Pro Forma Data
23. Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
</TABLE>
*Item is omitted because answer is negative or item inapplicable.
<PAGE>
PROSPECTUS
Empire Federal Bancorp, Inc.
(Proposed Holding Company for Empire Federal Savings and Loan Association,
to be known as "Empire Federal Savings Bank")
Up to 2,254,000 Shares of Common Stock (Anticipated Maximum)
Empire Federal Bancorp, Inc. ("Holding Company"), a Delaware corporation,
is offering between 1,666,000 and 2,254,000 shares of its common stock, $.01 par
value per share ("Common Stock"), in connection with the conversion of Empire
Federal Savings and Loan Association ("Association") from a federally chartered
mutual savings and loan association to a federally chartered capital stock
savings bank, the simultaneous issuance of the Association's capital stock to
the Holding Company. The simultaneous conversion of the Association to stock
form, the issuance of the Association's capital stock to the Holding Company and
the offer and sale of the Common Stock by the Holding Company are undertaken
pursuant to a plan of conversion ("Plan" or "Plan of Conversion"), and are
referred to herein as the "Conversion." References herein to the Association
include Empire Federal Savings and Loan Association and Empire Federal Savings
Bank, as indicated by the context.
Pursuant to the Plan, nontransferable rights to subscribe for the Common
Stock ("Subscription Rights") have been granted, in order of priority, to (i)
depositors with $50.00 or more on deposit at the Association as of March 31,
1995 ("Eligible Account Holders"), (ii) the Association's employee stock
ownership plan ("ESOP"), a tax-qualified employee benefit plan, (iii) depositors
with $50.00 or more on deposit at the Association as of ________________
("Supplemental Eligible Account Holders"), and (iv) depositors of the
Association as of ________, 1996 ("Voting Record Date") and borrowers of the
Association with loans outstanding as of ____________, 1996 which continue to be
outstanding as of the Voting Record Date ("Other Members"), subject to the
priorities and purchase limitations set forth in the Plan of Conversion
("Subscription Offering"). Subscription Rights are nontransferable. Persons
selling or otherwise transferring their Subscription Rights to subscribe for
Common Stock in the Subscription Offering or subscribing for Common Stock on
behalf of another person will be subject to forfeiture of such rights and
possible further sanctions and penalties imposed by the Office of Thrift
Supervision ("OTS") or another agency of the U.S. Government. See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings" and "-- Limitations on Purchases of Shares." Concurrently, but
subject to the prior rights of holders of Subscription Rights, the Holding
Company is offering the Common Stock for sale to members of the general public
through a direct community offering ("Direct Community Offering") with
preference given to natural persons who are permanent residents of Park,
Gallatin and Sweet Grass Counties of Montana ("Local Community"). The
Subscription Offering and the Direct Community Offering are referred to herein
as the "Subscription and Direct Community Offering." It is anticipated that
shares of Common Stock not subscribed for or purchased in the Subscription and
Direct Community Offering will be offered to eligible members of the general
public on a best efforts basis by a selling group of broker-dealers managed by
Charles Webb & Company ("Webb"), a division of Keefe, Bruyette & Woods, Inc.
("Keefe, Bruyette"), in a syndicated offering ("Syndicated Community Offering").
The Subscription and Direct Community Offering and the Syndicated Community
Offering are referred to collectively as the "Offerings." The Holding Company
and the Association reserve the right, in their absolute discretion, to accept
or reject, in whole or in part, any or all orders in the Direct Community
Offering or Syndicated Community Offering either at the time of receipt of an
order or as soon as practicable following the termination of the Offerings. If
an order is rejected in part, the purchaser does not have the right to cancel
the remainder of the order.
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT (406) ________ AND ASK FOR A WEBB REPRESENTATIVE.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE
INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER
GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE
OTS, THE FDIC OR ANY OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is _____ __, 1996.
<PAGE>
<TABLE>
<CAPTION>
Estimated Underwriting
Purchase and Other Fees and Estimated Net
Price(1) Expenses(2) Proceeds
<S> <C> <C> <C>
Minimum Price Per Share $10.00 $0.33 $9.67
Midpoint Price Per Share $10.00 $0.30 $9.70
Maximum Price Per Share $10.00 $0.27 $9.73
Maximum Price Per Share, as adjusted(3) $10.00 $0.24 $9.76
Minimum Total(4) $16,660,000 $545,000 $16,115,000
Midpoint Total(5) $19,600,000 $585,000 $19,015,000
Maximum Total(6) $22,540,000 $619,000 $21,921,000
Maximum Total, as
adjusted(3)(7) $25,921,000 $619,000 $25,302,000
</TABLE>
(1)Determined in accordance with an independent appraisal prepared
by Keller & Company, Inc. ("Keller") as of September 6, 1996, which
states that the estimated aggregate pro forma market value of the
Holding Company and the Association, as converted, ranged from
$16,660,000 to $22,540,000 with a midpoint of $19,600,000
("Estimated Valuation Range"). See "THE CONVERSION -- Stock Pricing
and Number of Shares to be Issued." (2)Includes estimated costs to
the Holding Company and the Association arising from the Conversion,
including fees to be paid to Webb in connection with the Offerings.
Such fees may be deemed to be underwriting fees and Webb may be
deemed to be an underwriter. Actual expenses, and thus net proceeds,
may be more or less than estimated amounts. The Holding Company and
the Association have agreed to indemnify Webb against certain
liabilities, including liabilities that may arise under the
Securities Act of 1933, as amended ("Securities Act"). See "USE OF
PROCEEDS" and "THE CONVERSION -- Plan of Distribution for the
Subscription, Direct Community and Syndicated Community Offerings."
(3)Gives effect to an increase in the number of shares sold in the
Offerings due to an increase in the pro forma market value of the
Holding Company and the Association, as converted, up to 15% above
the maximum of the Estimated Valuation Range. Such shares may be
issued without the resolicitation of subscribers or any right of
cancellation. The ESOP shall have a first priority right to
subscribe for such additional shares up to an aggregate of 8% of the
Common Stock issued in the Conversion. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued."
(4) Assumes the issuance of 1,666,000 shares at $10.00 per share.
(5) Assumes the issuance of 1,960,000 shares at $10.00 per share.
(6) Assumes the issuance of 2,254,000 shares at $10.00 per share.
(7) Assumes the issuance of 2,592,100 shares at $10.00 per share.
Except for the ESOP, which is expected to purchase 8% of the
Common Stock issued in the Conversion, subject to the approval of
the OTS, no Eligible Account Holder, Supplemental Eligible Account
Holder or Other Member may subscribe in their capacity as such in
the Subscription Offering for shares of Common Stock having an
aggregate purchase price of more than $125,000 (12,500 shares based
on the Purchase Price); no person may purchase in the Direct
Community Offering shares of Common Stock having an aggregate
purchase price of more than $125,000 (12,500 shares based on the
Purchase Price); no person, together with associates of and persons
acting in concert with such person, may purchase in the Subscription
Offering, Direct Community Offering and the Syndicated Community
Offering shares of Common Stock having an aggregate purchase price
of more than $350,000 (35,000 shares based on the Purchase Price);
and no person, together with associates of and persons acting in
concert with such person, may purchase shares of Common Stock in the
Conversion having an aggregate purchase price of more than $350,000
(35,000 shares based on the Purchase Price). Under certain
circumstances, the maximum purchase limitation may be increased or
decreased at the sole discretion of the Association and the Holding
Company. See "THE CONVERSION -- The Subscription, Direct Community
and Syndicated Community Offerings," "-- Limitations on Purchases of
Shares" and "-- Procedure for Purchasing Shares in the Subscription
and Direct Community Offering" for other purchase and sale
limitations. The minimum purchase is 25 shares.
The Subscription Offering will expire at Noon, Mountain Time,
on _____ __, 1996 ("Expiration Date"), unless extended by the
Association and the Holding Company for up to __ days to ____ __,
1996.
<PAGE>
Such extension may be granted without additional notice to
subscribers. The Direct Community Offering is also expected to
terminate at Noon, Mountain Time, on _____ __, 1996 or at a date
thereafter, however, in no event later than ____ __, 1997. The
Holding Company must receive at the Association's office the
accompanying original Stock Order Form (facsimile copies and
photocopies will not be accepted) and a fully executed separate
Certification Form ("Certification Form") along with full payment
(or appropriate instructions authorizing a withdrawal from a deposit
account at the Association) of $10.00 per share ("Purchase Price")
for all shares subscribed for or ordered by the Expiration Date.
Funds so received will be placed in segregated accounts created for
this purpose at the Association, and interest will be paid at the
passbook rate (___% per annum as of the date hereof) from the date
payment is received until the Conversion is consummated or
terminated. These funds will be otherwise unavailable to the
depositor until such time. Payments authorized by withdrawals from
deposit accounts will continue to earn interest at the contractual
rate until the Conversion is consummated or terminated, although
such funds will be unavailable for withdrawal until the Conversion
is consummated or terminated. Shares of Common Stock issued in the
Conversion are not deposit liabilities, will not earn interest, and
will not be insured by the FDIC, the SAIF or any other government
agency. Payment for shares of Common Stock by wire transfer will not
be accepted. Orders submitted are irrevocable until the consummation
of the Conversion. If the Conversion is not consummated within 45
days after the last day of the Subscription and Direct Community
Offering (which date will be no later than ____ __, 1997) and the
OTS consents to an extension of time to consummate the Conversion,
subscribers will be notified in writing of the time period within
which the subscriber must notify the Association of his or her
intention to increase, decrease or rescind his or her subscription.
If an affirmative response to any such resolicitation is not
received by the Holding Company or the Association from subscribers,
such orders will be rescinded and all funds will be returned
promptly with interest. If such period is not extended or, in any
event, if the Conversion is not consummated by _______ __, 1997, all
subscription funds will be promptly returned, together with accrued
interest, and all withdrawal authorizations terminated.
The Association and the Holding Company have engaged Webb as
their financial advisor and to assist the Holding Company in the
sale of the Common Stock in the Offerings. Neither Webb nor any
other registered broker-dealer is obligated to take or purchase any
shares of Common Stock in the Offerings. See "THE CONVERSION -- Plan
of Distribution for the Subscription, Direct Community and
Syndicated Community Offerings."
Prior to the Offerings, the Holding Company has not issued any
capital stock and accordingly there has been no market for the
shares offered hereby. There can be no assurance that an active and
liquid trading market for the Common Stock will develop or, if
developed, will be maintained. See "RISK FACTORS -- Absence of Prior
Market for the Common Stock." The Holding Company has received
conditional approval to list the Common Stock on the National Market
under the symbol "____." Keefe, Bruyette has advised the Holding
Company that it intends to act as a market maker for the Common
Stock following the Conversion. See "MARKET FOR COMMON STOCK."
<PAGE>
Empire Federal Savings and Loan Association
Livingston, Montana
[Map to be filed by amendment]
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE PLAN OF CONVERSION BY AT LEAST
A MAJORITY OF THE ELIGIBLE VOTING MEMBERS OF THE ASSOCIATION, THE SALE OF AT
LEAST 1,666,000 SHARES OF COMMON STOCK PURSUANT TO THE PLAN OF CONVERSION, AND
RECEIPT OF ALL APPLICABLE REGULATORY APPROVALS.
<PAGE>
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See "RISK
FACTORS."
Empire Federal Bancorp, Inc.
The Holding Company is a Delaware corporation organized in September 1996
at the direction of the Association to acquire all of the capital stock that the
Association will issue upon its conversion from the mutual to stock form of
ownership. The Holding Company has not engaged in any significant business to
date. The Holding Company has received OTS approval to become a savings and loan
holding company and to acquire 100% of the capital stock of the Association.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the outstanding capital stock of the Association, that portion
of the net proceeds of the Offerings permitted by the OTS to be retained by the
Holding Company and a note receivable from the ESOP evidencing a loan from the
Holding Company to fund the Association's ESOP. The Holding Company has received
approval from the OTS to retain 50% of the net proceeds of the Offerings, which
will be used for general business activities, including a loan by the Holding
Company directly to the ESOP to enable the ESOP to purchase 8% of the Common
Stock issued in the Conversion. See "USE OF PROCEEDS." Upon consummation of the
Conversion, the Holding Company initially will be a unitary savings and loan
holding company which, under existing laws, generally would not be restricted in
the types of business activities in which it may engage as long as the
Association retains a specified amount of its loans in housing-related
investments. See "REGULATION -- Savings and Loan Holding Company Regulations."
Management believes that the holding company structure and retention of proceeds
would facilitate the expansion and diversification of its operations, should it
decide to do so. There are no present plans, arrangements, agreements, or
understandings, written or oral, however, regarding any such activities or
repurchases. The principal executive office of the Holding Company is located at
123 South Main Street, Livingston, Montana 59047, and its telephone number is
(406) 222-1981.
Empire Federal Savings and Loan Association
The Association is a federally chartered mutual savings and loan
association located in Livingston, Montana, which is approximately 26 miles east
of Bozeman, Montana. Chartered in 1923 as a Montana-chartered mutual building
and loan association under the name "Empire Building and Loan Association," the
Association converted to a federal charter and adopted its current name in 1970.
In connection with the Conversion, the Association will convert to a federal
stock savings bank and change its name to "Empire Federal Savings Bank." The
Association is regulated by the OTS, its primary federal regulator, and the
FDIC, the insurer of its deposits. The Association's deposits are federally
insured by the FDIC under the SAIF. The Association is a member of the Federal
Home Loan Bank ("FHLB") System. At June 30, 1996, the Association had total
assets of $86.8 million, total deposits of $68.6 million and total equity of
$15.9 million, or 18.3% of total assets, on a consolidated basis.
The Association is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential
(i)
<PAGE>
dwellings, including an emphasis on loans for construction of residential
dwellings. To a lesser extent, lending activities also have included the
origination of multi-family, commercial real estate and home equity loans. The
Association's primary business has been that of a traditional thrift
institution, originating loans in its primary market area for its portfolio. At
June 30, 1996, the Association's gross loan portfolio totaled $43.1 million, of
which 81.7% were one- to four-family residential mortgage loans, 3.2% were
construction loans (most of which related to one- to four-family residences),
5.4% were multi-family loans, and 2.7% were commercial real estate loans. In
addition the Association has maintained a significant portion of its assets in
investment and mortgage-backed securities. Similar to its lending activities,
the Association's investment portfolio has been weighted toward mortgage-backed
securities secured by one- to four-family residential properties. The portfolio
also includes U.S. Government agency securities. Investment securities,
including mortgage-backed securities, totaled $39.1 million, or 45.0% of total
assets, at June 30, 1996. In addition to interest and dividend income on loans
and investments, the Association receives other income from the sale of
insurance products through its wholly-owned subsidiary, Dime Service
Corporation.
The Association's market area is comprised of Park, Gallatin and Sweet
Grass Counties of South Central Montana. The Association faces strong
competition in its market area. See "RISK FACTORS -- Dependence on Local Economy
and Competition Within Market Area." The Association's principal executive
office is located at 123 South Main Street, Livingston, Montana 59047, and its
telephone number is (406) 222-1981.
The Conversion
The Association is converting from a federally chartered mutual savings
and loan association to a federally chartered capital stock savings bank and, in
connection therewith, will issue all of its outstanding capital stock to the
Holding Company in exchange for 50% of the net Conversion proceeds.
Simultaneously, the Holding Company will sell its Common Stock in the Offerings.
The Conversion is subject to the approval of the OTS, as well as the
Association's members at a special meeting to be held on ____ __, 1996. After
the Conversion, depositors and borrowers of the Association will have no voting
rights in the Holding Company, unless they become stockholders.
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Association, as converted. Keller has advised the Association that in its
opinion, at September 6, 1996, the aggregate estimated pro forma market value of
the Holding Company and the Association, as converted, ranged from $16,660,000
to $22,540,000, with a midpoint of $19,600,000, or from 1,666,000 shares to
2,254,000 shares, with a midpoint of 1,960,000 shares, assuming a $10.00 per
share Purchase Price. The appraisal of the pro forma market value of the Holding
Company and the Association as converted is based on a number of factors and
should not be considered a recommendation to buy shares of the Common Stock or
any assurance that after the Conversion the shares of Common Stock will be able
to be resold at or above the Purchase Price. The appraisal will be updated or
confirmed prior to the consummation of the Conversion.
The Board of Directors and management of the Association believe that the
stock form of ownership is preferable to the mutual form of organization,
especially in light of the competitive and heavily regulated environment within
which the Association operates. The Board of Directors and management believe
that the Conversion is in the best interests of the Association's members and
its communities. The Conversion is intended to (i) improve the competitive
position of the Association in its market area and support possible future
expansion and diversification of operations (currently, there are no specific
plans, arrangements or understandings, written or oral, regarding any such
activities); (ii) afford members of the Association and others the opportunity
to become stockholders of the Holding Company and thereby participate more
directly in, and contribute to, any future growth of the Holding Company and the
Association; and (iii) provide future access to capital markets. See "THE
CONVERSION -- Purposes of Conversion."
(ii)
<PAGE>
Tax Consequences of the Conversion
The Association has received an opinion of counsel that the Conversion
will constitute a nontaxable reorganization under the Internal Revenue Code of
1986, as amended ("Code"), and will not result in any federal income tax
liability to the Association, its account holders, or the Holding Company. The
Association has also received an opinion from Huppert and Swindlehurst, P.C.
that, assuming the Conversion does not result in any federal income tax
liability to such persons and entities, the Conversion will not result in any
Montana income tax liability to such persons or entities. Prospective
investors are urged to consult with their own tax advisors regarding the tax
consequences of the Conversion particular to them. See "RISK FACTORS --
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights" and "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association -- Tax Effects."
The Subscription, Direct Community and Syndicated Community Offerings
The Holding Company is offering up to 2,254,000 shares of Common Stock at
$10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Association's ESOP; (iii)
Supplemental Eligible Account Holders; and (iv) Other Members. In the event the
number of shares offered in the Conversion is increased above the maximum of the
Estimated Valuation Range, the Association's ESOP shall have a first priority
right to purchase any such shares exceeding the maximum of the Estimated
Valuation Range up to an aggregate of 8% of the Common Stock issued in the
Conversion. Concurrently, and subject to the prior rights of holders of
Subscription Rights, any shares of Common Stock not subscribed for in the
Subscription Offering are being offered in the Direct Community Offering to the
general public with preference being given to natural persons who are permanent
residents of the Local Community. The Holding Company and the Association have
engaged Webb to consult with and advise the Holding Company and the Association
in the Offerings, and Webb has agreed to use its best efforts to assist the
Holding Company with the solicitation of subscriptions and purchase orders for
shares of Common Stock in the Offerings. Webb is not obligated to take or
purchase any shares of Common Stock in the Offerings. If all shares of Common
Stock to be issued in the Conversion are not sold through the Subscription and
Direct Community Offering, then the Holding Company expects to offer the
remaining shares in the Syndicated Community Offering managed by Webb, which
would occur as soon as practicable following the close of the Subscription and
Direct Community Offering but may commence during the Subscription and Direct
Community Offering, subject to the prior rights of subscribers in the
Subscription Offering and to the right of the Holding Company to accept or
reject orders in the Direct Community Offering and the Syndicated Community
Offering in whole or in part. All shares of Common Stock will be sold at the
same price per share in the Syndicated Community Offering as in the Subscription
and Direct Community Offering. Orders submitted are irrevocable until the
consummation of the Conversion. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued." The Subscription
Offering will expire at Noon, Mountain Time, on _____ __, 1996, unless extended
by the Association and the Holding Company for up to __ days. The Direct
Community Offering and Syndicated Community Offering, if any, are also expected
to terminate at Noon, Mountain Time, on _____ __, 1996, and may terminate on a
date thereafter, however, in no event later than ____ __, 1997.
Restrictions on Transfer of Subscription Rights
No person may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the Subscription Rights issued
under the Plan or the shares of Common Stock to be issued upon the exercise of
Subscription Rights. Each person exercising Subscription Rights will be required
to certify that a purchase of Common Stock is solely for the purchaser's own
account and there is no agreement or understanding regarding the sale or
transfer of such shares. The Holding Company and the Association may pursue any
and all legal and equitable remedies in the event they become aware of the
transfer of Subscription Rights and will not honor orders known by them to
involve the transfer or purported transfer of Subscription Rights.
(iii)
<PAGE>
Prospectus Delivery and Procedure for Purchasing Common Stock
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, in accordance with Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus will
be mailed later than five days or hand delivered later than two days prior to
the Expiration Date. Execution of the Stock Order Form will confirm receipt or
delivery of a Prospectus in accordance with Rule 15c2-8. Stock Order Forms will
be distributed only with a Prospectus.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of Other
Members who are only borrowers, loans held at the Association, on the Stock
Order Form giving all names on each deposit account and/or loan and the account
and/or loan numbers at the applicable eligibility date.
Full payment by check, cash (only if delivered in person at the
Association), money order, bank draft or withdrawal authorization (payment by
wire transfer will not be accepted) must accompany an original Stock Order Form
(facsimile copies and photocopies will not be accepted) and a fully executed
separate Certification Form. Orders cannot and will not be accepted without a
fully executed separate Certification Form. See "THE CONVERSION -- Procedure for
Purchasing Shares in the Subscription and Direct Community Offering."
Purchase Limitations
Except for the ESOP, which is expected to subscribe for 8% of the shares
of Common Stock issued in the Conversion, no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member may purchase in their
capacity as such in the Subscription Offering shares of Common Stock having an
aggregate purchase price of more than $125,000 (12,500 shares based on the
Purchase Price); no person may purchase in the Direct Community Offering shares
of Common Stock having an aggregate purchase price of more than $125,000 (12,500
shares based on the Purchase Price); no person, together with associates of and
persons acting in concert with such person, may purchase in the Direct Community
Offering and the Syndicated Community Offering shares of Common Stock having an
aggregate purchase price of more than $350,000 (35,000 shares based on the
Purchase Price); and no person, together with associates of and persons acting
in concert with such person, may purchase shares of Common Stock in the
Conversion having an aggregate purchase price of more than $350,000 (35,000
shares based on the Purchase Price). This maximum purchase limitation may be
increased or decreased as consistent with OTS regulations in the sole discretion
of the Holding Company and the Association, subject to any required regulatory
approval. The minimum purchase is 25 shares. In addition, stock orders received
either through the Direct Community Offering or the Syndicated Community
Offering may be accepted or rejected, in whole or in part, at the discretion of
the Holding Company and the Association. See "THE CONVERSION -- Limitations on
Purchases of Shares." If an order is rejected in part, the purchaser does not
have the right to cancel the remainder of the order. In the event of an
oversubscription, shares will be allocated in accordance with the Plan of
Conversion. See "THE CONVERSION -- The Subscription, Direct Community and
Syndicated Community Offerings."
Stock Pricing and Number of Shares to be Issued in the Conversion
The Purchase Price in the Offerings is a uniform price for all
subscribers, including members of the Holding Company's and the Association's
Boards of Directors and their managements and the Association's ESOP, and was
set by the Boards of Directors of the Holding Company and the Association. The
number of shares to be offered at the Purchase Price is based upon an
independent appraisal of the aggregate pro forma market value of the Holding
Company and the Association, as converted, which was estimated by Keller to
range from $16,660,000 to $22,540,000 as of September 6, 1996, or from 1,660,000
to 2,254,000 shares based on the Purchase Price. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued." The appraisal of the pro forma value
of the Holding Company and the Association as converted will be updated or
confirmed at the completion of the Offerings. The maximum of the Estimated
Valuation Range may be increased by up to 15% and the number of shares of Common
Stock to be issued in the Conversion may be increased to 2,592,100 shares due to
material changes in the
(iv)
<PAGE>
financial condition or operations of the Association or changes in market
conditions or general financial and economic conditions. Subscribers will be
resolicited and will not be permitted to modify or cancel their subscriptions
unless the gross proceeds from the sale of the Common Stock are less than the
minimum of the Estimated Valuation Range or more than 15% above the maximum of
the Estimated Valuation Range. The appraisal is not intended and should not be
construed as a recommendation of any kind as to the advisability of purchasing
such stock nor can assurance be given that purchasers of the Common Stock in the
Conversion will be able to sell such shares after the Conversion at a price that
is equal to or above the Purchase Price. Furthermore, the pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be greater than amounts that would be available for
distribution to stockholders in the event of liquidation.
Benefits of the Conversion to Management
ESOP. In connection with the Conversion, the Association will adopt the
ESOP, a tax-qualified employee benefit plan, for the benefit of officers and
employees of the Association. The ESOP intends to purchase 8% of the shares of
Common Stock issued in the Offerings (180,320 shares of Common Stock, based on
the issuance of the maximum of the Estimated Valuation Range). In the event that
the ESOP's subscription is not filled in its entirety, the ESOP may purchase
additional shares in the open market or may purchase additional authorized but
unissued shares with cash contributed to it by the Association. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Impact of New Accounting Pronouncements and Regulatory Policies --
Accounting for Employee Stock Ownership Plans" and "MANAGEMENT OF THE
ASSOCIATION -- Benefits -- Employee Stock Ownership Plan."
Management Recognition Plan. The Holding Company expects to seek
stockholder approval of the Management Recognition Plan and Trust ("MRP") at a
meeting of stockholders occurring no earlier than six months following
consummation of the Conversion. The MRP, which will be funded with a number of
shares equal to 4% of the number of shares issued in the Conversion, is a
non-tax-qualified restricted stock plan intended for the benefit of key
employees and directors of the Holding Company and the Association. If
stockholder approval of the MRP is obtained, it is expected that shares of
Common Stock of the Holding Company will be awarded pursuant to such plan to key
employees and directors of the Holding Company and the Association (which shares
will be awarded at no cost to such recipients). Although no specific award
determinations have been made, the Association anticipates that if stockholder
approval is obtained it would provide awards to its directors, officers and
employees to the extent permitted by applicable regulations. OTS regulations
currently provide that no individual officer or employee may receive more than
25% of the shares reserved for issuance under any stock compensation plan and
that non-employee directors may not receive more than 5% of such shares
individually or 30% in the aggregate for all non-employee directors.See
"MANAGEMENT OF THE ASSOCIATION -- Benefits -- Management Recognition Plan."
Stock Option Plan. The Holding Company expects to seek stockholder
approval of the 1996 Stock Option Plan ("Stock Option Plan"), which will reserve
a number of shares equal to 10% of the number of shares issued in the
Conversion, at a meeting of stockholders occurring no earlier than six months
following consummation of the Conversion. If stockholder approval of the Stock
Option Plan is obtained, it is expected that options to acquire up to 259,210
shares of Common Stock of the Holding Company will be available for award to
key employees and directors of the Holding Company and the Association (based
on the issuance of the maximum of the Estimated Valuation Range). The exercise
price of such options will be 100% of the fair market value of the Common Stock
on the date the option is granted. Although no specific award determinations
have been made, the Association anticipates that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to
the extent permitted by applicable regulations. OTS regulations currently
provide that no individual officer or employee may receive more than 25% of the
shares reserved for issuance under any stock compensation plan and that
non-employee directors may not receive more than 5% of such shares
individually or 30% in the aggregate for all non-employee directors. Options
granted to officers and directors are valuable only to the extent that such
options are exercisable and the market price for the underlying share of
common stock is in excess of the exercise price. An option effectively
eliminates the market risk of holding the underlying security since no
consideration is paid for
(v)
<PAGE>
the option until it is exercised and, therefore, the recipient may, within the
limits of the term of the option, wait to exercise the option until the market
price exceeds the exercise price. See "MANAGEMENT OF THE ASSOCIATION -- Benefits
- -- 1996 Stock Option Plan."
Employment Agreements. The Holding Company and the Association have agreed
to enter into employment agreements with Mrs. Harris and Mr. Ernest A. Sandberg,
Treasurer, Secretary and Chief Financial Officer of the Holding Company and
Executive Vice President and Secretary of the Association, which provide certain
benefits in the event of their termination following a change in control of the
Holding Company and the Association. In the event of a change in control of the
Holding Company or the Association, as defined in the agreements, Mrs. Harris
and Mr. Sandberg will be entitled to a cash severance amount equal to 2.99 times
her or his average annual compensation during the five-year period preceding the
change in control. Assuming a change of control occurred as of June 30, 1996,
the aggregate amounts payable to Mrs. Harris and Mr. Sandberg under these
agreements would have been approximately $309,000 and $284,000, respectively.
See "MANAGEMENT OF THE ASSOCIATION -- Executive Compensation -- Employment
Agreements."
For information concerning the possible voting control of officers,
directors and employees following the Conversion, see "RISK FACTORS -- Anti-
takeover Considerations -- Voting Control by Insiders."
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to range
from $16.2 million to $22.0 million, or to $25.3 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company has received the
approval of the OTS to purchase all of the capital stock of the Association to
be issued in the Conversion in exchange for 50% of the net proceeds. This will
result in the Holding Company retaining approximately $8.1 million to $11.0
million of the net proceeds, or up to $12.7 million if the Estimated Valuation
Range is increased by 15%, and the Association receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Association's capital and will support the expansion of the
Association's existing business activities. The Association will use the funds
contributed to it for general corporate purposes, including, initially, local
lending and securities of the type currently held by the Association. Shares of
Common Stock may be purchased with funds on deposit at the Association, which
will reduce deposits by the amounts of such purchases. The net amount of funds
available to the Association for investment following receipt of the Conversion
proceeds will be reduced to the extent shares are purchased with funds on
deposit.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the Association's ESOP to enable it to
purchase 8% of the shares of Common Stock issued in the Conversion. Such loan
would fund the entire purchase price of the ESOP shares ($1.8 million at the
maximum of the Estimated Valuation Range) and would be repaid principally from
the Association's contributions to the ESOP and from dividends payable on the
Common Stock held by the ESOP. The remaining proceeds retained by the Holding
Company initially will be invested primarily in certificates of deposit and
securities of the type currently held by the Association. Such proceeds will be
available for additional contributions to the Association in the form of debt or
equity, to support future growth and diversification activities, as a source of
dividends to the stockholders of the Holding Company and for future repurchases
of Common Stock (including possible repurchases to fund the MRP or to provide
shares to be issued upon exercise of stock options) to the extent permitted
under Delaware law and OTS regulations. Currently, as discussed below under "USE
OF PROCEEDS," there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any of such activities.
(vi)
<PAGE>
Market for Common Stock
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market under the symbol "____." Keefe, Bruyette has
indicated its intention to act as a market maker in the Common Stock following
the consummation of the Conversion, depending on trading volume and subject to
compliance with applicable laws and regulatory requirements. Furthermore, Webb
has agreed to use its best efforts to assist the Holding Company in obtaining
additional market makers for the Common Stock. No assurance can be given that an
active and liquid trading market for the Common Stock will develop. Further, no
assurance can be given that purchasers will be able to sell their shares at or
above the Purchase Price after the Conversion. See "RISK FACTORS -- Absence of
Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
Dividends
The Board of Directors of the Holding Company will consider a dividend
policy following the consummation of the Conversion. Declarations and payments
of dividends by the Board of Directors will depend upon a number of factors,
including the amount of the net proceeds retained by the Holding Company,
capital requirements, regulatory limitations, the Association's and the Holding
Company's financial condition and results of operations, tax considerations and
general economic conditions. In order to pay such cash dividends, however, the
Holding Company must have available cash either from the net proceeds raised in
the Offerings and retained by the Holding Company, dividends received from the
Association or earnings on Holding Company assets. There are certain limitations
on the payment of dividends from the Association to the Holding Company. See
"REGULATION -- Federal Regulation of Savings Associations -- Limitations on
Capital Distributions." No assurances can be given that any dividends will be
declared or, if declared, what the amount of dividends will be or whether such
dividends, once declared, will continue. See "DIVIDEND POLICY."
Officers' and Directors' Common Stock Purchases and Beneficial Ownership
Officers and directors of the Association (seven persons) are expected to
subscribe for an aggregate of approximately $690,000 of Common Stock, or 3.1%
of the shares based on the maximum of the Estimated Valuation Range. See "THE
CONVERSION -- Shares to be Purchased by Management Pursuant to Subscription
Rights." In addition, purchases by the ESOP and allocations under the MRP, and
the exercise of stock options issued under the Stock Option Plan, will increase
the number of shares beneficially owned by officers, directors and employees.
See "RISK FACTORS -- Anti-takeover Considerations -- Voting Control by
Insiders." The MRP and Stock Option Plan are subject to approval by the
stockholders of the Holding Company at a meeting to be held no earlier than six
months following consummation of the Conversion.
Risk Factors
See "RISK FACTORS" for a discussion of certain risks related to the
Offerings that should be considered by all prospective investors, including,
interest rate risk; declining interest rate spread and return on equity after
Conversion; management succession; recapitalization of SAIF and its impact on
SAIF premiums; certain lending considerations; dependence on local economy and
competition within market area; anti-takeover considerations; absence of prior
market for the Common Stock; dilutive effect of benefit programs; possible
increase in the number of shares issued in the Conversion; possible adverse
income tax consequences of the distribution of Subscription Rights; regulatory
oversight and possible legislation.
(vii)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operation of the Association at
the dates and for the periods indicated. This information is qualified in its
entirety by reference to the detailed information and Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
At June 30,
1996 1995 1994 1993 1992
(In Thousands)
SELECTED FINANCIAL
CONDITION DATA:
Total assets $86,810 $85,495 $86,143 $83,107 $78,586
Cash and interest-bearing
deposits 2,499 2,196 2,098 1,892 2,857
Investment and
mortgage-backed securities
available for sale 13,877 1,192 1,081 -- --
Investment and
mortgage-backed securities
held-to-maturity 25,196 39,441 38,805 38,010 36,222
Loans receivable, net 41,882 39,432 41,387 40,347 37,038
Deposits 68,548 67,064 68,336 65,234 62,835
Advances from FHLB 1,500 1,751 2,189 4,106 3,513
Total equity 15,876 15,500 14,475 12,792 11,534
Year Ended June 30,
1996 1995 1994 1993 1992
(In Thousands)
SELECTED OPERATING DATA:
Interest income $6,304 $6,305 $6,272 $6,664 $6,627
Interest expense 3,310 2,938 2,641 2,955 3,562
Net interest income 2,994 3,367 3,631 3,709 3,065
Provision for loan losses 55 -- -- 82 31
Net interest income after
provision for loan losses 2,939 3,367 3,631 3,627 3,034
Non-interest income:
Insurance commission income 688 691 589 461 326
Loan origination fees and
service charges 145 130 149 141 145
Other income 45 36 37 25 57
Total other income 878 857 775 627 528
Non-interest expense:
Compensation and
benefits 1,615 1,542 1,385 1,134 955
Occupancy and equipment 340 264 268 262 244
Deposit insurance premiums 185 226 177 139 152
Other general and
administrative 646 651 674 542 477
Provision for losses on real
estate owned -- -- -- 61 406
Total non-interest expense 2,786 2,683 2,504 2,138 2,234
Income before income taxes 1,031 1,541 1,902 2,116 1,328
Income tax expense 399 589 713 857 498
Income before cumulative effect of
change in accounting principle 632 952 1,189 1,259 830
Cumulative effect of change in
accounting for income taxes -- -- 56 -- --
Net income $ 632 $ 952 $ 1,245 $ 1,259 $ 830
(viii)
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets) 0.72% 1.12% 1.47% 1.55% 1.10%
Return on average equity (net income
divided by average equity) 3.99 6.33 9.13 10.25 7.42
Average interest-earning assets
to average interest-bearing
liabilities 119.33 118.48 117.34 118.34 116.99
Net interest income after provision
for loan losses to total
other expenses 105.49 125.49 145.02 169.63 135.84
Interest rate spread 2.80 3.33 3.87 3.96 3.31
Net yield on average interest-earning
assets 3.57 3.97 4.43 4.63 4.12
Efficiency ratio (non-interest
expense divided by the sum of net
interest income and non-interest
income) 71.95 63.52 56.83 49.32 62.17
Equity Ratios:
Average equity to average assets
ratio (average equity divided
by average total assets) 18.11 17.07 16.08 15.16 14.80
Equity to assets at year end 18.29 18.13 16.80 15.39 14.68
Asset quality ratios:
Non-performing assets to total
assets -- -- 0.02 0.62 0.65
Non-performing loans to
total assets -- -- 0.02 0.06 0.06
Non-performing loans to
net loans -- -- 0.04 0.13 0.12
Allowance for loan losses, REO and
other repossessed assets to
non-performing assets * * 966.67 117.51 91.36
Allowance for loan losses to total
loans outstanding 0.46 0.36 0.34 0.35 0.17
At June 30,
1996 1995 1994 1993 1992
OTHER DATA:
Number of:
Real estate loans outstanding 744 765 824 853 864
Deposit accounts 10,633 10,623 10,692 10,540 10,613
Full-service offices 3 3 3 3 3
</TABLE>
---------
* Not meaningful.
(ix)
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below, in addition to
the matters discussed elsewhere in this Prospectus.
Above Average Interest Rate Risk Associated With Fixed-Rate Loan and Mortgage-
Backed Securities Portfolio
General. The mismatch between maturities and interest rate sensitivities
of balance sheet items results in interest rate risk. The Association is subject
to above average interest rate risk because of its practice of originating
primarily fixed-rate loans, which, unlike adjustable rate loans, do not reprice
in response to changes in interest rates. Like most of the savings industry, the
interest-earning assets of the Association have longer effective maturities than
its deposits, which largely mature or are subject to repricing within a shorter
period of time. Unlike many savings institutions, however, the Association holds
a significant amount of its assets in fixed-rate loans that do not reprice in
response to changes in interest rates. The majority of the Association's
residential mortgage loans are fixed-rate with maturities up to 20 years and are
retained in the Association's loan portfolio. In addition, the Association has
$31.2 million or 35.6% of its total assets in fixed rate mortgaged-backed
securities that do not reprice in response to changes in interest rate.
Accordingly, a material and prolonged increase in interest rates could be
expected to have a greater adverse effect on the net interest income of the
Association relative to that of other savings institutions that hold a
materially larger portion of their assets in adjustable rate loans or in
fixed-rate one- to four-family mortgage loans that are originated for committed
sale in the secondary market, or in a combination thereof. Because of its
capital position, the Association has accepted the above average interest rate
risk associated with fixed-rate loans and fixed-rate mortgage-backed securities
in an effort to maximize yield. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources."
Potential Adverse Impact on Results of Operations. The Association's
profitability is substantially dependent on its net interest income, which is
the difference between the interest income received from its interest-earning
assets and the interest expense incurred in connection with its interest-bearing
liabilities. When an institution's interest-bearing liabilities exceed its
interest-earning assets which mature within a given period of time, material and
prolonged increases in interest rates generally would adversely affect net
interest income, while material and prolonged decreases in interest rates
generally would have a favorable effect on net interest income.
The extent of interest rate risk to which the Association is subject is
monitored by management by modeling the change in net portfolio value ("NPV")
over a variety of interest rate scenarios. NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The
calculation is intended to illustrate the change in NPV that will occur in the
event of an immediate and sustained change in interest rates of at least 200
basis points with no effect given to any steps which management might take to
counter the effect of that interest rate movement. At June 30, 1996, the
Association's NPV as a percent of present value of assets was 20.49%. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset and Liability Management and Interest Rate Risk" for a
discussion of the NPV method of analyzing interest rate risk and for an
illustration of the effect of an increase in interest rates on the Association's
earnings.
Changes in interest rates can affect the amount of loans originated by an
institution, as well as the value of its loans and other interest-earning assets
and the resultant ability to realize gains on the sale of such assets. Changes
in interest rates also can result in disintermediation, which is the flow of
funds away from savings associations into direct investments, such as U.S.
Government and corporate securities, and other investment vehicles which,
because of the absence of federal insurance premiums and reserve requirements,
generally can pay higher rates of return than financial intermediaries such as
commercial banks and thrift institutions.
1
<PAGE>
Changes in the level of interest rates also affect the Association's
portfolio of mortgage-backed securities. Payments in the Association's
mortgage-backed securities may be affected by declining and rising interest rate
environments. In a low and falling interest rate environment, prepayments could
be expected to increase. The Association's adjustable-rate instruments would be
expected to generate lower yields as a result of the effect of falling interest
rates on the indices for determining payment of interest. Additionally, the
increased principal payments received may be subject to reinvestment at lower
rates. Conversely, in a period of rising interest rates, prepayments would be
expected to decrease, which would make less principal available for reinvestment
at higher rates. In a rising interest rate environment, adjustable-rate
instruments generally would generate higher yields to the extent that the
indices for determining payment of interest did not exceed the lifetime interest
rate caps. Such changing interest rate environment may subject the Association's
fixed and variable rate mortgage-backed securities to yield and price
volatility.
Declining Interest Rate Spread and Return on Equity After Conversion
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. The Holding Company's
post-Conversion pro forma return on equity will be less than the Association's
pre-Conversion return on equity because of the increase in consolidated equity
of the Holding Company that will result from the net proceeds of the Offerings.
See "SELECTED CONSOLIDATED FINANCIAL INFORMATION" for numerical information
regarding the Association's historical returns on equity and "CAPITALIZATION"
for a discussion of the Holding Company's estimated pro forma consolidated
capitalization as a result of the Conversion.
For the three years ended June 30, 1996, 1995 and 1994 the Association's
return on average equity was 3.99%, 6.33%, and 9.13%, respectively. In order for
the Holding Company to achieve a return on equity comparable to the historical
levels achieved by the Association prior to the Conversion, the Holding Company
would have to either increase net income or reduce stockholders' equity, or
both, commensurate with the increase in equity as a result of the Conversion.
Reductions in equity could be achieved by, among other things, the payment of
regular cash dividends or periodic special dividends (although no assurances can
be given as to whether any dividends will be paid or, if paid, their amount and
frequency), the repurchase of shares of Common Stock subject to regulatory
restrictions, the acquisition of other financial institutions (neither the
Holding Company nor the Association has any present plans, arrangements, or
understandings, written or oral, regarding any repurchase or acquisitions), or
distributions to stockholders in the form of returns of capital (neither the
Holding Company nor the Association has any current plans regarding
such distributions). See "DIVIDEND POLICY" and "USE OF PROCEEDS."
Achievement of increased net income levels will depend on several
important factors outside the control of management, such as general economic
conditions, including the level of market interest rates, competition and
related factors, among others. See "-- Dependence on Local Economy and
Competition Within Market Area" and "-- Potential Adverse Impact of Changes in
Interest Rates." The Association has experienced a decrease in its interest rate
spread as the weighted average yield on its loan portfolio has decreased while
the weighted average rate paid on its interest-bearing liabilities has
increased. In addition to the contraction in net interest rate spread that the
Association has experienced in recent periods, and which can be expected to
continue, the expenses associated with the ESOP and the MRP (see "PRO FORMA
DATA") along with other post-Conversion expenses, are expected to contribute
initially to reduced earnings levels. The Association intends to deploy the net
proceeds of the Offerings to increase earnings per share and book value per
share without assuming undue risk, with the goal of maximizing its return on
equity. This goal will likely take a number of years to achieve and no
assurances can be given that this goal can or will be attained.
Management Succession
The Association believes that its success in serving the needs of its
community has been due largely to the local ties established by its directors
and management over the Association's 73-year history. The current members of
the Board of Directors and management of the Association have been affiliated
with the institution for an average
2
<PAGE>
of 25 years. There can be no assurance that adequate replacements for Mrs.
Harris and Mr. Sandberg could be found if the Association were to lose their
services. See "MANAGEMENT OF THE HOLDING COMPANY" and "MANAGEMENT OF THE
ASSOCIATION -- Directors and Executive Officers."
Recapitalization of SAIF and its Impact on SAIF Premiums
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the Bank Insurance Fund ("BIF"). Under the new assessment
schedule, approximately 92% of BIF members pay only the statutory minimum annual
assessment of $2,000. With respect to SAIF member institutions, the FDIC has
retained the existing rate schedule of 23 to 31 basis points. The Association
is, and after the Conversion will remain, a member of SAIF rather than BIF. SAIF
premiums may not be reduced for several years because SAIF has lower reserves
than BIF. Because deposit insurance premiums are often a significant component
of non-interest expense for insured depository institutions, the reduction in
BIF premiums may place the Association at a competitive disadvantage since
BIF-insured institutions (such as most commercial banks) may be able to offer
more attractive loan rates, deposit rates, or both.
Proposed federal legislation would recapitalize the SAIF and resolve the
current premium disparity by requiring savings institutions such as the
Association to pay a one-time assessment to increase SAIF's reserves to $1.25
per $100 of deposits that is expected to be approximately 80 basis points on the
amount of deposits held by a SAIF-member institution. The payment of a one-time
fee would have the effect of immediately reducing the capital and pre-tax
earnings of SAIF-member institutions by the amount of the fee. Based on the
Association's assessable deposits of $68.5 million at March 31, 1995, a one-time
assessment of 80 basis points would equal approximately $550,000 before taxes.
Although not assured, such assessment is expected to be tax deductible. This
change, if incurred, would represent, on a pro forma basis at June 30, 1996, a
decrease in book value per share of $0.33 and $0.24 based on the sale of shares
at the minimum of the Estimated Valuation Range and at the maximum of the
Estimated Valuation Range, respectively. Management cannot predict whether any
legislation imposing such a fee, will be enacted, or, if enacted, the amount or
timing of any one-time fee or whether ongoing SAIF premiums will be reduced to a
level equal to that of BIF premiums. See "REGULATION."
Certain Lending Considerations
Historically, the Association has been a portfolio lender, maintaining the
residential mortgage loans it originates in its portfolio rather than selling
them in the secondary market to the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). The Association
currently intends to continue this practice after the consummation of the
Conversion. A significant portion of the Association's residential mortgage
loans are not readily saleable in the secondary market because they are not
originated in conformity with the purchase requirements of the FHLMC or the FNMA
(i.e. "non-agency-conforming"). Although such loans satisfy the Association's
underwriting requirements, they are non-agency- conforming because they often
have irregular monthly payment dates and do not satisfy various other
requirements imposed by the FHLMC and FNMA. Accordingly, the Association's
non-conforming loans could be sold only after incurring certain costs and/or
discounting the purchase price.
Dependence on Local Economy and Competition Within Market Area
The Association has been and intends to continue to operate as an
independent community-oriented financial institution with a focus on servicing
customers in Park, Gallatin and Sweet Grass Counties. At June 30, 1996, the
Association's loan portfolio consisted of loans made to borrowers and
collateralized by properties located principally in this market area.
Principally all of the Association's depositors reside in this market area as
well.
A downturn in the economy of the Association's market area could have an
adverse effect on the quality of the Association's loan portfolio. In addition,
because the Association operates in a market area with a small population, the
Association's ability to achieve loan and deposit growth is limited. Future
growth opportunities for
3
<PAGE>
the Association depend largely on market area growth and the Association's
ability to compete effectively within and outside its market area.
The Association faces strong competition both in originating loans and
attracting deposits. This competition arises from savings institutions,
commercial banks, credit unions, mortgage banks and securities brokerage firms,
which operate within the Association's market area. This competition could
adversely affect the Association's future growth and earnings prospects.
Anti-takeover Considerations
Provisions in the Holding Company's Governing Instruments and Delaware
Law. Certain provisions included in the Holding Company's Certificate of
Incorporation and in the Delaware General Corporation Law ("DGCL") might
discourage potential takeover attempts, particularly those that have not been
negotiated with the Board of Directors. As a result, these provisions might
preclude takeover attempts that certain stockholders may deem to be in their
best interest and might tend to perpetuate existing management. These provisions
include, among other things, a provision limiting voting rights of beneficial
owners of more than 10% of the Common Stock, supermajority voting requirements
for certain business combinations, staggered terms for directors, non-cumulative
voting for directors, limits on the calling of special meetings, and specific
notice requirements for stockholder nominations and proposals. In addition, the
Certificate of Incorporation provides for the election of directors to staggered
terms of three years and for their removal without cause only upon the vote of
holders of 80% of the outstanding voting shares. Certain provisions of the
Certificate of Incorporation of the Holding Company cannot be amended by
stockholders unless an 80% stockholder vote is obtained. The Bylaws of the
Holding Company also contain provisions regarding the timing and content of
stockholder proposals and nominations. The existence of these anti-takeover
provisions could result in the Holding Company being less attractive to a
potential acquiror and in stockholders receiving less for their shares than
otherwise might be available in the event of a takeover attempt. Furthermore,
federal regulations prohibit for three years after consummation of the
Conversion the ownership of more than 10% of the Savings Bank or the Holding
Company without prior OTS approval. Federal law also requires OTS approval prior
to the acquisition of "control" (as defined in OTS regulations) of an insured
institution. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
Voting Control by Insiders. Directors and officers of the Association and
the Holding Company expect to purchase 69,000 shares of Common Stock, or 3.1%
of the shares issued in the Offerings at the maximum of the Estimated Valuation
Range. Directors and officers are also expected to control indirectly the voting
of approximately 8% of the shares of Common Stock issued in the Conversion
through the ESOP (assuming shares have been allocated under the ESOP). Under the
terms of the ESOP, the unallocated shares will be voted by the independent ESOP
trustee in the same proportion as the votes cast by participants with respect to
the allocated shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company expects to
seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Association. Assuming the receipt of stockholder
approval, the Holding Company expects to reserve for issuance common stock of
the Holding Company on behalf of the MRP in an amount equal to 4% of the Common
Stock issued in the Conversion, or 90,160 shares at the maximum of the Estimated
Valuation Range. Under the terms of the MRP, the MRP committee or the MRP
trustees will have the power to vote unallocated and unvested shares. In
addition, the Holding Company intends to reserve for future issuance pursuant to
the Stock Option Plan a number of authorized shares of Common Stock equal to 10%
of the Common Stock issued in the Conversion (225,400 shares at the maximum of
the Estimated Valuation Range). The Holding Company also intends to seek
approval of the Stock Option Plan at a meeting of stockholders to be held no
earlier than six months following the consummation of the Conversion.
Assuming (i) the receipt of stockholder approval for the MRP and the Stock
Option Plan, (ii) the open market purchase of shares on behalf of the MRP, (iii)
the purchase by the ESOP of 8% of the Common Stock sold in the Offerings, and
(iv) the exercise of stock options equal to 10% of the number of shares of
Common Stock
4
<PAGE>
issued in the Conversion, directors, officers and employees of the Holding
Company and the Association would have voting control, on a fully diluted basis,
of 9.1% of the Common Stock, based on the issuance of the maximum of the
Estimated Valuation Range. Management's potential voting control alone, as well
as together with additional stockholder support, may preclude or impede takeover
attempts that certain stockholders deem to be in their best interest, and may
tend to perpetuate existing management.
Provisions of Employment Agreements. The employment agreements with Mrs.
Harris and Mr. Sandberg provide for cash severance payments in the event of a
change in control of the Holding Company or the Association in an amount equal
to 2.99 times the executive's average annual compensation during the five-year
period preceding the change in control. Such agreements also provide for the
continuation of certain employee benefits for a three-year period following the
change in control. These provisions may have the effect of increasing the cost
of acquiring the Holding Company, thereby discouraging future attempts to take
over the Holding Company or the Association.
See "MANAGEMENT OF THE ASSOCIATION -- Benefits," "DESCRIPTION OF CAPITAL
STOCK OF THE HOLDING COMPANY" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
Regulatory and Statutory Provisions. Federal regulations prohibit for a
period of three years after consummation of the Conversion, the ownership of
more than 10% of the Association or the Holding Company without prior OTS
approval. Federal law also requires OTS approval prior to the acquisition of
"control" (as defined in OTS regulations) of an insured institution.
Absence of Prior Market for the Common Stock
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Although the Holding Company
has received conditional approval to list the Common Stock on the Nasdaq
National Market, there can be no assurance that the Holding Company will meet
Nasdaq National Market listing requirements upon the consummation of the
Conversion, which include a minimum market capitalization, at least two market
makers and a minimum number of record holders. Keefe, Bruyette has advised the
Holding Company that it intends to act as a market maker for the Common Stock
following the Conversion. Making a market in securities involves maintaining bid
and ask quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. The development of a public trading market
depends upon the existence of willing buyers and sellers, the presence of which
is not within the control of the Holding Company, the Association or any market
maker. There can be no assurance that purchasers will be able to sell their
shares at or above the Purchase Price. See "MARKET FOR COMMON STOCK."
Dilutive Effect of Benefit Programs
At a meeting held no earlier than six months following consummation of the
Conversion, the Holding Company expects to seek stockholder approval of the MRP.
If approved, the Holding Company intends to reserve for issuance under the MRP
an amount of Common Stock of the Holding Company equal to 4% of the shares
issued in the Conversion. Such shares of Common Stock of the Holding Company may
be acquired by the Holding Company in the open market or from authorized but
unissued shares of Common Stock of the Holding Company. In the event that the
MRP utilizes authorized but unissued shares of Common Stock from the Holding
Company, the voting interests of existing stockholders will be diluted and net
income per share and stockholders' equity per share will be decreased. See "PRO
FORMA DATA" and "MANAGEMENT OF THE ASSOCIATION - - Benefits -- Management
Recognition Plan."
At a meeting held no earlier than six months following consummation of the
Conversion, the Holding Company expects to seek stockholder approval of the
Stock Option Plan. If approved, the Stock Option Plan will provide for options
for up to a number of shares of Common Stock of the Holding Company equal to 10%
of the shares issued in the Conversion. Such shares may be authorized but
unissued shares of Common Stock of the Holding Company and, upon exercise of the
options, will result in the dilution of the voting interests of existing
5
<PAGE>
stockholders and will decrease net income per share and stockholders' equity per
share. See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- 1996 Stock Option
Plan."
Possible Increase in the Number of Shares Issued in the Conversion
The number of shares to be issued in the Conversion may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
material changes in the financial condition or performance of the Association or
changes in market conditions or general financial and economic conditions prior
to the consummation of the Conversion. In the event that the Estimated Valuation
Range is so increased, the Holding Company expects to issue up to 2,592,100
shares of Common Stock at the Purchase Price for an aggregate price of up to
$25.9 million. An increase in the number of shares issued will decrease the
Holding Company's net income per share and stockholders' equity per share on a
pro forma basis and will increase the Holding Company's consolidated
stockholders' equity and net income. Such an increase will also increase the
Purchase Price as a percentage of pro forma stockholders' equity per share and
net income per share.
The ESOP intends to purchase 8% of the Common Stock issued in the
Conversion. In the event the number of shares issued in the Conversion is
increased as a result of an increase in the Estimated Valuation Range, the ESOP
shall have a first priority right to subscribe for all the shares sold in excess
of 2,254,000 shares, up to an aggregate of 8% of the Common Stock issued in the
Conversion. See "PRO FORMA DATA" and "THE CONVERSION -- Stock Pricing and the
Number of Shares to be Issued."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Association are
deemed to have an ascertainable value, receipt of such rights may be a taxable
event (either as capital gain or ordinary income), which may be recognizable by
all members or only by those Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members who exercise the Subscription Rights in an
amount equal to such value. Additionally, the Association could be required to
recognize a gain for tax purposes on such distribution. Whether Subscription
Rights are considered to have ascertainable value is an inherently factual
determination. The Association has been advised by Keller that such rights have
no value; however, Keller's conclusion is not binding on the Internal Revenue
Service ("IRS"). See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association -- Tax Effects."
Regulatory Oversight and Possible Legislation
The Association is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Association is a member of the FHLB System and is subject to certain limited
regulations promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve"). As the holding company of the Association, the Holding
Company also will be subject to regulation and oversight by the OTS. Such
regulation and supervision govern the activities in which an institution can
engage and are intended primarily for the protection of the insurance fund and
depositors. Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities which are intended
to strengthen the financial condition of the banking and thrift industries,
including the imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC or Congress, could have a material impact on the Holding
Company, the Association and their respective operations. See "REGULATION." In
addition, legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) merge the BIF and the SAIF, at which time thrifts and banks would pay
the same deposit insurance premiums, (ii) require federal savings associations
to convert to a national bank or a state-chartered bank or thrift, (iii) require
all savings and loan holding companies to become bank holding companies and (iv)
abolish the OTS. Included in such proposed legislation may be provisions
imposing material limitations on the non-banking activities of federal savings
associations, particularly insurance activities. Such provisions, if included,
may impose material limitations
6
<PAGE>
on the operations of the Association's wholly-owned subsidiary, Dime Service
Corporation, and may have a material adverse effect on the Association's
financial condition and results of operations. See "BUSINESS OF THE ASSOCIATION
- -- Subsidiary Activities." It is uncertain when or if any of this type of
legislation will be passed, and, if passed, in what form the legislation would
be passed. As a result, management cannot accurately predict the possible impact
of such legislation on the Association.
EMPIRE FEDERAL BANCORP, INC.
The Holding Company was organized as a Delaware corporation at the
direction of the Association on September 20, 1996 to acquire all of the
outstanding capital stock of the Association to be issued upon its Conversion.
The Holding Company has received OTS approval to become a savings and loan
holding company and to acquire all of the outstanding capital stock of the
Association. Prior to the Conversion, the Holding Company will not engage in any
material operations. After the Conversion, the Holding Company will be
classified as a unitary savings and loan holding company subject to regulation
by the OTS, and its principal business will be the ownership of the Association.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of the Association, that portion of the net
proceeds of the Offerings to be retained by the Holding Company and a note
receivable from the ESOP evidencing a loan from the Holding Company to fund the
Association's ESOP. See "BUSINESS OF THE HOLDING COMPANY."
The management of the Holding Company is set forth under "MANAGEMENT OF
THE HOLDING COMPANY." Initially, the Holding Company will neither own nor lease
any property, but will instead use the premises, equipment and furniture of the
Association in accordance with applicable law and regulations. Presently, the
Holding Company does not intend to employ any persons other than officers who
are also officers of the Association, but will utilize the support staff of the
Association from time to time in accordance with applicable laws and
regulations. Additional employees will be hired as appropriate to the extent the
Holding Company expands or changes its business in the future.
The holding company structure will permit the Holding Company to expand
the financial services currently offered through the Association. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Offerings would facilitate the expansion and diversification of
its operations, should it decide to do so. The holding company structure will
also enable the Holding Company to repurchase its stock without adverse income
tax consequences. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Savings and Loan Holding Company Regulations."
The Holding Company's principal executive office is located at 123 South
Main Street, Livingston, Montana 59047, and its telephone number is (406) 222-
1981.
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
The Association is a federally chartered mutual savings and loan
association located in Livingston, Montana. Originally chartered in 1923 as a
Montana mutual building and loan association under the name "Empire Building and
Loan Association," the Association converted to a federal charter and adopted
its current name in 1970. In connection with the Conversion, the Association
will convert to a federally chartered capital stock savings bank under the name
"Empire Federal Savings Bank," and become a wholly-owned subsidiary of the
Holding Company. The Association is regulated by the OTS. The Association's
deposits are federally insured by the FDIC under the SAIF. The Association is a
member of the FHLB System. At June 30, 1996, the Association had total assets of
$86.8 million, total deposits of $68.6 million, and total equity of $15.9
million on a consolidated basis.
The Association is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings, including an emphasis on
loans for construction of residential dwellings. To a lesser extent, lending
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<PAGE>
activities also have included the origination of multi-family, commercial real
estate and consumer loans. The Association's primary business has been that of
a traditional thrift institution, originating loans in its primary market area
for its portfolio. At June 30, 1996, the Association's gross loan portfolio
totaled $43.1 million, of which 81.7% were one- to four-family residential
mortgage loans, 3.2% were construction loans (most of which related to one- to
four-family residences), 5.4% were multi-family loans, and 2.7% were commercial
real estate loans. In addition the Association has maintained a significant
portion of its assets in investments and mortgage-backed securities. Similar to
its lending activities, the Association's investment portfolio has been weighted
toward mortgage-backed securities secured by one- to four-family residential
properties. The balance of the portfolio includes U.S. agency securities.
Investment securities, including mortgage-backed securities, totaled $39.1
million at June 30, 1996. In addition to interest and dividend income on loans
and investments, the Association receives other income from the sale of
insurance products through its wholly owned subsidiary, Dime Service
Corporation.
The Association's principal executive office is located at 123 South Main
Street, Livingston, Montana 59047, and its telephone number is (406) 222- 1981.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $16.2 million to $22.0 million, or up to $25.3 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has received
OTS approval to purchase all of the capital stock of the Association to be
issued in the Conversion in exchange for 50% of the net proceeds of the
Offerings. This will result in the Holding Company retaining approximately
$8.1 million to $11.0 million of net proceeds, or up to $12.7 million if the
Estimated Valuation Range is increased by 15%, and the Association receiving
an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Association's capital and will support the expansion of the
Association's existing business activities. The Association will use the funds
contributed to it for general corporate purposes, including, initially, local
lending or investment in securities of the type currently held by the
Association.
In connection with the Conversion and the establishment of the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to purchase 8% of
the shares of Common Stock sold in the Conversion. The Holding Company's loan to
fund the ESOP may range from $1.3 million to $1.8 million based on the sale of
133,280 shares to the ESOP (at the minimum of the Estimated Valuation Range) and
180,320 shares (at the maximum of the Estimated Valuation Range), respectively,
at $10.00 per share. If 15% above the maximum of the Estimated Valuation Range,
or 2,592,100 shares, are sold in the Conversion, the Holding Company's loan to
the ESOP would be approximately $2.1 million. It is anticipated that the ESOP
loan will have a 10-year term with interest payable at the prime rate as
published in The Wall Street Journal on the closing date of the Conversion. The
loan will be repaid principally from the Association's contributions to the ESOP
and from any dividends paid on the Common Stock.
The remaining net proceeds retained by the Holding Company initially will
be invested primarily in securities of the type currently held by the
Association. Such proceeds will be available for additional contributions to the
Association in the form of debt or equity, to support future diversification or
acquisition activities, as a source of dividends to the stockholders of the
Holding Company and for future repurchases of Common Stock to the extent
permitted under Delaware law and federal regulations. Currently, there are no
specific plans, arrangements, agreements or understandings, written or oral,
regarding any diversification or acquisition activities.
Upon consummation of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Since the Holding Company has not yet issued stock, there is
currently insufficient information upon which an intention to repurchase stock
could be based. The facts and circumstances upon which the Board of Directors
may determine to repurchase stock in the future may include but are not limited
(i) to market and economic factors such as the price at which the stock is
trading in the
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market, the volume of trading, the attractiveness of other investment
alternatives in terms of the rate of return and risk involved in the investment,
the ability to increase the book value and/or earnings per share of the
remaining outstanding shares, and the ability to improve the Holding Company's
return on equity; (ii) to the avoidance of dilution to stockholders by not
having to issue additional shares to cover the exercise of stock options or to
fund employee stock benefit plans; and (iii) to any other circumstances in which
repurchases would be in the best interests of the Holding Company and its
stockholders. Any stock repurchases will be subject to a determination by the
Board of Directors that both the Holding Company and the Association will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases and that capital will be adequate, taking into account, among other
things, the level of non-performing and other risk assets, the Holding Company's
and the Association's current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. See "THE CONVERSION -- Restrictions on Repurchase of Stock."
The Holding Company has committed to the OTS not to make any tax-free
distributions to stockholders in the form of a return of capital, or take any
action in contemplation of any such distributions, within the first year
following the consummation of the Conversion.
DIVIDEND POLICY
General
The Board of Directors of the Holding Company will consider a dividend
policy following the consummation of the Conversion. Declarations or payments of
dividends will be subject to determination by the Holding Company's Board of
Directors, which will take into account the amount of the net proceeds retained
by the Holding Company, the Holding Company's financial condition, results of
operations, tax considerations, capital requirements, industry standards,
economic conditions and other factors, including regulatory restrictions that
affect the payment of dividends by the Association to the Holding Company as
discussed below. Under Delaware law, dividends may be paid either out of
surplus, or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or preceding fiscal year. In order to pay
cash dividends, however, the Holding Company must have available cash either
from the net proceeds raised in the Offerings and retained by the Holding
Company, dividends received from the Association or earnings on Holding Company
assets. No assurances can be given that any dividends will be declared or, if
declared, what the amount of dividends will be or whether such dividends, once
declared, will continue.
Regulatory Restrictions
Dividends from the Holding Company will depend, in part, upon receipt of
dividends from the Association because the Holding Company will have no initial
sources of income other than dividends from the Association and earnings from
the investment of the net proceeds from the Offerings retained by the Holding
Company. OTS regulations require the Association to give the OTS 30 days'
advance notice of any proposed declaration of dividends to the Holding Company,
and the OTS has the authority under its supervisory powers to prohibit the
payment of dividends to the Holding Company. The OTS imposes certain limitations
on the payment of dividends from the Association to the Holding Company which
utilizes a three-tiered approach that permits various levels of distributions
based primarily upon a savings association's capital level. In addition, the
Association may not declare or pay a cash dividend on its capital stock if the
effect thereof would be to reduce the regulatory capital of the Association
below the amount required for the liquidation account to be established pursuant
to the Plan of Conversion. See "REGULATION -- Dividend Limitations," "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and Borrowers of
the Association -- Liquidation Account" and Note 17 of Notes to the Consolidated
Financial Statements included elsewhere herein.
The Association currently meets the criteria to be designated a Tier 1
association, as hereinafter defined, and consequently could at its option (after
prior notice to and no objection made by the OTS) distribute up to the higher
of: (i) 100% of its net income during the calendar year plus 50% of its surplus
capital ratio at the beginning
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of the calendar year less any distributions previously paid during the year or
(ii) 75% of its net income over the most recent four-quarter period less any
distributions previously paid during such period.
Tax Considerations
In addition to the foregoing, retained earnings of the Association
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Association to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Association at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. See
"TAXATION -- Federal Taxation" and Note 9 of Notes to the Consolidated Financial
Statements included elsewhere herein. The Holding Company does not contemplate
any distribution by the Association that would result in a recapture of the
Association's bad debt reserve or create the above-mentioned federal tax
liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Although the Holding Company
has received conditional approval to list the Common Stock on the Nasdaq
National Market, there can be no assurance that the Holding Company will meet
Nasdaq National Market listing requirements, which include a minimum market
capitalization, at least two market makers and a minimum number of record
holders. Making a market involves maintaining bid and ask quotations and being
able, as principal, to effect transactions in reasonable quantities at those
quoted prices, subject to various securities laws and other regulatory
requirements. Keefe, Bruyette has indicated its intention to act as a market
maker in the Common Stock following the consummation of the Conversion,
depending on trading volume and subject to compliance with applicable laws and
regulatory requirements. Furthermore, Webb has agreed to use its best efforts to
assist the Holding Company in obtaining at least one additional market maker for
the Common Stock. There can be no assurance there will be two or more market
makers for the Common Stock. There can be no assurance that purchasers will be
able to sell their shares at or above the Purchase Price.
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CAPITALIZATION
The following table presents the historical capitalization of the
Association at June 30, 1996, and the pro forma consolidated capitalization of
the Holding Company after giving effect to the assumptions set forth under "PRO
FORMA DATA," based on the sale of the number of shares of Common Stock set forth
below in the Conversion at the minimum, midpoint and maximum of the Estimated
Valuation Range, and based on the sale of 2,592,100 shares (representing the
shares that would be issued in the Conversion after giving effect to an
additional 15% increase in the maximum valuation in the Estimated Valuation
Range, subject to receipt of an updated appraisal confirming such valuation and
OTS approval). A change in the number of shares to be issued in the Conversion
may materially affect pro forma consolidated capitalization.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
1,666,000 1,960,000 2,254,000 2,592,100
Shares at Shares at Shares at Shares at
Association $10.00 $10.00 $10.00 $10.00
Historical Per Share(1) Per Share(1) Per Share(1) Per Share(2)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3) $68,548 $68,548 $68,548 $68,548 $68,548
FHLB advances 1,500 1,500 1,500 1,500 1,500
ESOP borrowings(4) -- -- -- -- --
Total deposits and
borrowed funds $70,048 $70,048 $70,048 $70,048 $70,048
Stockholders' equity:
Preferred stock:
250,000 shares, $0.01
par value per share,
authorized; none to be issued
or outstanding $ -- $ -- $ -- $ -- $ --
Common Stock:
4,000,000 shares, $0.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding as
reflected(5) -- 17 20 23 26
Additional paid-in capital -- 16,098 18,995 21,898 25,276
Retained earinings(7) 15,620 15,620 15,620 15,620 15,620
Unrealized gain 256 256 256 256 256
Less:
Common Stock acquired
by ESOP(4) -- 1,333 1,568 1,803 2,074
Common Stock to be acquired
by MRP(6) -- 666 784 902 1,037
Total stockholders' equity 15,876 29,992 32,539 35,092 38,067
</TABLE>
(footnotes on following page)
11
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---------------
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or performance of the
Association or changes in market conditions or general financial and
economic conditions, or the issuance of shares under the Stock Option Plan.
(2) Represents the pro forma capitalization of the Holding Company in the
event the aggregate number of shares of Common Stock issued in the
Conversion is 15% above the maximum of the Estimated Valuation Range. See
"PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) Assumes that 8% of the Common Stock issued in the Conversion will be
acquired by the ESOP in the Conversion with funds borrowed from the Holding
Company. In accordance with generally accepted accounting principles
("GAAP"), the amount of Common Stock purchased by the ESOP represents
unearned compensation and is, accordingly, reflected as a reduction of
capital. Since the funds are borrowed from the Holding Company, the
borrowing will be eliminated in consolidation and no liability will be
reflected in the consolidated financial statements of the Holding Company.
See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee Stock Ownership
Plan."
(5) The Association's authorized capital will consist solely of 1,000 shares of
common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with the
Conversion.
(6) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed MRP, of a number of shares equal to 4% of the shares of Common
Stock issued in the Conversion at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. The shares assumed to
be purchased in the open market are reflected as a reduction of
stockholders' equity. The issuance of an additional 4% of the shares of
Common Stock for the MRP from authorized but unissued shares of Holding
Company Common Stock would dilute the ownership interest of stockholders
by 3.85%. See "RISK FACTORS -- Dilutive Effect of Benefit Programs,"
"PRO FORMA DATA" and "MANAGEMENT OF THE ASSOCIATION -- Benefits --
Management Recognition Plan." The MRP is subject to stockholder approval
and is expected to be presented to stockholders at a meeting to be held
no earlier than six months following consummation of the Conversion.
(7) Retained earnings are substantially restricted by applicable regulatory
capital requirements and includes unrealized gain on securities available-
for-sale, net of taxes. Additionally, the Association will be prohibited
from paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established for the
benefit of the Association's Eligible Account Holders and Supplemental
Eligible Account Holders at the time of the Conversion and adjusted
downward thereafter as such account holders reduce their balances or cease
to be depositors. See "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Association -- Liquidation
Account."
12
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Association's historical and pro forma
capital position relative to its capital requirements at June 30, 1996. The
amount of capital infused into the Association for purposes of the following
table is 50% of the net proceeds. For a discussion of the assumptions underlying
the pro forma capital calculations presented below, see "USE OF PROCEEDS,"
"CAPITALIZATION" and "PRO FORMA DATA." The definitions of the terms used in the
table are those provided in the capital regulations issued by the OTS. For a
discussion of the capital standards applicable to the Association, see
"REGULATION -- Federal Regulation of Savings Associations -- Capital
Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT JUNE 30, 1996 (6)
15% above
Minimum of Estimated Midpoint of Estimated Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
1,666,000 Shares 1,960,000 Shares 2,254,000 Shares 2,592,100 Shares
June 30, 1996 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
Percent of Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted Adjusted
Total Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital $15,876 18.5% $21,934 23.5% $23,032 24.3% $24,132 25.2% $25,416 26.1%
Tangible capital(2) $15,125 17.6% $21,183 22.7% $22,281 23.6% $23,381 24.4% $24,665 25.3%
Tangible capital
requirement 1,288 1.5 1,399 1.5 1,419 1.5 1,439 1.5 1,462 1.5
Excess $13,837 16.1% $19,784 21.2% $20,862 22.1% $21,942 22.9% $23,203 23.8%
Core capital(2) $15,125 17.6% $21,183 22.7% $22,281 23.6% $23,381 24.4% $24,665 25.3%
Core capital
requirement(3) 2,576 3.0 2,798 3.0 2,889 3.0 2,879 3.0 2,925 3.0
Excess $12,549 14.6% $18,385 19.7% $19,442 20.6% $20,502 21.4% $21,740 22.3%
Risk-based capital(4)(5) $15,305 46.7% $21,364 62.3% $22,461 65.0% $23,561 67.7% $24,845 70.8%
Risk-based
capital requirement 2,624 8.0 2,742 8.0 2,763 8.0 2,784 8.0 2,809 8.0
Excess $12,681 38.7% $18,622 54.3% $19,698 57.0% $20,777 59.7% $22,036 62.8%
</TABLE>
-------------------
(1) Based upon adjusted total assets for purposes of the tangible capital and
core capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement.
(2) In accordance with OTS policy, tangible capital and core capital are both
less than GAAP capital at June 30, 1996 as a result of the exclusion of
unrealized gain on securities available-for-sale, net of taxes, of
$256,000 and the investment in Dime Service Corporation of $495,000. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Impact of New Accounting Pronouncements and Regulatory
Policies -- Accounting for Certain Investments in Debt and Equity
Securities."
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(4) Percentage represents total core and supplementary capital divided by total
risk-weighted assets.
(5) Assumes reinvestment of net proceeds into assets with a risk weighting
equal to 20%.
(6) The pro forma data has been adjusted to reflect reductions in capital that
would result from an assumed 8% purchase of Common Stock by the ESOP and a
4% purchase of Common Stock by the Association for the MRP at June 30,
1996.
13
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Association, as converted, based upon an independent valuation. The Estimated
Valuation Range as of September 6, 1996 is from a minimum of $16.7 million to a
maximum of $22.5 million with a midpoint of $19.6 million or, at a price per
share of $10.00, a minimum number of shares of 1,666,000, a maximum number of
shares of 2,254,000 and a midpoint number of shares of 1,960,000. The actual net
proceeds from the sale of the Common Stock cannot be determined until the
Conversion is consummated. However, net proceeds set forth on the following
table are based upon the following assumptions: (i) Webb will receive a
management fee of $25,000, and a success fee of 1.5% of the aggregate Actual
Purchase Price of the shares of Common Stock sold in the Offerings excluding
shares purchased by the ESOP and officers and directors of the Association (such
success fee not to exceed 1.5% of the gross offering proceeds at the midpoint of
the Estimated Valuation Range, or $294,000); (ii) none of the shares will be
sold in the Syndicated Community Offering; and (iii) Conversion expenses will
total approximately $545,000, $585,000, $619,000 and $619,000 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. Actual expenses may vary from this estimate, and the fees paid
will depend upon the percentages and total number of shares sold in the
Offerings and other factors.
The pro forma consolidated net income of the Association for the year
ended June 30, 1996 has been calculated as if the Conversion had been
consummated at the beginning of such period and the estimated net proceeds
received by the Holding Company and the Association had been invested at 5.78%
at the beginning of the period, which represents the one-year U.S. Treasury Bill
yield as of June 30, 1996. While OTS regulations provide for the use of a yield
representing the arithmetic average of the weighted average yield earned by the
Association on its interest-earning assets and the rates paid on its deposits,
the Holding Company believes the U.S. Treasury Bill yield represents a more
realistic yield on the Association's investments. As discussed under "USE OF
PROCEEDS," the Holding Company expects to retain 50% of the net proceeds of the
Offerings from which it will fund the ESOP loan. Pro forma after-tax yields of
3.81% are used for both the Holding Company and the Association for the year
ended June 30, 1996, after giving effect to an incremental rate of 34%.
Historical and pro forma income per share amounts have been calculated by
dividing historical and pro forma amounts by the number of shares of Common
Stock indicated in the table. Pro forma stockholders' equity at June 30, 1996
has been calculated as if the Common Stock had been sold at June 30, 1996.
Historical and pro forma stockholders' equity per share amounts have been
calculated by dividing historical and pro forma amounts by the individual number
of shares of Common Stock issued. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on net proceeds.
The following tables summarize the historical net income and total equity
of the Association and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated, based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range. No effect has
been given (i) to the shares to be reserved for issuance under the Holding
Company's Stock Option Plan, which is expected to be presented to stockholders
for approval at a meeting to be held no earlier than six months following
consummation of the Conversion; (ii) to withdrawals from deposit accounts for
the purpose of purchasing Common Stock in the Conversion; (iii) to the issuance
of shares from authorized but unissued shares to the MRP, which is expected to
be presented to stockholders for approval at a meeting to be held no earlier
than six months following consummation of the Conversion; or (iv) to the
establishment of a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders. See "MANAGEMENT OF THE
ASSOCIATION -- Benefits -- 1996 Stock Option Plan" and "THE CONVERSION -- Stock
Pricing and Number of Shares Issued." Shares of Common Stock may be purchased
with funds on deposit at the Association, which will reduce deposits by the
amounts of such purchases. Accordingly, the net amount of funds available for
investment will be reduced to the extent shares are purchased with funds on
deposit.
The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Stockholders' equity represents the difference between the stated amounts of
consolidated assets and liabilities of the Holding Company computed in
accordance with GAAP. Stockholders' equity has not been increased or decreased
to reflect the difference between the carrying value of assets and liabilities
and market value. Stockholders' equity is not intended to represent fair market
value nor does it represent amounts that would be available for distribution to
stockholders in the event of liquidation.
14
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1996
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
1,666,000 1,960,000 2,254,000 2,592,100
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (1)
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds $16,660 $19,600 $22,540 $25,921
Less:
Estimated offering expenses (545) (585) (619) (619)
Estimated net proceeds 16,115 19,015 21,921 25,302
Less:
Common Stock acquired by the ESOP (1,333) (1,568) (1,803) (2,074)
Common Stock to be acquired by MRP (666) (784) (902) (1,037)
Estimated net cash proceeds $14,116 $16,663 $19,216 $22,191
Consolidated net income:
Historical $ 632 $ 632 $ 632 $ 632
Pro forma net income on proceeds(2) 538 636 733 847
Pro forma ESOP adjustments(3) (88) (103) (119) (137)
Pro forma MRP adjustments(4) (88) (103) (119) (137)
Pro forma net income(10) $ 994 $1,062 $ 1,127 $ 1,205
Consolidated net income per share(5)(6):
Historical $ 0.41 $ 0.35 $ 0.30 $ 0.26
Pro forma net income on proceeds 0.35 0.35 0.35 0.35
Pro forma ESOP adjustments(3) (0.06) (0.06) (0.06) (0.06)
Pro forma MRP adjustments(4) (0.06) (0.06) (0.06) (0.06)
Pro forma net income per share(10) $ 0.64 $ 0.58 $ 0.53 $ 0.49
Consolidated stockholders' equity(7):
Historical $ 15,876 $15,876 $15,876 $ 15,876
Estimated net Conversion proceeds 16,115 19,015 21,921 25,302
Less:
Common Stock acquired by ESOP (1,333) (1,568) (1,803) (2,074)
Common Stock to be acquired by MRP(4) (666) (784) (902) (1,037)
Pro forma(7) $29,992 $32,539 $35,092 $ 38,067
Consolidated stockholders' equity per
share(6)(8):
Historical(6) $ 9.53 $ 8.10 $ 7.04 $ 6.12
Estimated net Conversion proceeds 9.67 9.70 9.73 9.76
Common Stock acquired by ESOP (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by MRP(4) (0.40) (0.40) (0.40) (0.40)
Pro forma stockholders' equity
per share(9)(11) $ 18.00 $16.60 $ 15.57 $ 14.68
Purchase Price as a percentage of pro forma
stockholders' equity per share 55.56% 60.24% 64.23% 68.12%
Purchase price to pro forma income per share
(P/E ratio) 15.63 x 17.24 x 18.87 x 20.41 x
Shares used in calculating income
per share 1,539,384 1,811,040 2,082,596 2,395,100
</TABLE>
15
<PAGE>
-------------------
(1) Gives effect to the sale of an additional 338,100 shares in
the Conversion, which may be issued as a result of an increase
in the pro forma market value of the Holding Company and the
Association as converted, without the resolicitation of
subscribers or any right of cancellation. The issuance of such
additional shares will be conditioned on a determination of
the independent appraiser that such issuance is compatible
with its determination of the estimated pro forma market value
of the Holding Company and the Association as converted. See
"THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued."
(2) No effect has been given to withdrawals from accounts for the
purpose of purchasing Common Stock in the Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in
the Conversion will be purchased by the ESOP. The funds used
to acquire such shares will be borrowed by the ESOP (at an
interest rate equal to the prime rate as published in The Wall
Street Journal on the closing date of the Conversion, which
rate is currently 8.25%), from the net proceeds from the
Conversion retained by the Holding Company. The amount of this
borrowing has been reflected as a reduction from gross
proceeds to determine estimated net proceeds. The Association
intends to make contributions to the ESOP in amounts at least
equal to the principal and interest requirement of the debt.
The Association's payment of the ESOP debt is based upon
equal installments of principal over a 10-year period,
assuming a combined federal and state tax rate of 34%.
Interest income earned by the Holding Company on the ESOP debt
offsets the interest paid by the Association on the ESOP loan.
No reinvestment is assumed on proceeds contributed to fund the
ESOP. The ESOP expense reflects recognition of compensation
expense based upon shares committed to be released and the
exclusion of unallocated shares from income per share
computations. The valuation of shares committed to be released
would be based upon the average market value of the shares
during the year, which, for purposes of this calculation,
was assumed to be equal to the $10.00 per share Purchase
Price. See "MANAGEMENT OF THE ASSOCIATION -- Benefits --
Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed
that the required stockholder approval has been received and
that the shares were acquired by the MRP at the beginning of
the period presented in open market purchases at the Purchase
Price. The issuance of authorized but unissued shares of the
Common Stock at the date of the consummation of the Conversion
instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.9% and
pro forma net income per share would be $0.62, $0.56, $0.52
and $0.48 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ended
June 30, 1996, respectively, and pro forma stockholders'
equity per share would be $17.31, $15.96, $14.97 and $14.12
at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range at June 30, 1996,
respectively. Shares issued under the MRP vest 20% per year
and, for purposes of this table, compensation expense is
recognized on a straight-line basis over each vesting period.
In the event the fair market value per share is greater than
$10.00 per share on the date of stockholder approval of the
MRP, total MRP expense would increase. The total estimated
MRP expense was multiplied by 20% (the total percent of
shares for which expense is recognized in the first year)
resulting in pre-tax MRP expense of $133,280, $156,800,
$180,320 and $207,368 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for
the year ended June 30, 1996, respectively. No effect has
been given to the shares reserved for issuance under the
proposed Stock Option Plan. If stockholders approve the Stock
Option Plan following the Conversion, the Holding Company
will have reserved for issuance under the Stock Option Plan
authorized but unissued shares of Common Stock representing
an amount of shares equal to 10% of the shares sold in the
Conversion. If all of the options were to be exercised
utilizing these authorized but unissued shares rather than
treasury shares (which could be acquired), the voting
interests of existing stockholders would be diluted by
approximately 9.1%. See "MANAGEMENT OF THE ASSOCIATION --
Benefits -- 1996 Stock Option Plan" and "-- Management
Recognition Plan" and "RISK FACTORS -- Dilutive Effect of
Benefit Programs."
(5) Net income per share amounts are based upon
the shares of Common Stock sold in the Conversion less the
average number of shares assumed to be held by the ESOP not
committed to be released during the first year following the
Conversion.
16
<PAGE>
(6) Historical per share amounts have been computed as if the
shares of Common Stock expected to be issued in the Conversion
had been outstanding at the beginning of the period or on the
date shown, but without any adjustment of historical net
income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares
in the Conversion, the additional ESOP expense or the proposed
MRP expense, as described above.
(7) "Consolidated stockholders' equity" represents the difference
between the stated amounts of the Association's assets and
liabilities. The amounts shown do not reflect the liquidation
account that will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in
the Conversion, or the federal income tax consequences of the
restoration to income of the Association's special bad debt
reserves for income tax purposes, which would be required in
the unlikely event of liquidation. See "THE CONVERSION --
Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association" and "TAXATION." The amounts
shown for consolidated stockholders' equity do not represent
fair market values or amounts distributable to stockholders
in the unlikely event of liquidation.
(8) Consolidated stockholders' equity per share amounts are based
upon shares outstanding of 1,666,000, 1,960,000, 2,254,000
and 2,592,000 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range, respectively.
(9) Neither represents, nor is intended to represent, possible
future price appreciation or depreciation of the Common Stock.
(10) Pro forma consolidated net income per share would be $0.42,
$0.39, $0.37 and $0.35 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the
year ended June 30, 1996, respectively, assuming the
implementation of the one-time SAIF assessment based on the
assumptions discussed under "RISK FACTORS -- Recapitalization
of SAIF and its Impact on SAIF Premiums" occurred on June 30,
1996.
(11) Assuming implementation of the proposed SAIF assessment on
June 30, 1996 based on the assumptions discussed under "RISK
FACTORS -- Recapitalization of SAIF and its Impact on SAIF
Premiums," pro forma consolidated stockholders' equity
per share would be $17.80, $16.43, $15.42 and $14.55 at
the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range at June 30, 1996,
respectively.
17
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Empire Federal Savings
and Loan Association and Subsidiary for the fiscal years ended June 30, 1996 and
1995 have been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon appears elsewhere in this Prospectus. These statements should be
read in conjunction with the Consolidated Financial Statements and related Notes
included elsewhere herein.
Year Ended June 30,
1996 1995
Interest income:
Loans receivable $3,440,793 $3,408,170
Mortgage-backed securities 2,516,854 2,530,329
Investment securities 214,363 142,388
Other 131,543 223,905
Total interest income 6,303,553 6,304,792
Interest expense:
Deposits 3,214,259 2,793,293
Advances from Federal
Home Loan Bank 95,444 144,768
Total interest expense 3,309,703 2,938,061
Net interest income 2,993,850 3,366,731
Provision for loan losses 55,000 --
Net interest income after
provision for loan losses 2,938,850 3,366,731
Non-interest income:
Insurance commission
income 688,166 691,196
Loan origination fees and
service charges 145,456 129,425
Other 45,100 36,247
Total non-interest income 878,722 856,868
Non-interest expense:
Compensation and benefits 1,614,601 1,542,123
Occupancy and equipment 340,114 264,333
Deposit insurance premiums 185,287 225,663
Data processing services 105,986 86,125
Other 540,427 564,794
Total non-interest expense 2,786,415 2,683,038
Income before income taxes 1,031,157 1,540,561
Income taxes 399,480 588,623
Net income $ 631,677 $ 951,938
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Association. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto and the other sections contained in this
Prospectus.
Operating Strategy
The business of the Association consists principally of attracting
deposits from the general public and using such deposits to originate mortgage
loans secured primarily by one- to four-family residences. The Association also
invests in interest bearing deposits, investment grade federal agency securities
and mortgage-backed securities. The Association plans to continue to fund its
assets primarily with deposits, although FHLB advances have been used as a
supplemental source of funds.
The Association's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Association's profitability is
also affected by the level of other income and expenses. Other income consists
of service charges on negotiable order of withdrawal ("NOW") accounts, late
charges on loans and other fees, proceeds from the sale of available-for-sale
securities, insurance commissions, and net real estate owned income (expense).
Other expenses include compensation and employee benefits, occupancy expenses,
deposit insurance premiums, equipment and data servicing expenses, professional
fees and other operating costs. The Association's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
policies concerning monetary and fiscal affairs, housing and financial
institutions and the attendant actions of the regulatory authorities.
The Association's strategy is to operate as a conservative,
well-capitalized, profitable institution dedicated to financing home ownership
and other consumer needs and to provide quality service to all customers. The
Association believes that it has successfully implemented its strategy by (i)
maintaining strong capital levels, (ii) maintaining effective control over
operating expenses to attempt to achieve profitability under differing interest
rate scenarios, (iii) emphasizing local loan originations, and (iv) emphasizing
high-quality customer service with a competitive fee structure.
Financial Condition
Total assets increased by approximately $1.3 million, or 1.5%, from $85.5
million at June 30, 1995 to $86.8 million at June 30, 1996. This increase was
primarily attributable to an increase in net loans receivable.
The composition of the consolidated statements of financial condition was
not materially affected by market conditions between June 30, 1996 and June 30,
1995. Net loans increased $2.5 million, or 6.2%, as a result of increased
originations of one- to four-family and construction loans. Mortgage-backed
securities decreased by $1.7 million during this period primarily as the result
of maturities of mortgage-backed securities of $7.4 million that were partially
offset by purchases of $5.7 million. Premises and equipment increased $177,000
primarily as a result of the remodeling of the Bozeman branch office during
fiscal 1996.
Deposits increased $1.5 million, or 2.2%, to $68.6 million at June 30,
1996 from $67.1 million at June 30, 1995. NOW, regular savings and money market
accounts increased only slightly while time deposits increased by
19
<PAGE>
approximately $1.4 million. The weighted average rate on deposits increased from
4.05% during fiscal year 1995 to 4.68% for fiscal year 1996.
Results of Operations
The operating results of the Association depend primarily on its net
interest income. The Association's net interest income is determined by its
interest rate spread, which is the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities
and the degree of mismatch in the maturity and repricing characteristics of its
interest-earning assets and interest-bearing liabilities. The Association's net
earnings are also affected by the establishment of provisions for loan losses
and the level of its other non-interest income, including insurance commission
income and deposit service charges, as well as its other expenses and income tax
provisions.
Comparison of Results of Operations for the Years Ended June 30, 1996 and 1995
General. Market interest rates are generally measured by the yields on
U.S. Treasury obligations. The yields on the one-year U.S. Treasury Bill and the
30-year U.S. Treasury Bond are the respective benchmarks for short-term and
long-term market interest rates. During the fiscal year ended June 30, 1995, the
yield curve flattened (i.e. short-term and long-term rates converged) as the
yield on the one-year U.S. Treasury Bill increased from 4.22% at June 30, 1994
to 5.57% at June 30, 1995, while the yield on the 30-year U.S. Treasury Bond
decreased from 7.61% at June 30, 1994 to 6.63% at June 30, 1995. During the
fiscal year ended June 30, 1996, the yield curve steepened (i.e. short-term and
long-term rates diverged) as the yield on the one-year U.S. Treasury Bill
decreased to 5.16% at June 30, 1996, while the yield on the 30-year U.S.
Treasury Bond increased to 6.87% at June 30, 1996.
Net Income. Net income decreased $320,000, or 33.6%, to $632,000 for
fiscal 1996 from $952,000 for fiscal 1995. The decline in income was primarily
attributable to an increase in the Association's cost of funds from 4.10% during
the year ended June 30, 1995 to 4.71% for the year ended June 30, 1996. The
average balance of interest-bearing liabilities decreased slightly during this
period from $71.6 million during fiscal 1995 to $70.3 million during fiscal
1996.
Net Interest Income. Net interest income decreased $373,000, or 11.7%, to
$2.9 million for 1996 from $3.4 million for 1995. The decrease in net interest
income primarily reflected a 53 basis point decrease in the interest rate spread
to 2.80% for fiscal 1996 from 3.33% for fiscal 1995.
Interest Income. Total interest income was $6.3 million for both fiscal
1996 and 1995. Interest income from loans receivable decreased $33,000, or 9.6%.
The decrease was primarily attributable to a 7 basis point decrease in the
average yield on loans receivable from 8.51% to 8.44%. The decline in the
average yield on loans receivable was partially offset by an increase in the
average balance of loans receivable from $40.1 million during fiscal 1995 to
$40.8 million during fiscal 1996 as loan originations increased to $12.4 million
during fiscal 1996 compared to loan originations of $4.5 million during fiscal
1995.
Interest income from mortgage-backed securities was $2.5 million during
both periods. The average balance of mortgage-backed securities declined from
$38.1 million during fiscal 1995 to $37.1 million during fiscal 1996 as
principal repayments exceeded purchases. This was offset, however, by an
increase in the yield on mortgage-backed securities from 6.65% during fiscal
1995 to 6.78% during fiscal 1996.
Interest Expense. Interest expense on deposits increased $421,000 to $3.2
million for 1996 from $2.8 million for 1995. The increase is primarily
attributable to an increase in the average cost of deposits which increased from
4.05% during fiscal 1995 to 4.68% during fiscal 1996 which more than offset the
decline in the average balance of deposits. The increase in the cost of deposits
was primarily attributable to an increase in rates paid on certificates of
deposit to meet local competition.
20
<PAGE>
The Association utilized FHLB advances to purchase mortgage-backed
securities and to provide an additional source of funds for its lending
activities. During this period the average balance of short term borrowings
decreased $1.1 million from $2.7 million during fiscal 1995 to $1.6 million
during 1996 as traditional deposits were utilized to fund lending activities and
mortgage-backed securities purchases. As a result, the cost of FHLB advances
decreased 34.1% from $145,000 during fiscal 1995 to $95,000 during fiscal 1996.
Provision for Loan Losses. The provision for loan losses for 1996 was
$55,000 compared to no provision for 1995. The increase resulted in part from
management's desire to increase loan loss reserves based on management's
assessment of its loan portfolio (increase in total mortgage loans outstanding)
and the general economy (continued slow economic growth). Management's periodic
evaluation of the adequacy of the allowance is based on factors such as the
Association's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, current and prospective economic
conditions, peer group comparisons, and independent appraisals. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance for loan losses. Such agencies
may require the Association to provide additions to the allowance based upon
judgments different from management. Assessment of the adequacy of the allowance
for credit losses involves subjective judgements regarding future events, and
thus, there can be no assurance that additional provisions for credit losses
will not be required in future periods. Although management uses the best
information available, future adjustments to the allowance may be necessary due
to economic, operating, regulatory and other conditions that may be beyond the
Association's control. Any increase or decrease in the provision for loan losses
has a corresponding negative or positive effect on net income. At June 30, 1996,
the allowance represented 0.46% of loans receivable as compared to 0.36% of
loans receivable at June 30, 1995.
Non-Interest Income. Non-interest income increased $22,000, or 2.6%, in
fiscal 1996 as compared to fiscal 1995 primarily as the result of a $16,000, or
12.4%, increase in loan origination fees as a result of the increase in the
volume of loan originations and loan prepayments in fiscal 1996 compared to
fiscal 1995.
Insurance commissions that the Association receives from its wholly-owned
subsidiary are the largest component of its non-interest income. The Association
received income from insurance commissions of $688,000 and $691,000 during
fiscal 1996 and 1995, respectively.
Non-Interest Expense. Total non-interest expense increased $103,000, or
3.8%, for 1996 compared to 1995. This increase was primarily the result of a
$72,000, or 4.7%, increase in compensation and benefits and a $76,000, or 28.7%,
increase in occupancy and equipment expense caused primarily by additional
depreciation expense on new equipment and furniture related to the remodeling of
the Bozeman branch, repairs to an elevator and other maintenance costs. Data
processing expenses increased $20,000, or 23.1%. Other non-interest expense
items remained relatively stable.
Included in non-interest expense are direct costs (compensation and
benefits, occupancy and equipment, and other expenses) attributable to the
operations of the Association's wholly-owned subsidiary, Dime Insurance Agency.
Such direct costs totalled $638,000 and $617,000 for the fiscal years ended June
30, 1996 and 1995, respectively.
The Association expects to incur increased expenses following the
Conversion as a result of the costs associated with being a public company and
the ESOP and other stock benefit plans, if adopted.
Income Taxes. Income taxes declined $189,000 from 1995 to 1996 as a result
of the decline in income before income taxes. The effective combined Federal and
state tax rate was 38.74% during 1996 and 38.21% during 1995.
21
<PAGE>
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
<TABLE>
<CAPTION>
Year Ended June 30,
At June 30, --------------------------------------------------------------------
1996 1996 1995
---------- ------------------------------------------ -------------------------
Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost Balance Interest Cost
----- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) 8.16% $40,766 $3,441 8.44% $40,069 $3,408 8.51%
Mortgage-backed securities 6.86 37,097 2,517 6.78 38,064 2,531 6.65
Investment securities 5.28 4,020 214 5.32 3,705 142 3.83
Other interest-earning assets(2) 6.18 2,044 132 6.46 3,044 224 7.36
----- ------- ------ ------- ------
Total interest-earning assets 7.42 83,927 6,304 7.51 84,882 6,305 7.43
Non-interest-earning assets 3,567 3,196
------- -------
Total assets $87,494 $88,078
======= =======
Interest-bearing liabilities:
Deposits 4.64 $68,739 3,214 4.68 $68,974 2,793 4.05
Other liabilities 5.98 1,595 96 6.02 2,668 145 5.43
----- ------- ------- ------- ------
Total interest-bearing liabilities 4.67 70,334 3,310 4.71 71,642 2,938 4.10
------ ------
Non-interest-bearing liabilities 1,318 1,400
------- -------
Total liabilities 71,652 73,042
Retained earnings 15,842 15,036
------- -------
Total liabilities and retained earnings $87,494 $88,078
======= =======
Net interest income $2,994 $3,366
====== ======
Interest rate spread(3) 2.75 2.80% 3.33%
==== ====
Net yield on interest earning assets(4) 3.57% 3.97%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.33% 118.48%
====== ======
</TABLE>
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and
dividends on FHLB stock.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
22
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes
on net interest income of the Association. Information is provided with respect
to (i) effects on net interest income attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributed to the combined impact of rate
and volume have been allocated proportionately to the changes due to volume and
the changes due to rate.
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30,
1996 Compared to Year 1995 Compared to Year
Ended June 30, 1995 Ended June 30, 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $ 59 $ (28) $ 2 $ 33 $ (148) $ (54) $ (2) $ (204)
Mortgage-backed securities............ (64) 49 1 (14) 181 (18) -- 163
Investment securities................. 12 55 5 72 98 (60) (41) (3)
Other interest-earning assets......... (74) (27) 9 (92) 17 46 14 77
------- ------- ----- ------- ----- ----- ----- -----
Total interest-earning assets...... (67) (49) 17 (1) 148 (86) (29) 33
------- ------- ------ ------ ----- ------ ------ -----
Interest expense:
Savings accounts...................... (6) 428 (1) 421 74 228 5 307
Other liabilities..................... (58) 15 (6) (49) (13) 3 -- (10)
------- ------ ------- ------- ------ ----- ------ ------
Total interest-bearing liabilities. (64) 443 (7) 372 61 231 5 297
------- ------ ------- ------ ----- ----- ----- -----
Net change in net interest income...... $ (3) $(394) $ 24 $(373) $ 87 $(317) $(34) $264
===== ====== ==== ====== ==== ====== ===== ====
</TABLE>
23
<PAGE>
Asset and Liability Management and Interest Rate Risk
General. The ability to maximize net interest income depends largely upon
achieving a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would result in a decrease in net
interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
The Association has perceived its market niche to be that of a traditional
thrift lender that originates fixed rate residential loans for its portfolio and
purchases fixed rate United States agency investment securities and
mortgage-backed securities to supplement its lending activities. The Association
uses its capital position to absorb the adverse consequences of the increased
interest rate risk associated with this strategy. As an integral part of this
strategy, the Association has historically concentrated its lending activity on
the origination of long-term, fixed-rate, residential one- to four-family
mortgage loans and commercial real estate and multi-family loans. As of June 30,
1996, 83.1% of the Association's total loans, were fixed rate loans and 86.2% of
its investments and mortgage-backed securities had fixed interest rates.
The mismatch between maturities and interest rate sensitivities of balance
sheet items results in interest rate risk. The Association has a high level of
interest rate risk, compared to many similar sized thrift institutions, as a
result of its policies to make fixed-rate, residential one- to four-family real
estate loans and to purchase fixed rate investment and mortgage-backed
securities, which are longer term in nature than the short-term characteristics
of its liabilities for customer deposit accounts. See "RISK FACTORS -- Above
Average Interest Rate Risk Associated With Fixed-Rate Loan and Mortgage-Backed
Securities Portfolio"; Because of its capital position, the Association has
accepted the above average interest rate risk associated with fixed-rate loans
and fixed-rate investment and mortgage-backed securities in an effort to
maximize yield. See "-- Liquidity and Capital Resources."
Interest Rate Sensitivity of Net Portfolio Value
The following table is provided to the Association by the OTS and
illustrates the change in NPV, at June 30, 1996 based on OTS assumptions. No
effect has been given to any steps that management of the Association may take
to counter the effect of the interest rate movements presented in the table.
<TABLE>
<CAPTION>
Net Portfolio as %
Basis of Portfolio Value
Point ("bp") Net Portfolio Value of Assets
Change
in Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp 11,766 (6,495) -36% 14.51% -598 bp
+300 bp 13,403 (4,857) -27 16.13 -436 bp
+200 bp 15,095 (3,165) -17 17.72 -277 bp
+100 bp 16,762 (1,498) -8 19.22 -127 bp
0 bp 18,260 20.49
-100 bp 19,346 1,085 +6 21.35 +86 bp
-200 bp 19,744 1,484 +8 21.59 +110 bp
-300 bp 19,937 1,677 +9 21.64 +115 bp
-400 bp 20,417 2,157 +12 21.93 +144 bp
</TABLE>
24
<PAGE>
Under the OTS interest rate risk capital rule (implementation of which has
been postponed), those institutions with greater than "normal" levels of
interest rate risk will be subject to an interest rate risk component in
calculating their risk-based capital ratio. An institution with a "normal" level
of interest rate risk is defined as one whose "Measured Interest Rate Risk" is
less than 2.0%.
The following table is provided by the OTS and is based on the
calculations in the previous table. It sets forth the IRR capital component that
will be deducted from risk-based capital in determining the level of risk-based
capital. At June 30, 1996, the change in NPV as a percentage of portfolio value
of total assets in negative 3.55%, which is greater than negative 2.0%,
indicating that the Association has a greater than "normal" level of interest
rate risk. The Association is exempt from any additional capital requirements;
however, had the Association been subject to the IRR capital component, its IRR
capital component at June 30, 1996 would be approximately $670,000.
<TABLE>
<CAPTION>
June 30, March 31, June 30,
1996 1996 1995
<S> <C> <C> <C>
RISK MEASURES: 200 BP RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets 20.49% 20.73% 20.06%
Exposure Measure: Post-Shock NPV Ratio 17.72 18.02 17.86
Sensitivity Measure: Change in NPV Ratio (277) bp (270) bp (220) bp
CALCULATION OF CAPITAL COMPONENT
Change in NPV as % of PV of Assets (3.55)% (3.49)% (2.88)%
Interest Rate Risk Capital Component ($000) -- -- --
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as substantially all of the Association's ARM
loans, have features that restrict changes in interest rates on a short-term
basis (1.5% to 2.0% per adjustment period) and over the life of the asset
(generally 5% over the life). Furthermore, in the event of a change in interest
rates, expected rates of prepayments on loans and early withdrawals from
certificates could likely deviate significantly from those assumed in
calculating the table. Therefore, the data presented in the table should not be
relied upon as indicative of actual results.
Liquidity and Capital Resources
The Association's primary sources of funds are proceeds from principal and
interest payments on loans, maturing securities and certificates of deposit. The
proceeds from the sale of available-for-sale securities and FHLB advances are
additional sources of liquidity. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The primary investing activity of the Association is the origination of
one- to four-family mortgage loans. During the years ended June 30, 1996 and
1995, the Association originated mortgage loans in the amounts of $12.4 million
and $4.5 million, respectively. During these periods, the Association purchased
mortgage backed securities of $5.7 million and $4.9 million. Other investing
activities include activity in investment grade federal agency and
mortgage-backed securities.
The Association must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
25
<PAGE>
opportunities. During fiscal years 1996 and 1995, the Association used its
sources of funds primarily to fund loan commitments and to pay deposit
withdrawals.
The Association uses cash flows generated from operating, investing and
financing activities to meet its liquidity requirements. See Consolidated
Statements of Cash Flows included as part of the Consolidated Financial
Statements appearing elsewhere herein.
Like most thrift institutions, deposits, particularly certificates of
deposit, have been the primary source of external funds for the Association. By
offering interest rates that are competitive with or at a slight premium to the
average rate paid by local competitors, the Association has had limited success
in lengthening the maturity of its certificate of deposit portfolio. At June 30,
1996, certificates of deposit amounted to $40.0 million, or 58.3% of total
deposits, including $12.5 million which were scheduled to mature in more than
one year after June 30, 1996. At June 30, 1996, $27.4 million of certificates of
deposit were scheduled to mature within one year. Historically, the Association
has been able to retain a significant amount of maturing deposits. Management of
the Association believes it has adequate resources to fund all loan commitments
by deposits and, if necessary, FHLB-Seattle advances and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute 1.0%
of the sum of net withdrawable deposit accounts plus short-term borrowings. The
Association's actual short- and long-term liquidity ratios at June 30, 1996 were
23.9% and 3.3%, respectively. The Association consistently maintains liquidity
levels in excess of regulatory requirements, and believes this is an appropriate
strategy for proper asset and liability management.
The Association is required to maintain specific amounts of capital
pursuant to OTS requirements. As of June 30, 1996, the Association was in
compliance with all regulatory capital requirements which were effective as of
such date with tangible, core and risk-based capital ratios of 17.5%, 17.5% and
46.7%, respectively. For a detailed discussion of regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements." See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a
numerical presentation of the Association's historical and pro forma capital
levels at June 30, 1996 relative to regulatory requirements.
Impact of New Accounting Pronouncements and Regulatory Policies
Accounting for Derivative Financial Instruments. SFAS No. 119 requires
disclosures of information such as credit and market risks, cash requirements
and accounting policies about derivative financial instruments. The Association
holds structured notes which have contractual step-up interest rates and call
features. The Association's investment policy does not authorize investments in
interest rate swaps, options and futures contracts.
Accounting by Creditors for Impairment of a Loan. See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of SFAS No. 114, as
amended by SFAS No. 118. The Association's adoption of SFAS No. 114, as amended
by SFAS No. 118, did not have a material impact on the Association's financial
position or results of operations.
Disclosure of Fair Value of Financial Instruments. See Note 16 of Notes to
the Consolidated Financial Statements for a discussion of SFAS No. 107.
Accounting for Impairment of Long-Lived Assets. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss is recognized if the sum of the expected future cash flows is
less than the carrying amount of the asset. The
26
<PAGE>
Association does not expect the implementation of SFAS No. 121 to have an
material impact on the Association's consolidated financial position or results
of operations. SFAS No. 121 is effective for financial statements issued with
fiscal years beginning after December 15, 1995.
Accounting for Stock-Based Compensation. In October 1995, the FASB issued
SFAS No. 123, establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. SFAS No. 125 provides guidance on accounting for
transfers and servicing of financial assets, recognition and measurement of
servicing assets and liabilities, financial assets subject to prepayment,
secured borrowings and collateral, and extinguishment of liabilities.
SFAS No. 125 generally requires that the Association recognize as separate
assets the rights to service mortgage loans for others, whether the servicing
rights are acquired through purchases or loan originations. Servicing rights are
initially recorded at fair value based upon the present value of estimated
future cash flows. Subsequently, the servicing rights are assessed for
impairment, which is recognized in the statement of income in the period the
impairment occurs. For purposes of performing the impairment evaluation, the
related portfolio must be stratified on the basis of certain risk
characteristics including loan type and note rate. SFAS No. 125 also specifies
that financial assets subject to prepayment, including loans that can be
contractually prepaid or otherwise settled in such a way that the holder would
not recover substantially all of its recorded investment, be measured like debt
securities available-for-sale or trading securities under SFAS No. 115, as
amended by SFAS No. 125. The provisions of SFAS No. 125 apply to transactions
occurring after December 31, 1996.
Accounting for Employee Stock Ownership Plans. In November 1993, the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan. Assuming shares of Common Stock appreciate in value over
time, the adoption of SOP 93-6 will increase compensation expense relating to
the ESOP to be established in connection with the Conversion. This effect on net
income and book value per share in fiscal 1996 and future periods cannot be
predicted due to the uncertainty of the fair value of the shares of Common Stock
subsequent to their issuance.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which generally require the
measurement of financial position and operating results in terms of historical
dollars, without considering the change in the relative purchasing power of
money over time due to inflation. The primary impact of inflation is reflected
in the increased cost of the Association's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
27
<PAGE>
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Delaware business corporation at
the direction of the Association in September 1996 for the purpose of becoming a
holding company for the Association upon consummation of the Conversion. Upon
consummation of the Conversion, the Association will be a wholly-owned
subsidiary of the Holding Company.
Business
Prior to the Conversion, the Holding Company will not engage in any
significant operations. Upon consummation of the Conversion, the Holding
Company's sole business activity will be the ownership of all of the capital
stock of the Association. In the future, the Holding Company may acquire or
organize other operating subsidiaries, although there are no current plans,
arrangements, agreements or understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Association with
the payment of appropriate rental fees, as required by applicable law.
Since the Holding Company will only hold the capital stock of the
Association, the competitive conditions applicable to the Holding Company will
be the same as those confronting the Association. See "BUSINESS OF THE
ASSOCIATION -- Competition."
BUSINESS OF THE ASSOCIATION
General
The Association operates as a community oriented financial institution
devoted to serving the needs of its customers in its market area. The
Association's business consists primarily of attracting deposits from the
general public and using those funds to originate residential real estate loans.
In addition, the Association has maintained a significant portion of its assets
in investments and mortgage-backed securities.
Market Area
The Association's primary market area includes the Counties of Park,
Gallatin and Sweet Grass in South Central Montana. This area has similar
economic characteristics, however, there is diversity in some unique industries.
All three counties are located near Yellowstone National Park and offer a number
of recreational activities, which are popular tourist attractions.
The Association's main office is located in Livingston (population
approximately 7,000), which is the county seat of Park County (population
approximately 16,000). The primary economic sources in Park County are
agriculture, tourism, mining and forestry. Park County has experienced an
increase in population during the last few years as individuals and businesses
have relocated to Montana. According to information provided by Livingston Job
Service the largest employers in Park County are the State and local
governments, the local hospital, Livingston Rebuild Center, Livingston
Convalescent Center and Industrial Towel. The Park County unemployment rate for
July 1996 was 3.3%.
Bozeman (population approximately 28,000) is the county seat of Gallatin
County (population approximately 59,500). The primary economic sources in
Gallatin County are agriculture, tourism, services, recreational manufacturing
and natural resource-based industries such as mining and forestry. Gallatin
County has also
28
<PAGE>
experienced an increase in population during the last three years. In connection
with this increase in population, Gallatin County has also experienced some
growth in its technology-based companies. Montana State University, which is
located in Bozeman and is the largest single employer, also has a significant
impact on the Gallatin County economy. Other large employers in Gallatin County
include Gibson Guitar, Louisiana Pacific Corp. and Video Lottery Technologies,
Inc. The Gallatin County unemployment rate for July 1996 was 1.9%.
Big Timber (population approximately 1,600) is the county seat of Sweet
Grass County (population approximately 3,300). The primary economic sources in
Sweet Grass County are agriculture, tourism, mining and forestry. Sweet Grass
County has experienced a minimal increase in population during the last few
years. The Sweet Grass County unemployment rate for July 1996 was 1.9%.
Lending Activities
General. As a federally chartered savings and loan association, the
Association has general authority to originate and purchase loans secured by
real estate located throughout the United States. Notwithstanding this
nationwide lending authority, substantially all of the mortgage loans in
the Association's portfolio are secured by properties located in its primary
market area of Park, Gallatin, and Sweet Grass Counties in South Central
Montana.
Permanent residential one- to four-family mortgage loans amounted to $35.2
million, or 81.7%, of the Association's total loan portfolio, before net items,
at June 30, 1996. The Association originates other loans secured by multi-family
residential and commercial real estate, and construction loans. Those loans
amounted to $4.9 million, or 11.4%, of the total loan portfolio, before net
items, (i.e., loans in process, deferred loan origination fees and costs, and
allowance for loan losses), at June 30, 1996. Approximately 2.2%, or $965,000,
of the Association's total loan portfolio, before net items, as of June 30, 1996
consisted of non-real estate loans.
Permissible loans-to-one borrower by the Association are generally limited
to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower
limitation was $2.4 million at June 30, 1996 and would be $5.3 million assuming
gross proceeds from the Offering of $22.5 million at the maximum of the
Estimated Valuation Range, less the adjustment to capital for the ESOP and MRP.
At June 30, 1996, the Association had four borrowing relationships with
outstanding balances in excess of $300,000, the largest of which was $1.3
million and all of which were secured by multiple single family properties,
multi-family or commercial real estate. All of those loans have performed in
accordance with their terms since origination.
Loan Portfolio Analysis. The following table sets forth the composition of
the Association's loan portfolio by type of loan as of the dates indicated. The
Association had no concentration of loans of a given category exceeding 10% of
total gross loans other than as set forth below.
<TABLE>
<CAPTION>
At June 30,
1996 1995
Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One- to four-family $35,202 81.66% $33,974 84.67%
Multi-family 2,333 5.41 2,557 6.37
Commercial real estate 1,182 2.74 1,425 3.55
Consumer 2,112 4.90 1,456 3.63
Share loans 901 2.09 455 1.13
Construction 1,380 3.20 257 0.65
-------- ------- ------- -------
Total 43,110 100.00% 40,124 100.00%
====== ======
Less:
Loans in process 770 315
Deferred loan origination
fees and costs 258 232
Allowance for loan losses 200 145
-------- --------
Total loans, net $41,882 $39,432
======= =======
</TABLE>
29
<PAGE>
Permanent Residential One- to Four-Family Mortgage Loans. The primary
lending activity of the Association is the origination for portfolio of
permanent residential one- to four-family first mortgage loans. Management
believes that this policy of focusing on single-family residential mortgage
loans has been successful in contributing to interest income while keeping
delinquencies and losses to a minimum. At June 30, 1996, $35.2 million, or
81.7%, of the Association's total loan portfolio, before net items, consisted of
permanent residential one- to four-family mortgage loans, with an average
balance of $49,000.
The Association presently originates for portfolio fixed-rate mortgage
loans secured by one- to four- family properties with terms of up to 20 years.
At June 30, 1996, $29.6 million, or 68.6% of the total loans before net items
were fixed rate one- to four-family loans and $5.6 million, or 13.0%, were ARM
loans. The Association has offered two ARM products for portfolio which adjust
annually subject to a limitation on the annual increase of 1.5% to 2.0% and an
overall limitation of 5.0% or to a specific ceiling rate. These ARM products
utilize either the OTS Monthly Median Cost of Funds Index or the Semi-Annual
Cost of Funds Index ("COFI"). Loans based on COFI constitute a majority of the
Association's adjustable rate loans. The COFI is a lagging model index which,
together with the periodic and overall interest rate caps, may cause the yield
on such loans to adjust more slowly than the cost of interest-bearing
liabilities especially in a rapidly rising rate environment. The Association's
ARM loans do not permit negative amortization of principal and carry no
prepayment restrictions. Borrower demand for ARM loans versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectations of
changes in the level of interest rates and the difference between the initial
interest rates and fees charged for each type of loan. The relative amount of
fixed-rate mortgage loans and ARM loans that can be originated at any time is
largely determined by the demand for each in a competitive environment.
ARM loans help reduce the Association's exposure to changes in interest
rates. There are, however, unquantifiable credit risks resulting from the
potential of increased costs due to changed rates to be paid by the customer. It
is possible that, during periods of rising interest rates, the risk of default
on ARM loans may increase as a result of repricing with increased costs to the
borrower. Another consideration is that although ARM loans allow the Association
to increase the sensitivity of its asset base to changes in the interest rates,
the extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limits. Because of these considerations, the
Association has no assurance that yields on ARM loans will be sufficient to
offset increases in the Association's cost of funds.
The Association's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
80% of the lesser of the appraised value or the purchase price, however, most
loans have loan-to-value ratios of 75% or less. Appraisals are obtained on all
properties and are made by independent fee appraisers approved by the Board of
Directors.
The Association offers fixed-rate, permanent residential one- to
four-family mortgage loans with terms of up to 30 years. Substantially all
permanent one- to four-family loans have original contractual terms to maturity
of 20 to 25 years and are primarily made for loan amounts of less than $250,000.
Such loans generally are amortized on a monthly basis with principal and
interest due each month and customarily include "due-on-sale" clauses. The
Association enforces due-on-sale clauses to the extent permitted under
applicable laws. Substantially all of the Association's mortgage loan portfolio
consists of conventional loans. The Association has not originated significant
amounts of mortgage loans on second residences.
The Association also originates residential mortgage loans secured by
non-owner occupied rental properties within its primary market area. At June 30,
1996, these loans totaled approximately $_______. Generally, such loans are made
at higher interest rates than owner occupied residential mortgage loans, with a
loan-to-value ratio of 70%, and with a debt coverage ratio of 1.25x.
The Association requires title insurance on all real estate secured loans.
The Association also requires that fire and extended coverage casualty insurance
or homeowners insurance (and, if appropriate, flood insurance) be maintained in
an amount at least equal to the outstanding loan balance.
30
<PAGE>
Construction Loans. The Association makes construction loans primarily to
prospective home owners for the construction of their single-family residences,
which generally convert to a permanent loan upon the completion of construction.
Construction loans generally begin to amortize as permanent residential one- to
four-family mortgage loans after the construction period (typically six months)
is completed, unless extended. At June 30, 1996, construction loans amounted to
$1.4 million, or 3.2% of the Association's total loan portfolio, before net
items. In connection with the recent population growth experienced in Bozeman,
Montana, the Association experienced an increase in the origination of
construction loans during fiscal 1996. The balance of the Association's
construction loan portfolio increased from $257,000 at June 30, 1995 to $1.4
million at June 30, 1996. Construction loans have rates and terms which
generally match the non-construction loans then offered by the Association,
except that during the construction phase, the borrower pays only interest on
the loan. The borrower is qualified at the interest rate for the permanent loan.
The Association's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Association
periodically reviews the progress of the underlying construction project.
Construction lending is generally limited to the Association's primary lending
areas and is underwritten pursuant to the same general guidelines used for
originating permanent one- to four-family loans.
Construction financing is generally considered to involve a higher degree
of risk of loss than financing on improved, owner-occupied real estate because
of the uncertainties of construction and the possibility of costs exceeding the
initial estimates. The Association has sought to minimize the risks associated
with permanent construction lending by limiting construction loans to qualified
owner-occupied borrowers with construction performed by qualified builders
located primarily in the Association's market area.
Multi-Family and Commercial Real Estate Lending. The Association also
originates loans secured by multi-family and commercial real estate. At June 30,
1996, the Association's loan portfolio included $2.3 million in multi-family and
$1.2 million in commercial real estate loans.
Multi-family and commercial real estate lending affords the Association an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties are generally greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation and management of the properties, repayment of such loans
may be influenced by adverse conditions in the real estate market or the
economy.
Multi-family and commercial real estate loans originated by the
Association are predominately fixed rate loans with terms to maturity of 15 to
20 years. The Association's commercial real estate portfolio consists of loans
on a variety of properties including office buildings and churches. Multi-family
loans generally are secured by small to medium sized apartment buildings.
Appraisals on properties which secure multi-family and commercial real estate
loans are performed by an independent appraiser engaged by the Association
before the loan is made. Underwriting of commercial and multi-family loans
includes a thorough analysis of the cash flows generated by the real estate to
support the debt service and the financial resources, experience, and income
level of the borrowers. The Association imposes a debt coverage ratio of 1.25x
to ensure that the property securing the loans will generate sufficient cash
flow to adequately cover operating expenses and debt service payments plus
provide an acceptable return to the investor. Operating statements on each
multi-family and commercial real estate loan are required and reviewed by
management on an annual basis.
At June 30, 1996, the average loan balance of the Association's
multi-family loans was $167,000. At June 30, 1996, the Association had four
multi-family loans with one borrower with an aggregate balance of $1.3 million.
All of the properties securing the loans are located in the Association's
primary market area with the exception of one participation loan on a property
located in California with a balance at June 30, 1996 of $324,000. At June 30,
1996, all multi-family and commercial real estate loans were current.
31
<PAGE>
Consumer Lending. The Association's consumer loan portfolio consist
primarily of home equity, home improvement, share loans (loans secured by
deposits) and, to a substantially lesser extent, mobile home and automobile
loans. At June 30, 1996, the Association's consumer loans totalled approximately
$3.0 million, or 7.0% of the Association's gross loans of which $2.0 million, or
4.8%, consisted of home equity and home improvement loans.
Consumer loans are made at fixed interest rates and for varying terms.
Home equity and home improvement loans are made for terms up to 15 years for
owner occupied residences. In the case of the majority of home equity loans, the
Association holds a second mortgage behind another financial institution that
holds the first mortgage. When originating a home equity loan, the Association
accounts for both the first and second mortgage liens and generally limits the
loan-to-value ratio to 80%.
32
<PAGE>
Maturity of Loan Portfolio. The following table sets forth the maturity of
Association's loan portfolio at June 30, 1996. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $9.4 million and $7.0 million, for the two
years ended June 30, 1996, respectively. Adjustable-rate mortgage loans are
shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
1-4 Family Multi-family Commercial Construction Consumer Total
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 3 months $ 5 $ -- $ -- $ 210 $ 361 $ 576
3 months to 1 year 7 -- -- 1,170 421 1,598
After 1 year:
1 to 3 years 244 190 42 -- 136 612
3 to 5 years 455 40 28 -- 260 783
5 to 10 years 2,392 822 207 -- 571 3,992
10 to 20 years 23,833 1,078 905 -- 1,241 27,057
Over 20 years 8,266 203 -- -- 23 8,492
-------- ------- -------- -------- ------- --------
Total due after one year 35,190 2,333 1,182 -- 2,231 40,936
-------- ------- ------- -------- ------- --------
Total amount due $35,202 $2,333 $1,182 $1,380 $ 3,013 43,110
======= ====== ====== ====== =======
Less:
Allowance for loan loss 200
Loans in process 770
Deferred loan fees 258
--------
Loans receivable, net $41,882
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
June 30, 1996, which have fixed interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed- Floating- or
Rates Adjustable-Rates Total
(In Thousands)
<S> <C> <C> <C>
One- to four-family $29,586 $5,616 $35,202
Multi-family 646 1,687 2,333
Non-residential 1,182 -- 1,182
Construction 1,380 -- 1,380
Consumer and share 3,013 -- 3,013
------- -------- --------
Total $35,807 $7,303 $43,110
======= ====== =======
</TABLE>
33
<PAGE>
Scheduled contractual principal repayments of loans as presented in the
preceding table do not reflect the actual life of such assets. The average life
of loans ordinarily is substantially less than their contractual terms because
of prepayments. In addition, due-on-sale clauses on loans generally give the
Association the right to declare loans immediately due and payable in the event,
(among other things), that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan market rates are higher than rates
on existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan customers are solicited through
advertising media and contacts with local real estate brokers. Upon receipt of a
loan application from a prospective borrower, a credit report and other data are
obtained to verify specific information relating to the loan applicant's
employment, income and credit standing. All of the Association's lending is
subject to its written nondiscriminatory underwriting standards, loan
origination procedures and lending policies prescribed by the Association's
Board of Directors.
All loans must be approved by the Association's Loan Committee, which
consists of any three members of the Board of Directors. Interest rates are
subject to change if the approved loan is not closed within the time of the
commitment. Because the Association originates loans for its own portfolio, many
of the loans do not comply with all secondary market documentation criteria.
This has enabled the Association to develop an expedited loan application and
approval process which management believes provides it with a competitive
advantage in its primary market area while continuing to maintain its
underwriting standards. Management of the Association also believes its local
decision-making capabilities is an attractive quality to customers within its
market area. The Association's loan approval process allows loans to be approved
and closed in approximately four weeks.
Loan Commitments. Loan commitments typically contain a termination date of
30 days from the date of the commitment letter that is issued at the time the
loan is approved. The Association had outstanding loan commitments of
approximately $304,000 at June 30, 1996 all of which were for fixed rate loans.
See Note 14 of Notes to the Consolidated Financial Statements.
Loan Originations, Sales and Purchases. During the year ended June 30,
1996, the Association's total gross mortgage loan originations were $12.4
million.
The Association has occasionally originated or participated in loans
secured by properties outside the State of Montana. These properties are
primarily located in Northern California but also include loans secured by one-
to four- family properties in the Commonwealth of Massachusetts and the States
of New Mexico, Arizona and Colorado. At June 30, 1996, these loans amounted to
$1.8 million and consisted of (i) $934,826 million in permanent residential
one- to four-family mortgage loans, (ii) $429,000 in multi-family loans, (iii)
a participation interest in a commercial real estate loan for $324,000, and (iv)
two whole loan purchases for $145,000. The Association has purchased loan
participation interests primarily during periods of reduced loan demand in its
market area. At June 30, 1996, the Association had three participations in its
primary market area with a balance of $127,000. Any such purchases are made in
conformance with the Association's underwriting standards. The Association may
decide to purchase additional loans outside its market area in the future
depending upon the demand for mortgage credit in its market area, however, it
has not purchased any participation interests outside of its primary market area
during the past five years.
Historically, the Association has been a portfolio lender, maintaining the
residential mortgage loans its originates in its portfolio rather than selling
them in the secondary market. The Association currently intends to continue this
practice after the consummation of the Conversion. See "RISK FACTORS -- Certain
Lending Considerations."
34
<PAGE>
The following table sets forth the Association's originations and loan
sales and principal repayments during the periods indicated. Predominately all
mortgage loan originations during the periods indicated were fixed rate loans.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Total gross loans receivable at
beginning of period $40,124 $42,637 $41,344 $38,120
------- ------- ------- -------
Loans originated:
One- to four-family 7,411 2,857 13,223 13,115
Multi-family 225 57 -- 311
Construction 2,631 641 1,937 1,592
Commercial 47 -- -- 18
Consumer 2,069 899 413 1,200
------- ------ ------- -------
Total loans originated 12,383 4,454 15,578 16,236
Loans sold:
Whole loans -- -- -- --
Participations sold -- -- -- --
Total loans sold -- -- -- --
Loan principal repayments (9,397) (6,967) (14,280) (13,012)
------- ------- -------- --------
Net loan activity 2,986 (2,513) 1,293 3,224
------- ------- -------- --------
Total gross loans receivable
at end of period $43,110 $40,124 $42,637 $41,344
======= ======= ======= =======
</TABLE>
Loan Origination and Other Fees. The Association charges loan origination
fees, which are a percentage of the principal amount of the mortgage loan. The
amount of fees charged by the Association is generally up to 1% for mortgage
loans and 2% for construction loans. The Association generally does not charge
fees for home equity loans. Current accounting standards require that
origination fees received (net of certain loan origination costs) be deferred
and amortized into interest income over the contractual life of the loan. Net
deferred fees or costs associated with loans that are prepaid are recognized as
income at the time of prepayment. The Association had $252,000 in net deferred
loan fees at June 30, 1996.
Non-Performing Assets and Delinquencies. When a mortgage loan borrower
fails to make a required loan payment when due, the Association institutes
collection procedures. All loan payments are due on the contractual due date of
the loan, however, a loan is not considered delinquent and collection procedures
are not instituted until after the 30th day of the contractual due date. The
Association does not charge its borrowers late penalty fees on payments made
after the contractual due date. The first notice is mailed to the borrower 30
days after the contractual due date and, if necessary, a second written notice
follows within 30 days thereafter giving the borrower 15 days to respond and
correct the delinquency. Attempts to contact the borrower by telephone generally
begin soon after the first notice is mailed to the borrower. If a satisfactory
response is not obtained, continuous follow-up contacts are attempted until the
loan has been brought current or foreclosure is initiated. Attempts to interview
the borrower, preferably in person, are made to establish (i) the cause of the
delinquency, (ii) whether the cause is temporary, (iii) the attitude of the
borrower toward the debt, and (iv) a mutually satisfactory arrangement for
curing the default.
After such attempts have been made by the Association, or sooner if the
borrower is chronically delinquent and all reasonable means of obtaining payment
on time have been exhausted, foreclosure is initiated according to
35
<PAGE>
the terms of the security instrument and applicable law. Interest income on
loans is then reduced by the full amount of accrued and uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Association institutes the same
collection procedures as for its mortgage loan borrowers.
The Association's Board of Directors is informed monthly as to the status
of all mortgage and consumer loans that are delinquent more than 30 days, the
status on all loans currently in foreclosure, and the status of all foreclosed
and repossessed property owned by the Association.
At June 30, 1996 and 1995, the Association did not have any nonaccrual
loans, accruing loans contractually past due 90 days or more as to principal or
interest payments, or troubled debt restructurings within the meaning of SFAS
No. 15. Loans amounting to $290,000 and $25,000 were past due (30-89 days) but
still accruing at June 30, 1996 and 1995, respectively.
Real Estate Owned. The Association had no real estate acquired through
foreclosure or in satisfaction of loans at June 30, 1996. See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of the Association's
procedures for accounting for real estate owned.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses may make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset . All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and are
monitored by the Association.
At June 30, 1996 the Association had two substandard loans totaling
$75,000 and at June 30, 1995 had three substandard loans totaling $81,000.
Allowance for Loan Losses. The Association has established a systematic
methodology for determining provisions for loan losses. The methodology is set
forth in a formal policy and considers the need for an overall general valuation
allowance as well as specific allowances for individual loans.
In originating loans, the Association recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Association may increase its allowance
for loan losses by charging provisions for loan losses against the Association's
income.
The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on management's assessment of current
economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio. The amount
36
<PAGE>
of the allowance is based on management's evaluation of the collectibility of
the loan portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, peer group comparisons and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flow. Specific valuation
allowances may be established to absorb losses on loans for which full
collectibility may not be reasonably assured. The amount of the allowance is
based on the estimated value of the collateral securing the loan and other
analyses pertinent to each situation.
At June 30, 1996, the Association had an allowance for loan losses of
$200,000, which management believed to be adequate to absorb losses inherent in
the portfolio at that date. Although management believes that it uses the best
information available to make such determinations in accordance with GAAP,
future adjustments to the allowance for loan losses may be necessary and results
of operations could be significantly and adversely affected if circumstances
differ substantially from the assumptions used in making the determinations.
Furthermore, there can be no assurance that regulators, in reviewing the
Association's loan portfolio, will not request the Association to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect the Association's financial
condition and results of operations.
The following table sets forth an analysis of the Association's allowance
for loan losses for the periods indicated. As indicated by the table, there has
not been any fluctuations in the allowance for loan losses.
Year Ended June 30,
1996 1995
---- ----
(Dollars in Thousands)
Total loans outstanding before net items $43,110 $40,124
------- -------
Allowance balance at beginning of
year 145 145
------- -------
Provision 55 --
Net charge-offs -- --
-------- --------
Allowance balance at end of year $ 200 $ 145
======= =======
Allowance for loan losses as a percent
of total loans outstanding 0.46% 0.36%
37
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. The portion of the allowance
to each loan category does not necessarily represent the total available for
losses within that category since the total allowance applies to the entire loan
portfolio. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
<TABLE>
<CAPTION>
At June 30,
1996 1995
% of % of
Loans Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One- to four-family $120 81.66% $105 84.67%
Commercial real estate 40 2.74 15 3.55
Multi-family 25 5.41 10 6.37
Construction -- 3.20 -- 0.65
Consumer and share 15 6.99 15 4.76
----- ------- ----- -------
Total allowance $200 100.00% $145 100.00%
==== ====== ==== ======
</TABLE>
Investment Activities
The Association is permitted under federal law to invest in various types
of liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
FHLB-Seattle, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Association may also invest a portion of its assets in commercial paper and
corporate debt securities. The Association is also required to maintain an
investment in FHLB stock.
The Association is required under federal regulations to maintain a
minimum amount of liquid assets. At June 30, 1996, the Association's regulatory
liquidity of 23.9% was significantly in excess of the 5% required by OTS
regulations. The securities in the Association's investment portfolio provide it
with liquidity for funding loan originations and enables the Association to
improve the match between the maturities and repricing of its interest-rate
sensitive assets and liabilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources" and "REGULATION."
The President of the Association determines appropriate investments in
accordance with the Board of Directors' approved investment policies and
procedures. The Association's policies generally limit investments to U.S.
Government and agency securities and mortgage-backed securities issued and
guaranteed by FHLMC, FNMA and Government National Mortgage Association ("GNMA").
The Association's policies provide that investment purchases be ratified at
monthly Board of Directors meetings. Investments are made based on certain
considerations, which include the interest rate, yield, settlement date and
maturity of the investment, the Association's liquidity position, and
anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits and anticipated loan
amortization and repayments). The effect that the proposed investment would have
on the Association's credit and interest rate risk, and risk-based capital is
also given consideration during the evaluation.
At June 30, 1996, the Association's investment and mortgage-backed
securities portfolio totaled $39.1 million and consisted principally of U.S.
Government and agency obligations and mortgage-backed securities. At June 30,
1996, the Association had investment securities available for sale with an
estimated market value of $1.4
38
<PAGE>
million which includes stock in the FHLMC and two mutual funds, the assets of
which consisted of adjustable rate mortgages and U.S. Government and agency
securities. The FHLMC common and preferred stock at June 30, 1996 had an
amortized cost of $68,000 and an estimated market value of $1.0 million. From
time to time, investment levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short-term demand for funds to be
used in the Association's loan origination and other activities.
U.S. Government and Agency Obligations. The Association's portfolio of
U.S. Government and agency obligations had a fair value of $2.4 million ($2.5
million at amortized cost) at June 30, 1996. The portfolio consisted of FHLB
bonds that mature between 1998 and 2011, all of which were held in the
Association's held to maturity portfolio. At June 30, 1996, the interest rates
on these obligations ranged from 5.2% to 8.0%.
The Association's investment securities include structured notes in the
form of step-up bonds and bonds that are subject to call. The form of structured
notes in which the Association has invested provides for periodic adjustments in
coupon rates on specified dates or call prior to maturity. The Association
purchases these bonds as part of its investment strategy and will only consider
bonds issued by a governmental agency with maturities of no longer than 15
years. Management of the Association acknowledges the uncertainty that these
instruments may be called before maturity with the initial higher coupon offered
by these bonds. Management of the Association realizes that step-up bonds, or
bonds subject to call, are not as liquid an investment as traditional agency
bonds and thus involve more risk than other investments in the Association's
portfolio. However, as the Association intends to hold the instruments until
their maturity or call, management does not consider this as an obstacle to
purchasing these instruments. At June 30, 1996, the Association had $750,000 in
step-up bonds and all of the FHLB bonds were subject to call prior to maturity.
Mortgage-Backed Securities. The Association purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads on large
principal balances with minimal administrative expense; (ii) lower the credit
risk of the Association as a result of the guarantees provided by FHLMC, FMNA,
and GNMA; (iii) enable the Association to use mortgage-backed securities as
collateral for financing; and (iv) invest excess funds during periods of reduced
loan demand. Included in the Association's mortgage-backed securities portfolio
are real estate mortgage investment conduits ("REMICs"), which mature in 2023
and have adjusting interest rates based primarily on the rate paid on United
States Treasury Securities and the COFI. At June 30, 1996, net mortgage-backed
securities totaled $35.2 million, or 40.5% of total assets. At June 30, 1996,
$4.0 million of the mortgage-backed securities had adjustable-rates of interest
and $31.2 million had fixed-rates. The mortgage-backed securities portfolio had
coupon rates ranging from 5.50% to 12.75% and had a weighted average yield of
6.78% during the year ended June 30, 1996. At June 30, 1996, the amortized cost
of the Association's mortgage-backed securities held to maturity was $22.6
million.
On November 15, 1995, the FASB issued a FASB Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." The Special Report allows for a "one-time
reclassification" of securities as of a single date between November 15, 1995
and December 31, 1995. In December 1995, the Association reclassified
approximately $14.2 million of mortgage-backed securities from the held to
maturity classification to the available for sale classification. The estimated
fair value of the Association's mortgage-backed securities available for sale at
June 30, 1996, was $12.5 million, which is $600,000 less than the amortized cost
of $13.1 million.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) typically represent a participation
interest in a pool of single-family or multi-family mortgages. The principal and
interest payments on these mortgages are passed from the mortgage originators,
through intermediaries (generally U.S. Government agencies and government
sponsored enterprises) that pool and resell the participation interests in the
form of securities, to investors such as the Association. Such U.S. Government
agencies and government sponsored enterprises, which guarantee the payment of
principal and interest to investors, primarily
39
<PAGE>
include the FHLMC, FNMA and the GNMA. Mortgage-backed securities typically are
issued with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with interest rates that fall within a specific range
and have varying maturities. Mortgage-backed securities generally yield less
than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, mortgage-backed securities are
usually more liquid than individual mortgage loans and may be used to
collateralize certain liabilities and obligations of the Association. These
types of securities also permit the Association to optimize its regulatory
capital because they have low risk weighting.
REMICs are generally classified as derivative financial instruments
because they are created by redirecting the cash flows from the pool of
mortgages or mortgage-backed securities underlying these securities to create
two or more classes (or tranches) with different maturity or risk
characteristics designed to meet a variety of investor needs and preferences.
Management believes these securities may represent attractive alternatives
relative to other investments due to the wide variety of maturity, repayment and
interest rate options available. Investment practices of the Association
prohibit the purchase of high risk REMICs. The Association held REMICs with a
net carrying value of $1.9 million at June 30, 1996. REMICs may be sponsored by
private issuers, such as mortgage bankers or money center banks, or by U.S.
Government agencies and government sponsored entities. At June 30, 1996, the
Association did not own any privately issued REMICs.
Thrift Bulletin Number 52 ("TB-52"), the OTS Policy Statement on
securities portfolio policies and unsuitable investment practices, requires that
institutions classify mortgage derivative products acquired, including REMICs
and certain tranches of CMOs, as "high-risk mortgage securities" if such
products exhibit greater price volatility than a benchmark fixed-rate 30-year
mortgage-backed pass-through security. Institutions may only hold high-risk
mortgage securities to reduce interest-rate risk in accordance with safe and
sound practices and must also follow certain prudent safeguards in the purchase
and retention of such securities. At June 30, 1996, the Association did not have
any securities that would be identified under TB-52 as "high-risk mortgage
securities." The Association also evaluates its mortgage-backed securities
portfolio annually for compliance with applicable regulatory requirements,
including testing for identification of high risk investments pursuant to
Federal Financial Institutions Examination Council standards.
Derivatives also include "off balance sheet" financial products whose
value is dependent on the value of an underlying financial asset, such as a
stock, bond, foreign currency, or a reference rate or index. Such derivatives
include "forwards," "futures," "options" or "swaps." The Association's
investment policy does not permit investment in such "off balance sheet"
derivative instruments.
Of the Association's $35.2 million mortgage-backed securities portfolio at
June 30, 1996, $17.1 million had contractual maturities within six years and
$18.1 million with a weighted had contractual maturities over six years. The
actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and may result in a
loss of any premiums paid and thereby reduce the net yield on such securities.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of mortgages, the geographical
location of the underlying real estate collateralizing the mortgages and general
levels of market interest rates, the difference between the interest rates on
the underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Association may be subject to reinvestment risk because, to the extent that the
Association's mortgage-backed securities amortize or prepay faster than
anticipated, the Association may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate. In contrast to mortgage-backed
securities in which cash flow is received (and hence, prepayment risk is shared)
pro rata by all securities holders, the cash flow from the mortgages or
mortgage-backed securities underlying REMICs are segmented and paid in
accordance with a predetermined priority to investors holding various
40
<PAGE>
tranches of such securities or obligations. A particular tranche of REMICs may
therefore carry prepayment risk that differs from that of both the underlying
collateral and other tranches.
The following table sets forth information regarding the Association's
mortgage-backed securities (including REMICs) activity for the periods
indicated.
Year Ended June 30,
1996 1995
(In Thousands)
Beginning balance $36,943 $37,605
Mortgage-backed securities purchased 5,704 4,870
Amortization of premiums and discounts (31) (42)
Principal repayments (7,428) (5,490)
-------- --------
Ending balance $35,188 $36,943
======= =======
The following table sets forth the composition of the Association's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------
Percent Percent
Amount of Total Amount of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
REMIC $ 1,865 5.32% $ 1,865 5.07%
GNMA 996 2.84 1,262 3.43
FNMA 9,042 25.78 11,998 32.61
FHLMC 23,167 66.06 21,670 58.89
-------- ------- -------- -------
Total 35,070 100.00% 36,795 100.00%
====== =======
Net premiums 118 148
------- -------
Net mortgage-backed securities $35,188 $36,943
======= =======
</TABLE>
The following table sets forth the contractual maturities of the
Association's mortgage-backed securities portfolio as of June 30, 1996:
<TABLE>
<CAPTION>
Contractual Maturities Due in Year(s) Ended June 30,
2000 2003 2013
to to and
1997 1998 1999 2002 2012 Thereafter
---- ---- ---- ---- ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities $1,645 $1,958 $3,204 $10,191 $11,312 $6,760
====== ====== ====== ======= ======= ======
</TABLE>
41
<PAGE>
The following table sets forth the carrying value of the Association's
investment securities portfolio, securities available for sale portfolio,
short-term investments and FHLB stock at the dates indicated. At June 30, 1996,
the market value of the Association's investment securities portfolio was $2.4
million and securities available for sale portfolio was $1.4 million.
At June 30,
1996 1995
(In Thousands)
Investment securities held to maturity:
U.S. Government securities $ -- $ --
U.S. Agency securities 2,499 2,498
------ ------
Total investment securities 2,499 2,498
Securities available-for-sale(1) 1,385 1,192
Interest-bearing deposits 1,338 1,235
FHLB stock 1,123 1,044
------- -------
Total $6,345 $5,969
====== ======
(1) Excludes mortgage-backed securities.
42
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Association's investment
securities and securities available for sale portfolios as of June 30, 1996.
<TABLE>
<CAPTION>
More Than More Than
One Year or Less One to Five Years Five to Ten Years More Than Ten Years
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- --------- -------- --------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Agency
obligations $ -- --% $ 1,000 6.28% $ 500 6.00% $ 999 7.31%
Securities
available-for-sale 1,385 -- -- -- -- -- -- --
--------- --------- ------- --------
Total $ 1,385 $ 1,000 $ 500 $ 999
======= ======= ===== =====
<CAPTION>
Total Investment Securities
Carrying Average Market
Value Yield Value
-------- -------- ------
<S> <C> <C> <C>
U.S. Agency
obligations $ 2,499 6.64 $ 2,405
Securities
available-for-sale 1,385 -- 1,385
------- -------
$ 3,884 $ 3,790
Total ======= =======
</TABLE>
43
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Association's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Seattle may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources. At June 30, 1996, the Association had no other
borrowing arrangements.
Deposit Accounts. Substantially all of the Association's depositors are
residents of South Central Montana. Deposits are attracted from within the
Association's market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market accounts, regular savings
accounts, certificates of deposit and retirement savings plans. Deposit account
terms vary, according to the minimum balance required, the time periods the
funds must remain on deposit and the interest rate, among other factors. In
determining the terms of its deposit accounts, the Association considers current
market interest rates, profitability to the Association, matching deposit and
loan products and its customer preferences and concerns. The Association reviews
its deposit mix and pricing weekly.
In the unlikely event the Association is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the Holding Company, which will own all the
outstanding capital stock that is issued by the Association.
The following table sets forth certain information concerning the
Association's time deposits and other interest-bearing deposits at June 30,
1996.
<TABLE>
<CAPTION>
Weighted Percentage
Average Original Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.50% None NOW accounts $200 $8,673 12.63%
3.25 None Regular savings 5 14,949 21.77
3.50 None Money market accounts 1,000 4,950 7.21
Certificates of deposit:
5.11 1-3 months Fixed term, fixed rate 500 967 1.41
5.18 4-6 months Fixed term, fixed rate 500 6,716 9.78
5.55 7-12 months Fixed term, fixed rate 500 9,172 13.36
6.12 13-24 months Fixed term, fixed rate 500 7,369 10.73
5.88 25-36 months Fixed term, fixed rate 500 7,161 10.43
5.87 36-48 months Fixed term, fixed rate 500 957 1.39
6.35 49-120 months Fixed term, fixed rate 500 4,299 6.26
6.01 -- Jumbo certificates 100,000 3,334 4.87
-------- -------
68,547 --
Accrued interest on deposits 107 .16
-------- -------
4.64 Total $68,654 100.00%
======= ======
</TABLE>
44
<PAGE>
The following table indicates the amount of the Association's
certificates of deposit of $100,000 or more by time remaining until maturity as
of June 30, 1996.
Maturity Period Amount
(In Thousands)
Three months or less................... $1,183
Over three through six months.......... 514
Over six through 12 months............. 1,014
Over 12 months......................... 623
-------
Total.......................$3,334
Time Deposits by Rates
The following table sets forth the time deposits in the Association
classified by rates at June 30, 1996.
<TABLE>
<CAPTION>
At June 30,
1996
(In Thousands)
<S> <C>
4.00 - 5.99%.................... $28,717
6.00 - 7.99%.................... 10,862
8.00 - 8.99%.................... 396
---------
Total........................ $39,975
=======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at June 30, 1996.
<TABLE>
<CAPTION>
Amount Due
After
June 30, June 30, June 30, June 30,
1997 1998 1999 1999 Total
-------- ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
4.00 - 5.99%.................... $ 22,828 $ 3,918 $ 1,041 $ 930 $ 28,717
6.00 - 7.99%.................... 4,371 2,484 1,570 2,431 10,862
8.00 - 8.99%.................... 232 33 131 -- 396
--------- -------- ------- ------- --------
Totals..................... $ 27,431 $ 6,435 $ 2,742 $ 3,367 39,975
======== ======= ======= =======
Accrued interest on certificate
accounts....................... 107
--------
Total...................... $40,082
=======
</TABLE>
45
<PAGE>
Savings Activities
The following table sets forth the deposit activities of the
Association for the periods indicated.
Year Ended June 30,
1996 1995
(In Thousands)
Net decrease before interest
credited.................................. $(1,778) $(3,971)
Interest credited.......................... 3,262 2,699
------- -------
Net increase (decrease) in savings
deposits.................................. $1,484 $(1,272)
====== ========
Borrowings
Savings deposits are the primary source of funds for the Association's
lending and investment activities and for its general business purposes. The
Association also relies upon advances from the FHLB-Seattle to supplement its
supply of lendable funds, to meet deposit withdrawal requirements and to fund
the purchase of investment and mortgage-backed securities. At June 30, 1996, the
Association had $1.5 million of borrowings from the FHLB- Seattle at a weighted
average rate of 5.98%. Such amount represented three borrowings of $750,000,
$500,000 and $250,000 with interest rates of 6.02%, 5.82% and 5.27%,
respectively. These borrowings are secured by a blanket lien on $40.1 million of
one- to four- family residential real estate loans and by certain investment and
mortgage-backed securities having an aggregate carrying value of $38.1 million
at June 30, 1996. These borrowings mature between July and September 1996. See
Note 8 of Notes to Consolidated Financial Statements.
The FHLB-Seattle functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Association is required to own capital stock in
the FHLB-Seattle and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit.
The following table sets forth information concerning only short-term
borrowings (those maturing within one year or less) the Association had during
the periods indicated.
Year Ended June 30,
1996 1995
(In Thousands)
Short-term FHLB advances:
Average balance outstanding................ $ 1,595 $ 2,668
Maximum amount outstanding at any
month-end during the period.............. $ 1,925 $ 4,210
Weighted average interest rate
during the period........................ 5.98% 5.43%
Total short-term borrowings at
end of period.............................. $ 1,500 $ 1,751
46
<PAGE>
Competition
The Association operates in a very competitive market for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Historically, its most direct competition for savings
deposits has come from commercial banks, thrift institutions and credit unions
operating in its market area. Some of these commercial banks are subsidiaries of
large regional holding companies having vastly greater resources than the
Association at their disposal. At June 30, 1996, there were 14 commercial banks,
two thrift institutions (in addition to the Association) and two credit unions
in Park, Gallatin and Sweet Grass Counties. Particularly in times of high market
interest rates, the Association has faced competition for investors' funds from
short-term money market securities and corporate and U.S. Government securities.
The Association competes for loan originations with mortgage bankers, thrift
institutions, credit unions and commercial banks. Such competition for deposits
and loans may limit the Association's future growth and earnings prospects.
Subsidiary Activities
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount in
excess of 1% is used primarily for community, inner-city and community
development projects. The Association's investment in its service corporation,
Dime Service Corporation ("Service Corporation"), did not exceed these limits at
June 30, 1996.
The Service Corporation is a wholly owned subsidiary of the
Association. The Service Corporation was established in 1985 to operate the
insurance agency business started by one of the Association's original founders
in 1886. In 1992 and 1993, the Service Corporation purchased the insurance
business of two local insurance agencies. The Service Corporation presently
engages in full service property and casualty insurance activities under the
name "Dime Insurance Agency." At June 30, 1996, the Association's investment in
the Service Corporation was $495,000. The Service Corporation had total assets
of approximately $714,000 at June 30, 1996 and net income of approximately
$50,000 and $74,000 for the years ended June 30, 1996 and 1995, respectively.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Comparison of Results of Operations for the Years
Ended June 30, 1996 and 1995."
Properties
The Association has three offices, two of which are owned by the
Association. The Association's main office is located at 123 South Main Street,
Livingston, Montana 59047. The main office was opened in 1923 and the square
footage is approximately 15,000 feet. Beginning in September 1995, the
Association subleased part of this building to the Human Resource Development
Counsel, District IX. This office is leased by the Association through March
1997. The Association's President, Beverly D. Harris, the Association's
Executive Vice President and Chief Financial Officer, Ernest A. Sandberg, and
the Association's general counsel, Joseph T. Swindlehurst, are the owners of
this building. Mrs. Harris and Mr. Swindlehurst are sister and brother and Mr.
Sandberg is their brother-in-law. For information regarding this relationship,
see "MANAGEMENT OF THE ASSOCIATION -- Transactions with the Association." The
Association has negotiated with the owners to purchase the building, which has
been approved by the OTS. If the Association determines not to purchase the
building, it will negotiate and enter into a lease with the owners for the
rental of the building prior to the expiration of the current lease term. At
June 30, 1996, the net book value of the leasehold improvements was $48,000.
The Association has branch offices located at 101 McLeod Street, Big
Timber, Montana 59011 and at 5 West Mendenhall Street, Bozeman, Montana 59715.
The Big Timber branch office consists of approximately 2,000 square feet, was
opened in 1980 in connection with the merger with Big Timber Building and Loan
Association and relocated to its current facility in 1984. At June 30, 1996, the
net book value of the property and equipment was $138,000. The Bozeman branch
office consists of approximately 7,000 square feet, was opened in 1958 in
connection with the merger with Pioneer Building and Loan Association and
relocated to its current facility in 1971.
47
<PAGE>
At June 30, 1996, the net book value of the property and equipment was $827,000.
The net book value of the Association's premises and equipment at June 30, 1996
was $1.3 million.
The Association's subsidiary, Dime Service Corporation, leases offices
in Livingston and Big Timber, Montana. The Livingston office is 2,500 square
feet and the Big Timber office is 365 square feet. There are no written lease
agreements for these two offices.
Personnel
As of June 30, 1996, the Association had 36 full-time employees (ten of
which are employed by the Service Corporation) and four part-time employees,
none of whom were represented by a collective bargaining unit. The Association
believes its relationship with its employees is good.
Legal Proceedings
From time to time, the Association is involved in routine legal
proceedings occurring in the ordinary course of business. At June 30, 1996, the
Association was not a party to any legal proceedings that management of the
Association believed would be materially adverse to the financial condition of
the Association.
48
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company is divided into three
classes, each of which contains approximately one third of the Board. The
Directors shall be elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
One class of Directors, consisting of Walter J. Peterson, Jr., Sanroe J.
Kaisler, Jr. and Walter R. Sales, has a term of office expiring at the first
annual meeting of stockholders, a second class, consisting of Beverly D. Harris
and Edwin H. Doig, has a term of office expiring at the second annual meeting of
stockholders, and a third class, consisting of Ernest A. Sandberg and John R.
Boe, has a term of office expiring at the third annual meeting of stockholders.
The executive officers of the Holding Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
The following individuals are the executive officers of the Holding
Company:
Name Position with Holding Company
Beverly D. Harris President and Chief Executive Officer
Ernest A. Sandberg Treasurer, Chief Financial Officer and Secretary
Since the formation of the Holding Company, none of the executive
officers, directors or other personnel has received remuneration from the
Holding Company. Information concerning the principal occupations, employment
and compensation of the directors and officers of the Holding Company during the
past five years is set forth under "MANAGEMENT OF THE ASSOCIATION --
Biographical Information."
MANAGEMENT OF THE ASSOCIATION
Directors and Executive Officers
The Board of Directors of the Association is presently composed of
seven members who are elected for terms of three years, approximately one third
of whom are elected annually in accordance with the Bylaws of the Association.
The executive officers of the Association are elected annually by the Board of
Directors and serve at the Board's discretion. The following table sets forth
information with respect to the Directors and executive officers of the
Association.
<TABLE>
<CAPTION>
Current
Director Term
Name Age (1) Position with Association Since Expires
- ---- ------- ------------------------- ------- -------
<S> <C> <C> <C> <C>
Beverly D. Harris 62 President and Director 1971 1998
Walter J. Peterson, Jr. 73 Chairman of the Board and 1964 1997
Director
Ernest A. Sandberg 60 Executive Vice President, 1971 1999
Secretary and Director
John R. Boe 72 Director 1979 1999
</TABLE>
(table continued on following page)
49
<PAGE>
<TABLE>
<CAPTION>
Current
Director Term
Name Age (1) Position with Association Since Expires
- ---- ------- ------------------------- ------- -------
<S> <C> <C> <C> <C>
Edwin H. Doig 65 Director 1979 1998
Sanroe J. Kaisler, Jr. 71 Director 1964 1997
Walter R. Sales 68 Director 1977 1997
</TABLE>
(1) As of June 30, 1996.
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Association. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years. All Directors and executive officers reside in Livingston, Montana,
unless otherwise noted. There are no family relationships among or between the
Directors or executive officers, except for Mrs. Harris and Mr. Sandberg who are
sister- and brother-in-law.
Beverly D. Harris has been employed by the Association since 1956, and
has been President since 1972. She is a Director and Treasurer of the Park
County Chapter of American Red Cross, the Livingston Community Trust, the
Livingston Community Concert Association and the Park County Friends of the
Arts. She serves on the Thrift Advisory Council of the Federal Reserve Board.
Mrs. Harris also serves on the Board of Directors of the Association's
service corporation, Dime Service Corporation, the Montana Power Company, and
the Financial Institutions Retirement Fund ("FIRF").
Walter J. Peterson is Vice President and Manager of Dime Service
Corporation. He is a past president of the Montana Association of Insurance
Agents, and a past national director. He co-organized and served as trustee
of the Montana Insurance Education Foundation. Community endeavors have
included serving as president of the Livingston Community Hospital
Association, the Livingston Chamber of Commerce, and the Livingston Golf
and Country Club; as trustee of the Livingston Elks Lodge #245 B.P.O.E., as
alderman on the Livingston City Council, as chairman of the City Water
Board, and as a member of the City-County Planning Board. He is an active
member of the Livingston Rotary Club.
Ernest A. Sandberg has been employed by the Association since 1969 and
been Executive Vice President and Secretary since 1979. Mr. Sandberg is a member
of the Livingston Rotary Club, Chairman of two high school scholarship programs
and has served on the Advisory Committee for the Livingston Block Grant Program.
Mr. Sandberg also serves on the Board of Directors of the Association's service
corporation, Dime Service Corporation.
John R. Boe is retired after 39 years as a teacher and Vice Principal
of the local junior high school. He has been a director of the Association for
17 years. Mr. Boe is a member of the Board of Directors of the Pioneer Medical
Center. Mr. Boe is also a member of the American Legion and the Masonic
Lodge/Scottish Rite. He resides in Big Timber, Montana.
Edwin H. Doig is a registered pharmacist, and has been employed by
Pamida Pharmacy, a retail drugstore, since 1995. From 1972 to 1995, Mr. Doig
was the owner and Manager of Livingston Drug. He is past president of the
Montana State Pharmacy Association, and a member of the American Legion, the
Masonic Lodge, the Elks Lodge, and the Livingston Golf and Country Club.
Sanroe J. Kaisler, Jr., a retired insurance broker, was the partner and
majority stockholder of Waite & Company, an insurance company. He is a volunteer
for the American Red Cross, the American Lung Association and the Diabetes
Association. Mr. Kaisler resides in Bozeman, Montana.
50
<PAGE>
Walter R. Sales is a retired rancher who served 10 years in the Montana
legislature. He has been a director of the Association for 19 years. Mr. Sales
resides in Bozeman, Montana.
Meetings and Committees of the Board of Directors
The business of the Association is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended June 30, 1996, the Board of Directors held 12 meetings. No Director
attended fewer than 75% of the total meetings of the Board of Directors and of
committees on which such Director served.
The Association's Executive Committee, consisting of Directors Harris,
Peterson and Kaisler, meets as needed. This Committee generally has the power
and authority to act on behalf of the Board of Directors between scheduled Board
meetings, unless specific matters are delegated to it for action by the Board.
The Executive Committee did not meet during the fiscal year ended June 30, 1996.
The Association's Audit Committee, consisting of Directors Peterson,
Kaisler, Sales, Doig and Boe, meets as needed. This Committee is responsible for
reviewing the external auditors' reports and results of their examination. The
Audit Committee met one time during the fiscal year ended June 30, 1996.
The Loan Committee, consisting of any three Directors of the
Association's Board of Directors, meets as needed. This Committee is responsible
for reviewing all loan applications prior to their submission to the Board.
Directors' Compensation
Directors received a fee of $500 per month and a fee of $250 for
attendance at regular Board meetings during the year ended June 30, 1996.
Effective January 1, 1997, directors will receive a retainer of $500 per month
and a fee of $250 for attendance at regular Board meetings of the Association
and a fee of $250 per month, payable quarterly, by the Holding Company. In
addition, Directors residing in Bozeman and Big Timber received $20 per meeting
for travel expenses. No additional fees are paid to Directors for committee
meetings. Directors' fees totalled $84,000 for the year ended June 30, 1996. It
is currently anticipated that after completion of the Conversion directors' fees
will be paid by the Holding Company and no separate fees will be paid for
service on the Board of Directors of the Association.
Executive Compensation
Summary Compensation Table. The following information is furnished for
the President and Chief Executive Officer, and the Executive Vice President
and Secretary of the Association for the year ended June 30, 1996. No other
executive officer of the Association received salary and bonus in excess of
$100,000 during the year ended June 30, 1996.
51
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
SUMMARY COMPENSATION TABLE(1)
- -------------------------------------------------------------------------------------------------------------------------------
Annual Compensation
- -------------------------------------------------------------------------------------------------------------------------------
Other
Annual
Name and Position Year Salary Bonus Compensation
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beverly D. Harris 1996 $102,090 $18,724 $11,750
President and Chief Executive
Officer
Ernest A. Sandberg 1996 $93,480 $17,137 $12,250
Executive Vice President and
Secretary
===============================================================================================================================
</TABLE>
(1) Compensation information for fiscal years ended June 30, 1995 and 1994
has been omitted because the Association was neither a public company
nor a subsidiary thereof at such times. Excludes certain additional
benefits, the aggregate amounts of which do not exceed 10% of total
salary and bonus.
Employment Agreements. In connection with the Conversion, the Holding
Company and the Association (collectively, the "Employers") will enter into
three-year employment agreements with Mrs. Harris and Mr. Sandberg. Under the
agreements, the initial salary level for Mrs. Harris and Mr. Sandberg will be
$105,000 and $96,000, respectively, which amounts will be paid by the
Association and may be increased at the discretion of the Board of Directors or
an authorized committee of the Board. In determining salary levels for Mrs.
Harris and Mr. Sandberg, the Board will consider compensation levels for
similarly situated executives at comparable institutions, the financial
performance of the Association, as well as their individual performance. On
each anniversary of the commencement date of the agreements, the term of the
agreements may be extended for an additional year. The agreements are terminable
by the Employers at any time or upon the occurrence of certain events specified
by federal regulations.
The employment agreement provides for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, Mrs. Harris and Mr.
Sandberg are assigned duties inconsistent with their positions, duties,
responsibilities and status immediately prior to such change in control. The
term "change in control" is defined in the agreements as having occurred when,
among other things, (a) a person other than the Holding Company purchases shares
of Common Stock pursuant to a tender or exchange offer for such shares, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Holding Company representing 25% or more of the combined voting power of the
Holding Company's then outstanding securities, (c) the membership of the Board
of Directors changes as the result of a contested election, or (d) shareholders
of the Holding Company approve a merger, consolidation, sale or disposition of
all or substantially all of the Holding Company's assets, or a plan of partial
or complete liquidation.
The severance payments from the Employers will equal 2.99 times each
executive's average annual compensation during the five-year period preceding
the change in control. Such amount will be paid in a lump sum within 10 business
days following the termination of employment. Assuming that a change in control
had occurred at June 30, 1996, Mrs. Harris and Mr. Sandberg would be entitled to
severance payments of approximately $309,000 and $284,000, respectively. Section
280G of the Code states that severance payments that equal or exceed three times
the base compensation of the individual are deemed to be "excess parachute
payments" if they are contingent upon a change in control. Individuals receiving
excess parachute payments are subject to a 20% excise tax on the amount of such
excess payments, and the Employers would not be entitled to deduct the amount of
such excess payments.
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The agreements restrict each executive's right to compete against the
Employers for a period of one year from the date of termination of the agreement
if Mrs. Harris and Mr. Sandberg involuntarily terminate employment, except in
the event of a change in control.
The Board of Directors of the Holding Company or the Association may,
from time to time, also extend employment agreements to other senior executive
officers.
Benefits
General. The Association currently provides health insurance benefits
for full-time employees, subject to certain deductibles.
Defined Benefit Plan. The Association is a participant in the FIRF, a
multi-employer, non-contributory defined benefit retirement plan. The FIRF plan
covers all employees who have completed one year of service and have attained
the age of 21 years and provides for monthly retirement benefits determined
based on the employee's base salary and years of service. The normal retirement
age is 65 and the early retirement age is before age 65, but at least 45. Normal
retirement benefits are equal to 2.0% multiplied by the years of service to the
Association and the employee's average salary for the five highest consecutive
years preceding retirement. Benefits under the plan are not subject to offset
for social security benefits. If an employee elects early retirement, but
defers the receipt of benefits until age 65, the formula for computation of
early retirement benefits is the same as if the employee had
retired at the normal retirement age. However, if the employee elects early
retirement and receives benefits prior to age 65, benefits are reduced by
applying an early retirement factor based on the number of years the early
retirement date precedes age 65. If a participant terminates employment prior to
the normal retirement date or early retirement date as a result of disability,
the participant would receive the vested percentage of benefits at the
participant's normal retirement date. Separate actuarial valuations are not made
for individual members of the plan. The Association contributed $108,000 to the
plan for the fiscal year ended June 30, 1996. As of June 30, 1996, Mrs. Harris
and Mr. Sandberg had 41 and 25 years of credited service under the FIRF,
respectively.
The following table illustrates annual pension benefits payable at
normal retirement age, based on various levels of compensation and years of
service.
<TABLE>
<CAPTION>
Highest Five-Year Years of Service
Average Annual ------------------------------------------------------------------------
Compensation 5 10 15 25 35 40 45
- ----------------- ----- ------ ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 10,000 ..................1,000 2,000 3,000 5,000 7,000 8,000 9,000
20,000 ..................2,000 4,000 6,000 10,000 14,000 16,000 18,000
30,000 ..................3,000 6,000 9,000 15,000 21,000 24,000 27,000
40,000 ..................4,000 8,000 12,000 20,000 28,000 32,000 36,000
60,000 ..................6,000 12,000 18,000 30,000 42,000 48,000 54,000
80,000 ..................8,000 16,000 24,000 40,000 56,000 64,000 72,000
100,000 .................10,000 20,000 30,000 50,000 70,000 80,000 90,000
120,000 .................12,000 24,000 36,000 60,000 84,000 96,000 99,000
</TABLE>
Deferred Compensation. The Association has entered into deferred
compensation arrangements with Mrs. Harris and Mr. Sandberg to provide those
individuals $500 per month for at least 132 months beginning at age 65. The
Association has purchased life insurance as an informal funding vehicle for its
obligation under these deferred compensation arrangements.
Employee Stock Ownership Plan. The Board of Directors has authorized
the adoption by the Association of an ESOP for employees of the Association to
become effective upon the consummation of the Conversion. The ESOP is intended
to satisfy the requirements for an employee stock ownership plan under the Code
and the
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Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding Company and the Association who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be
issued in the Conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company. Such loan will equal 100% of the aggregate purchase price
of the Common Stock. The loan to the ESOP will be repaid principally from the
Association's contributions to the ESOP and any dividends paid on Common Stock
held by the ESOP over the anticipated 10-year term of the loan. The interest
rate for the ESOP loan is expected to be the prime rate as published in The Wall
Street Journal on the closing date of the Conversion. See "PRO FORMA DATA." In
any plan year, the Association may make additional discretionary contributions
to the ESOP for the benefit of plan participants in either cash or shares of
Common Stock, which may be acquired through the purchase of outstanding shares
in the market or from individual stockholders or which constitute authorized but
unissued shares or shares held in treasury by the Holding Company. The timing,
amount, and manner of such discretionary contributions will be affected by
several factors, including applicable regulatory policies, the requirements of
applicable laws and regulations, and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be
held in a suspense account and released on a pro rata basis as the loan is
repaid. Discretionary contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the basis of each
participant's proportional share of total compensation. Forfeitures will be
reallocated among the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP upon
the completion of five years of service. Benefits may be payable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Association's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
_______, ______ and _____ have been appointed by the Board of
Directors of the Association to serve as trustees of the ESOP. Under the ESOP,
the trustees must vote all allocated shares held in the ESOP in accordance with
the instructions of plan participants and allocated shares for which no
instructions are received must be voted in the same ratio on any matter as those
shares for which instructions are given.
Compensation expense for a leveraged employee stock ownership plan,
such as the ESOP, is recorded at the fair market value of the ESOP shares
committed to be released to participants' accounts. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Impact of New
Accounting Pronouncements and Regulatory Policies -- Accounting for Employee
Stock Ownership Plans."
The ESOP will be subject to the requirements of ERISA and the
regulations of the IRS and the Department of Labor issued thereunder. The
Association intends to request a determination letter from the IRS regarding the
tax-qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Association expects that a
favorable determination letter will be received by the ESOP.
1996 Stock Option Plan. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and to submit the Stock Option Plan to
the stockholders for approval at a meeting held no earlier than six months
following consummation of the Conversion. The approval of a majority vote of the
Holding Company's outstanding shares is required prior to the implementation of
the Stock Option Plan within one year of the consummation of the Conversion. The
Stock Option Plan will comply with all applicable regulatory requirements.
However, the Stock Option Plan will not be approved or endorsed by the OTS.
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The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as a incentive to contribute to the success of the Holding Company and
the Association, and to reward officers and key employees for outstanding
performance. The Stock Option Plan will provide for the grant of incentive stock
options ("ISOs") intended to comply with the requirements of Section 422 of the
Code and for nonqualified stock options ("NQOs"). Upon receipt of stockholder
approval of the Stock Option Plan, stock options may be granted to key employees
of the Holding Company and its subsidiaries, including the Association. Unless
sooner terminated, the Stock Option Plan will continue in effect for a period of
ten years from the date the Stock Option Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the
number of shares of Common Stock issued in connection with the Conversion will
be reserved for future issuance under the Stock Option Plan (225,400 shares
based on the issuance of 2,254,000 shares at the maximum of the Estimated
Valuation Range). Shares acquired upon exercise of options will be authorized
but unissued shares or treasury shares. In the event of a stock split, reverse
stock split, stock dividend, or similar event, the number of shares of Common
Stock under the Stock Option Plan, the number of shares to which any award
relates and the exercise price per share under any option may be adjusted by the
Committee to reflect the increase or decrease in the total number of shares of
Common Stock outstanding.
The Stock Option Plan will be administered and interpreted by a
committee of the Board of Directors ("Committee"). Under the Stock Option Plan,
the Committee will determine which nonemployee directors, officers and key
employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. The per share exercise
price of an option granted to an officer or employee will equal at least 100% of
the fair market value of a share of Common Stock on the date the option is
granted. All options granted to nonemployee directors will be NQOs and such
options will be granted at an exercise price equal to 100% of the fair market
value of the Common Stock on the date the option is granted. Options granted
upon the effective date of the Stock Option Plan will become exercisable ratably
over a five-year period following the date of grant. However, unvested options
will be immediately exercisable in the event of the recipient's death or
disability. Unvested options will also be exercisable following a change in
control (as defined in the Stock Option Plan) of the Holding Company or the
Association, to the extent authorized or not prohibited by applicable law or
regulations. Current OTS regulations, however, do not permit accelerated vesting
of options in the event of a change in control.
Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are generally
nontransferable except by will or the laws of descent or distribution.
The Stock Option Plan will also provide that upon the payment of an
"extraordinary dividend" by the Holding Company, each optionee will receive a
cash payment equivalent to the dividends that would have been payable to such
optionee had the options been exercised on or before the record date of such
dividend. For purposes of the Stock Option Plan, an "extraordinary dividend" is
a dividend payable at a rate in excess of the Association's weighted average
cost of funds on interest-bearing liabilities for the 12-month period preceding
the record date of the dividend.
Under current provisions of the Code, the federal tax treatment of
ISOs and NQOs is different. With respect to ISOs, an optionee who satisfies
certain holding period requirements will not recognize income at the time the
option is granted or at the time the option is exercised. If the holding period
requirements are satisfied, the
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optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made, the
Association anticipates that if stockholder approval is obtained it would
provide awards to its directors, officers and employees to the extent permitted
by applicable regulations. OTS regulations currently provide that no individual
officer or employee may receive more than 25% of the shares reserved for
issuance under any stock compensation plan and that non-employee directors may
not receive more than 5% of such shares individually or 30% in the aggregate for
all non-employee directors.
Management Recognition Plan. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and
the Association. The MRP will enable the Holding Company and the Association to
provide participants with a proprietary interest in the Holding Company as an
incentive to contribute to the success of the Holding Company and the
Association.
The MRP will be submitted to stockholders for approval at a meeting to
be held no earlier than six months following consummation of the Conversion. The
approval of a majority vote of the Holding Company's stockholders is required
prior to implementation of the MRP within one year of the consummation of the
Conversion. The MRP will comply with all applicable regulatory requirements.
However, the OTS will not approve or endorse the MRP.
The MRP expects to acquire a number of shares of Common Stock equal to
4% of the Common Stock issued in connection with the Conversion (90,160 shares
based on the issuance of 2,254,000 shares in the Conversion at the maximum of
the Estimated Valuation Range). Such shares will be acquired on the open market,
if available, with funds contributed by the Holding Company to a trust which the
Holding Company may establish in conjunction with the MRP ("MRP Trust") or from
authorized but unissued shares or treasury shares of the Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company to the MRP Trust. Upon recommendation
of the Board of Directors, the Committee will allocate awards under the MRP to
nonemployee directors, officers and employees of the Association.
Shares of Common Stock granted pursuant to the MRP will be in the form
of restricted stock vesting ratably over a five-year period following the date
of grant. During the period of restriction, all shares will be held in escrow by
the Holding Company or by the MRP Trust. If a recipient terminates employment
for reasons other than death or disability, the recipient will forfeit all
rights to allocated shares that are then subject to restriction. In the event of
the recipient's death or disability, all restrictions will expire and all
allocated shares will become unrestricted. In addition, all allocated shares
will become unrestricted in the event of a change in control (as defined in the
MRP) of the Holding Company or the Association to the extent authorized or not
prohibited by applicable law or regulations. Current OTS regulations, however,
do not permit accelerated vesting of MRP awards in the event of a change in
control. Compensation expense in the amount of the fair market value of the
Common Stock at the date of the grant to the recipient will be recognized during
the years in which the shares vest.
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The Board of Directors of the Holding Company may terminate the MRP at
any time and, upon termination, all unallocated shares of Common Stock will
revert to the Holding Company.
A recipient of an MRP award in the form of restricted stock generally
will not recognize income upon an award of shares of Common Stock, and the
Holding Company will not be entitled to a federal income tax deduction, until
the termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made, the
Association anticipates that if stockholder approval is obtained it would
provide awards to its directors, officers and employees to the extent permitted
by applicable regulations. OTS regulations currently provide that no individual
officer or employee may receive more than 25% of the shares reserved for
issuance under any stock compensation plan.
Transactions with the Association
Applicable law and regulations require that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and does not involve more
than the normal risk of repayment or present other unfavorable features, and the
Association has adopted a policy to this effect. In addition, loans made to a
director or executive officer in an amount that, when aggregated with the amount
of all other loans to such director or executive officer and his or her related
interests are in excess of the greater of $25,000, or 5% of the Association's
capital and surplus (up to a maximum of $500,000), must be approved in advance
by a majority of the disinterested members of the Board of Directors. See
"REGULATION -- Federal Regulation of Savings Associations -- Transactions with
Affiliates." The aggregate amount of loans by the Association to its executive
officers and directors was $134,589 at June 30, 1996, or approximately 0.44% and
0.38%, respectively, of the Holding Company's pro forma stockholders' equity
based on the minimum and maximum of the Estimated Valuation Range.
Mr. Joseph T. Swindlehurst, General Counsel to the Association, is a
partner with the law firm of Huppert & Swindlehurst, P.C. Mr. Swindlehurst also
is the brother of Beverly D. Harris, President of the Association, and the
brother-in-law of Ernest A. Sandberg, Executive Vice President and Secretary of
the Association. As counsel to the Association during the fiscal year ended June
30, 1996, Huppert & Swindlehurst, P.C. was paid $11,734 in fees and expense
reimbursement, which amount did not exceed 5% of the law firm's annual gross
revenues. The fees proposed or estimated to be paid to Huppert & Swindlehurst,
P.C. for the ending June 30, 1997 are $12,000, which amount is not expected to
exceed 5% of the law firm's annual gross revenues.
The Association's main office is owned by Mr. Swindlehurst, Mrs.
Harris and their sister, Mrs. Jean E. Sandberg, who is the wife of Mr. Sandberg,
and is leased by the Association from the owners through March 1997. The
Association has negotiated the purchase of the building, which has been approved
by the OTS. See "BUSINESS OF THE ASSOCIATION -- Properties. During the fiscal
year ended June 30, 1996, the owners received $10,000 in rental income from the
Association.
REGULATION
General
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
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the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS
and the FDIC to implement these statutes. These laws and regulations delineate
the nature and extent of the activities in which federal savings associations
may engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Association's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Association's mortgage documents. The Association must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to review
the Association's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Holding Company, the Association and their
operations. The Holding Company, as a savings and loan holding company, will
also be required to file certain reports with, and otherwise comply with the
rules and regulations of, the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs
carry out their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital markets; and ensure that the
FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB-Seattle, is required to
acquire and hold shares of capital stock in the FHLB-Seattle in an amount equal
to the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Seattle. The Association is in compliance with this requirement with an
investment in FHLB-Seattle stock of $1.1 million at June 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB-Seattle.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer, up
to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the BIF and
the SAIF. As insurer of deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The Association's accounts are insured by the SAIF. The FDIC insures
deposits at the Association to the maximum extent permitted by law. The
Association currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups that are based solely on the level of an
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institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized"-- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the
FDIA, as discussed below. These three groups are then divided into three
subgroups that reflect varying levels of supervisory concern, from those that
are considered to be healthy to those that are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates currently ranging from .23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to .31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. Until
the second half of 1995, the same rate matrix applied to BIF-member
institutions. The FDIC is authorized to raise assessment rates in certain
circumstances. The Association's assessments expensed for the year ended
June 30, 1996 were $185,000.
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000. With
respect to SAIF member institutions, the FDIC has retained the existing rate
schedule of 23 to 31 basis points. The Association is, and after the Conversion
will remain, a member of the SAIF rather than the BIF. See "RISK FACTORS --
Recapitalization of SAIF and its Impact on SAIF Premiums."
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to be
(i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or
more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v)
"critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
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Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At June 30, 1996, the Association was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies have adopted final
regulations and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement safety and soundness standards required by
the FDIA. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final, would
be added to the Guidelines. Under the final regulations, if the OTS determines
that the Association fails to meet any standard prescribed by the Guidelines,
the agency may require the Association to submit to the agency an acceptable
plan to achieve compliance with the standard, as required by the FDIA. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test set forth in the HOLA and
regulations of the OTS thereunder to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a QTL shall
either become a national bank or be subject to the following restrictions on its
operations: (i) the association may not make any new investment or engage in
activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; (iii) the association shall be ineligible to obtain new advances
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the rules regarding the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after the
date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-related
assets on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-backed securities
(where the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting
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the test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold
within 90 days of origination; 100% of consumer and educational loans
(limited to 10% of total portfolio assets); and stock issued by the FHLMC
or the FNMA. Portfolio assets consist of total assets minus the sum of
(i) goodwill and other intangible assets, (ii) property used by the savings
institution to conduct its business, and (iii) liquid assets up to 20% of
the institution's total assets. At June 30, 1996, the Association's qualified
thrift investments significantly exceeded 65% of its portfolio assets as
required by regulation.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements. The Holding Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers,
or engaged solely in mortgage-banking activities. In calculating adjusted
total assets, adjustments are made to total assets to give effect to the
exclusion of certain assets from capital and to account appropriately for
the investments in and assets of both includable and nonincludable
subsidiaries. Institutions that fail to meet the core capital requirement
would be required to file with the OTS a capital plan that details the steps
they will take to reach compliance. In addition, the OTS' prompt corrective
action regulation provides that a savings institution that has a leverage
ratio of less than 4% (3% for institutions receiving the highest CAMEL
examination rating) will be deemed to be "undercapitalized" and may be subject
to certain restrictions. See "-- Federal Regulation of Savings
Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less
than 1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal
to at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory convertible subordinated debt,
and (iii) general valuation loan and lease loss allowances up to 1.25% of
risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
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repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk- weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included as risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. The rule also provides that the Director of the
OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS has
postponed the date that the component will first be deducted from an
institution's total capital until savings associations become familiar with the
process for requesting an adjustment to its interest rate risk component.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table that sets
forth in terms of dollars and percentages the OTS tangible, core and risk-based
capital requirements, the Association's historical amounts and percentages at
June 30, 1996, and pro forma amounts and percentages based upon the assumptions
stated therein.
Limitations On Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS 30
days' advance notice of any proposed declaration of dividends, and the OTS has
the authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application but
upon prior notice to, and no objection made by, the OTS) capital distributions
during a calendar year up to 100% of its net income to date during the calendar
year plus one-half its surplus capital ratio (i.e., the amount of capital in
excess of its fully phased-in requirement) at the beginning of the calendar year
or the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital requirement
but below its fully phased-in capital requirement (both before and after the
proposed capital distribution). Such an association may make (without
application) capital distributions up to an amount equal to 75% of its net
income during the previous four quarters
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depending on how close the association is to meeting its fully phased-in
capital requirement. Capital distributions exceeding this amount require prior
OTS approval. Tier 3 associations are savings associations with capital below
the minimum capital requirement (either before or after the proposed capital
distribution). Tier 3 associations may not make any capital distributions
without prior approval from the OTS.
The Association is currently meeting the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the beginning
of the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such loan
is secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower in
additional amounts under circumstances limited essentially to loans to develop
or complete residential housing units. At June 30, 1996, the Association's limit
on loans to one borrower was $2.4 million. At June 30, 1996, the Association's
largest aggregate amount of loans to one borrower was $1.3 million, all of
which were performing according to their original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guaranty and similar types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case
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with respect to all FDIC-insured banks. The Association has not been
significantly affected by the rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Association may make to such persons based, in part, on the
Association's capital position, and requires certain board approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), a federal statute, all federally-insured financial institutions have a
continuing and affirmative obligation consistent with safe and sound operations
to help meet all the credit needs of its delineated community. The CRA does not
establish specific lending requirements or programs nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to meet all the credit needs of its delineated
community. The CRA requires the federal banking agencies, in connection with
regulatory examinations, to assess an institution's record of meeting
the credit needs of its delineated community and to take such record into
account in evaluating certain regulatory applications filed by an institution.
The CRA requires public disclosure of an institution's CRA rating. The
Association received a "satisfactory" rating as a result of its latest
evaluation.
Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
or directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially egregious cases. Under the FDIA, the
FDIC has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Holding Company generally is not subject to activity restrictions.
If the Holding Company acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more restrictions
on the activities of a multiple savings and loan holding company than on a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
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liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Holding Company and the Association will report their
income on a calendar year basis using the accrual method of accounting and will
be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Association's
reserve for bad debts discussed below. See "CHANGE IN FISCAL YEAR." The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Association or the Holding Company.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Association which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Association's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, may have been
computed using an amount based on the Association's actual loss experience, or a
percentage equal to 8% of the Association's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the nonqualifying reserve. The Association's deduction with respect to
nonqualifying loans was computed under the experience method, which essentially
allows a deduction based on the Association's actual loss experience over a
period of several years. Each year the Association selected the most favorable
way to calculate the deduction attributable to an addition to the tax bad debt
reserve.
Recently enacted federal legislation repeals the reserve method of
accounting for bad debt reserves for tax years beginning after December 31,
1995. As result, savings associations are no longer able to calculate their
deduction for bad debts using the percentage-of-taxable-income method. Instead,
savings associations are required to compute their deduction based on specific
charge-offs during the taxable year or, if the savings association or its
controlled group had assets of less than $500 million, based on actual loss
experience over a period of years. This legislation also requires savings
associations to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves, thereby generating additional tax
liability. At June 30, 1996, the Association's post- 1987 reserves were a
negligible amount of approximately $1,000. The recapture may be suspended for up
to two years if, during those years, the institution satisfies a residential
loan requirement. The Association anticipates that it will meet the residential
loan requirement for the taxable year ending December 31, 1996.
Under prior law, if the Association failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Association would be required to
deduct bad debts as they occur and would additionally be required to recapture
its bad debt reserve deductions ratably over a multi-year period. At June 30,
1996, the Association's total bad debt reserve for tax purposes was
approximately $3.3 million. Among other things, the qualifying thrift
definitional tests required the Association to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations of
the United States or any
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agency or instrumentality thereof, certain obligations of a state or political
subdivision thereof, loans secured by interests in improved residential real
property or by savings accounts, student loans and property used by the
Association in the conduct of its banking business. Under current law, a
savings association will not be required to recapture its pre-1988 bad debt
reserves if it ceases to meet the qualifying thrift definitional tests.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Holding Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Association's taxable income. Nondividend distributions include
distributions in excess of the Association's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation. However, dividends paid out of the Association's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Association's bad debt reserve. Thus, any dividends to the Holding Company that
would reduce amounts appropriated to the Association's bad debt reserve and
deducted for federal income tax purposes would create a tax liability for the
Association. The amount of additional taxable income attributable to an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Association makes a "nondividend distribution," then
approximately one and one-half times the amount so used would be includable
in gross income for federal income tax purposes, assuming a 35% corporate
income tax rate (exclusive of state and local taxes). See "REGULATION" and
"DIVIDEND POLICY" for limits on the payment of dividends by the Association.
The Association does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Association, whether or not an
Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Holding Company may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which the Holding Company and the
Association will not file a consolidated tax return, except that if the Holding
Company or the Association owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
There have not been any IRS audits of the Association's federal income
tax returns during the past five years.
State Taxation
Empire Federal is subject to the Montana Corporation License Tax, which
is imposed at the rate of 6.75% of Montana taxable income. There have not been
any audits of the Association's state tax returns during the past five years.
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THE CONVERSION
The OTS has approved the Plan subject to the Plan's approval by the
members of the Association entitled to vote on the matter and subject to the
satisfaction of certain other conditions imposed by the OTS in its approval. OTS
approval, however, does not constitute a recommendation or endorsement of the
Plan.
General
On August 29, 1996, the Association's Board of Directors adopted the
Plan of Conversion, pursuant to which the Association will convert from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank under the name "Empire Federal Savings Bank," to be held as a
wholly-owned subsidiary of the Holding Company, a newly formed Delaware
corporation. The Holding Company and the Association intend to pursue the
business strategy described in this Prospectus with the goal of enhancing
long-term shareholder value. Neither the Holding Company nor the Association has
any existing plan to pursue any possible business combination, and neither has
any agreement or understanding, written or oral, with respect to any possible
business combination.
The following discussion of the Plan of Conversion is qualified in its
entirety by reference to the Plan of Conversion, which is attached as Exhibit A
to the Association's Proxy Statement and is available from the Association upon
written request to Ernest A. Sandberg, Executive Vice President and Secretary,
123 South Main Street, Livingston, Montana 59047. The OTS has approved the Plan
of Conversion subject to the Plan's approval by the members of the Association
entitled to vote on the matter at a Special Meeting called for that purpose to
be held on ________ __, 1996, and subject to the satisfaction of certain other
conditions imposed by the OTS in its approval.
If the Board of Directors of the Association decides for any reason,
such as possible delays resulting from overlapping regulatory processing or
policies or conditions that could adversely affect the Association's or the
Holding Company's ability to consummate the Conversion and transact its business
as contemplated herein and in accordance with the Association's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Association
will promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's registration statement from the SEC and
will take all steps necessary to consummate the Conversion and proceed with a
new offering without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Association
determines not to consummate the Conversion, the Association will issue and sell
the common stock of the Association. There can be no assurance that the OTS
would approve the Conversion if the Association decided to proceed without the
Holding Company. The following description of the Plan assumes that a holding
company form of organization will be utilized in the Conversion. In the event
that a holding company form of organization is not utilized, all other pertinent
terms of the Plan as described below will apply to the Conversion of the
Association from mutual to stock form of organization and the sale of the
Association's common stock.
The Conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the
Association. Under the Plan, 1,666,000 to 2,254,000 shares of Common Stock are
being offered for sale by the Holding Company at the Purchase Price of $10.00
per share. As part of the Conversion, the Association will issue all of its
newly issued common stock (1,000 shares) to the Holding Company in exchange for
50% of the net proceeds from the sale of Common Stock by the Holding Company.
The Plan of Conversion provides generally that (i) the Association will
convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings bank; (ii) the Common Stock will be
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offered by the Holding Company in the Subscription Offering to persons having
Subscription Rights and in a Direct Community Offering to certain members of
the general public with preference given to natural persons residing in the
Local Community; (iii) if necessary, shares of Common Stock not subscribed
for in the Subscription and Direct Community Offering will be offered to
certain members of the general public in a Syndicated Community Offering
through a syndicate of registered broker-dealers pursuant to selected dealers
agreements; and (iv) the Holding Company will purchase all of the capital
stock of the Association to be issued in connection with the Conversion.
The Conversion will be effected only upon completion of the sale of at least
1,666,000 shares of Common Stock to be issued pursuant to the Plan of
Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of March 31, 1995); (ii) the Association's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of _________ __, 1996); and (iv) Other Members (depositors of the Association
as of __________ __, 1996, and borrowers of the Association with loans
outstanding as of ________ __, 1996, which continue to be outstanding as of
__________ __, 1996). Concurrent with the Subscription Offering and subject to
the prior rights of holders of Subscription Rights, the Holding Company is
offering the Common Stock for sale to certain members of the general public
through a Direct Community Offering.
Shares of Common Stock not sold in the Subscription and Direct
Community Offering may be offered in the Syndicated Community Offering.
Regulations require that the Syndicated Community Offering be completed within
45 days after completion of the Subscription Offering unless extended by the
Association or the Holding Company with the approval of the regulatory
authorities. If the Syndicated Community Offering is determined not to be
feasible, the Board of Directors of the Association will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion provides
that the Conversion must be completed within 24 months after the date of the
approval of the Plan of Conversion by the members of the Association.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Association.
The completion of the Offerings, however, is subject to market
conditions and other factors beyond the Association's control. No assurance can
be given as to the length of time after approval of the Plan of Conversion at
the Special Meeting that will be required to complete the Syndicated Community
Offering or other sale of the Common Stock. If delays are experienced,
significant changes may occur in the estimated pro forma market value of the
Holding Company and the Association as converted, together with corresponding
changes in the net proceeds realized by the Holding Company from the sale of the
Common Stock. In the event the Conversion is terminated, the Association would
be required to charge all Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
1,666,000 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion closes. If the Conversion is not
consummated by ___________ __, 1997 (45 days after the last day of the fully
extended Subscription Offering) and the OTS consents to an extension of time to
consummate the Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
Association's passbook rate (____% per annum as of the date hereof) from the
date payment is received until the funds are returned to the subscriber. If such
period is not extended, or, in any event, if the Conversion is not consummated
by ____________ __, 1997, all withdrawal authorizations will be terminated and
all funds held will be promptly returned together with accrued interest at the
Association's passbook rate from the date payment is received until the
Conversion is terminated.
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Purposes of Conversion
Management of the Association believes that the Conversion offers a
number of advantages that will be important to the future growth and performance
of the Association in that it is intended to (i) improve the competitive
position of the Association in its market area and to support possible future
expansion (currently there are no specific plans, arrangements or
understandings, written or oral, regarding any such activities); (ii) afford
members of the Association and others the opportunity to become stockholders of
the Holding Company and thereby participate more directly in, and contribute to,
any future growth of the Association; and (iii) provide future access to capital
markets.
The Association's Board of Directors has formed the Holding Company to
serve upon consummation of the Conversion as a holding company with the
Association as its subsidiary. The Association, as a mutual savings association,
does not have stockholders and has no authority to issue capital stock. By
converting to the stock form of organization, the Holding Company and the
Association will be structured in the form used by holding companies of
commercial banks and by a growing number of savings institutions.
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Savings members and borrowers will have no voting rights
in the converted Association or the Holding Company and therefore will not be
able to elect directors of the Association or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings and borrower
members of the Association. Subsequent to the Conversion, voting rights will
be vested exclusively in the Holding Company with respect to the Association
and the holders of the Common Stock as to matters pertaining to the Holding
Company. Each holder of Common Stock shall be entitled to vote on any matter
to be considered by the stockholders of the Holding Company. A stockholder
will be entitled to one vote for each share of Common Stock owned.
Savings Accounts and Loans. The Association's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the loan
accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Association.
Tax Effects. The Association has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Association
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Association immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Association in its
mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Association immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or loss will
be recognized to account holders upon the receipt or exercise of Subscription
Rights in the Conversion, except to the extent Subscription Rights are deemed to
have value as discussed below. Unlike a private letter ruling issued by the IRS,
an opinion of counsel is not binding on the IRS and the IRS could disagree with
the conclusions reached therein. In the event of such disagreement, no assurance
can be given that the conclusions reached in an opinion of counsel would be
sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that
the receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan will be taxable to the
extent, if any, that the Subscription Rights are deemed to have a fair market
value. Keller, a financial consulting firm retained by the Association, whose
findings are not binding on the IRS, has indicated that the Subscription Rights
do not have any value, based on the fact that such rights are acquired by the
recipients without
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cost, are nontransferable and of short duration and afford the recipients the
right only to purchase shares of the Common Stock at a price equal to its
estimated fair market value, which will be the same price paid by purchasers in
the Direct Community Offering for unsubscribed shares of Common Stock. If the
Subscription Rights are deemed to have a fair market value, the receipt of such
rights may only be taxable to those Eligible Account Holders, Supplemental
Eligible Account Holders (if any) and Other Members who exercise their
Subscription Rights. The Association could also recognize a gain on the
distribution of such Subscription Rights. Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are encouraged to consult with their
own tax advisors as to the tax consequences in the event the Subscription Rights
are deemed to have a fair market value.
The Association has also received an opinion from Huppert and
Swindlehurst, P.C., Livingston, Montana, that, assuming the Conversion does
not result in any federal income tax liability to the Association, its account
holders, or the Holding Company, implementation of the Plan of Conversion will
not result in any Montana income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Huppert and Swindlehurst, P.C.
and the opinion from Keller are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in the Association at
the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the
Association, including certificates of deposit ("Savings Account(s)"), shall not
be entitled to share in any residual assets in the event of liquidation of the
Association. However, pursuant to OTS regulations, the Association shall, at the
time of the Conversion, establish a liquidation account in an amount equal to
its total equity as of the date of the latest statement of financial condition
contained herein.
The liquidation account shall be maintained by the Association
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Association. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related inchoate
interest in a portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder or a Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of such holder's "qualifying
deposit" in the Savings Account and the denominator is the total amount of the
"qualifying deposits" of all such holders. Such initial subaccount balance shall
not be increased, and it shall be subject to downward adjustment as provided
below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing day of the Association subsequent to March 31, 1995 is less than
the lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to March 31, 1995 or
_________ __, 1996 or (ii) the amount of the "qualifying deposit" in such
Savings Account on March 31, 1995 or _________ __, 1996, then the subaccount
balance for such Savings Account shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of a downward adjustment, such subaccount balance shall not be
subsequently
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increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Association (and only in
such event) each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Association is not the surviving institution shall be considered to
be a complete liquidation. In any such transaction the liquidation account shall
be assumed by the surviving institution.
The Subscription, Direct Community and Syndicated Community Offerings
The Offerings (including the Syndicated Community Offering) are
expected to expire at Noon, Mountain Time, on the Expiration Date, unless
extended or continued as described on the cover page of this Prospectus.
Subscription Offering. In accordance with the Plan, nontransferable
Subscription Rights to purchase the Common Stock have been issued to all persons
and entities entitled to purchase the Common Stock in the Subscription Offering.
The amount of the Common Stock which these parties may purchase will be subject
to the availability of the Common Stock for purchase under the categories set
forth in the Plan. Subscription priorities have been established for the
allocation of stock to the extent that the Common Stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or
more on deposit at the Association as of March 31, 1995 will receive
nontransferable Subscription Rights to subscribe for up to the greater of 12,500
shares of Common Stock, one-tenth of 1% of the total offering of Common Stock or
15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of Subscription Rights
in this category results in an oversubscription, shares of Common Stock will be
allocated among subscribing Eligible Account Holders so as to permit each
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation equal 100 shares or the number of
shares actually subscribed for, whichever is less. Thereafter, unallocated
shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Eligible Account Holders.
Subscription Rights received by officers and directors in this category based on
their increased deposits in the Association in the one-year period preceding
March 31, 1995 are subordinated to the Subscription Rights of other Eligible
Account Holders.
Category 2: ESOP. The Plan provides that the ESOP shall receive
nontransferable Subscription Rights to purchase up to 8% of the shares of Common
Stock issued in the Conversion. The ESOP intends to purchase 8% of the shares of
Common Stock issued in the Conversion. In the event the number of shares offered
in the Conversion is increased above the maximum of the Estimated Valuation
Range, the ESOP shall have a priority right to purchase any such shares
exceeding the maximum of the Estimated Valuation Range up to an aggregate of 8%
of the Common Stock.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit at the Association as of _________ __, 1996 will
receive nontransferable Subscription Rights to subscribe for up to the greater
of 12,500 shares of Common Stock, one-tenth of 1% of the total offering of
Common Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all
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Supplemental Eligible Account Holders. If the exercise of Subscription Rights in
this category results in an oversubscription, shares of Common Stock will be
allocated among subscribing Supplemental Eligible Account Holders so as to
permit each Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his or her total allocation equal
100 shares or the number of shares actually subscribed for, whichever is less.
Thereafter, unallocated shares will be allocated among subscribing Supplemental
Eligible Account Holders proportionately, based on the amount of their
respective qualifying deposits as compared to total qualifying deposits of all
Supplemental Eligible Account Holders.
Category 4: Other Members. Each depositor of the Association as of the
Voting Record Date and each borrower with a loan outstanding on ________ __,
1996 which continues to be outstanding as of the Voting Record Date will receive
nontransferable Subscription Rights to purchase the greater of 12,500 shares of
Common Stock in the Conversion or one-tenth of 1% of the total offering of
shares in the Conversion to the extent available following subscriptions by
Eligible Account Holders and Supplemental Eligible Account Holders. In the event
of an oversubscription, the available shares will be allocated proportionately
based on the amount of their respective subscriptions.
Subscription Rights are nontransferable. Persons selling or otherwise
transferring their Subscription Rights to subscribe for Common Stock in the
Subscription Offering or subscribing for Common Stock on behalf of another
person will be subject to forfeiture of such right and possible further
sanctions and penalties imposed by the OTS or another agency of the U.S.
Government. Each person exercising Subscription Rights will be required to
certify that he or she is purchasing such shares solely for his or her own
account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares. Once tendered, subscription
orders cannot be revoked without the consent of the Association and the Holding
Company.
The Subscription Offering and all Subscription Rights under the Plan
will expire at Noon, Mountain Time, on _____________ __, 1996, whether or not
the Association has been able to locate each person entitled to such
Subscription Rights. OTS regulations require that the Holding Company complete
the sale of Common Stock within 45 days after the close of the Subscription
Offering. The Subscription Offering may be extended by the Holding Company and
the Association up to _____________ __, 1997 without the OTS's approval. If the
Direct Community Offering and the Syndicated Community Offerings are not
completed by ______________ __, 1996 (or __________ __, 1997, if the
Subscription Offering is fully extended), all funds received will be promptly
returned with interest at the passbook rate and all withdrawal authorizations
will be canceled or, if regulatory approval of an extension of the time period
has been granted, all subscribers and purchasers will be given the right to
increase, decrease or rescind their orders. If an extension of time is obtained,
all subscribers will be notified of such extension and of the duration of any
extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by the Holding Company from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest (or withdrawal authorizations will be canceled). No
single extension can exceed 90 days.
Direct Community Offering. Concurrently with the Subscription Offering,
the Holding Company is offering shares of the Common Stock to certain members of
the general public in a Direct Community Offering with preference given to
natural persons residing in the Local Community. Purchasers in the Direct
Community Offering, together with their associates and groups acting in concert,
are eligible to purchase up to 12,500 shares of Common Stock in the Conversion.
In the event an insufficient number of shares are available to fill orders in
the Direct Community Offering, the available shares will be allocated on a pro
rata basis determined by the amount of the respective orders. Orders for the
Common Stock in the Direct Community Offering will be filled to the extent such
shares remain available after satisfaction of all orders received in the
Subscription Offering. The Direct Community Offering may terminate as early as
Noon, Mountain Time, on _____________ __, 1996 or any date thereafter; however,
in no case later than ___________ __, 1997, unless extended. Any extensions
beyond ___________ __, 1997 would require a resolicitation of orders, wherein
subscribers would be given the opportunity to continue their orders, in which
case they will need to reconfirm affirmatively their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the passbook rate, or be
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permitted to modify or cancel their orders. The right of any person to purchase
shares in the Direct Community Offering is subject to the absolute right of the
Holding Company and the Association to accept or reject such purchases in whole
or in part. If an order is rejected in part, the purchaser does not have the
right to cancel the remainder of the order. The Holding Company presently
intends to terminate the Direct Community Offering as soon as it has received
orders for all shares available for purchase in the Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering and all funds submitted pursuant to the Direct Community
Offering will be refunded promptly with interest.
Syndicated Community Offering. The Plan provides that shares of Common
Stock not purchased in the Subscription and Direct Community Offering, if any,
may be offered for sale to certain members of the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
managed by Webb acting as agent of the Holding Company. The Holding Company and
the Association have the right to reject orders, in whole or part, in their sole
discretion in the Syndicated Community Offering. If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. Neither Webb nor any registered broker-dealer shall have any obligation
to take or purchase any shares of the Common Stock in the Syndicated Community
Offering; however, Webb has agreed to use its best efforts in the sale of shares
in the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering will be sold at the
$10.00 Purchase Price, the same price as all other shares in the Offerings. See
"-- Stock Pricing and Number of Shares to be Issued." No person, together with
any associate or group of persons acting in concert, will be permitted to
subscribe in the Syndicated Community Offering for shares of Common Stock with
an aggregate purchase price of more than $250,000. See "-- Plan of Distribution
for the Subscription, Community and Syndicated Community Offerings" for a
description of the commission to be paid to the selected dealers and to Webb.
Webb may enter into agreements with selected dealers to assist in the
sale of shares in the Syndicated Community Offering. During the Syndicated
Community Offering, selected dealers may only solicit indications of interest
from their customers to place orders with the Holding Company as of a certain
date ("Order Date") for the purchase of shares of Conversion Stock. When and if
Webb and the Holding Company believe that enough indications of interest and
orders have been received in the Subscription Offering, the Direct Community
Offering and the Syndicated Community Offering to consummate the Conversion,
Webb will request, as of the Order Date, selected dealers to submit orders to
purchase shares for which they have received indications of interest from their
customers. Selected dealers will send confirmations to such customers on the
next business day after the Order Date. Selected dealers may debit the accounts
of their customers on a date which will be three business days from the Order
Date ("Settlement Date"). Customers who authorize selected dealers to debit
their brokerage accounts are required to have the funds for payment in their
account on but not before the Settlement Date. On the Settlement Date, selected
dealers will remit funds to the account that the Holding Company established for
each selected dealer. Each customer's funds so forwarded to the Holding Company,
along with all other accounts held in the same title, will be insured by the
FDIC up to the applicable $100,000 legal limit. After payment has been received
by the Holding Company from selected dealers, funds will earn interest at the
Association's passbook rate (_____% per annum as of the date hereof) until the
completion of the Offerings. At the consummation of the Conversion the funds
received in the Offerings will be used to purchase the shares of Common Stock
ordered. The shares of Common Stock issued in the Conversion cannot and will not
be insured by the FDIC or any other government agency. In the event the
Conversion is not consummated as described above, funds with interest will be
returned promptly to the selected dealers, who, in turn, will promptly credit
their customers' brokerage accounts.
The Syndicated Community Offering may close as early as Noon, Mountain
Time on _____________ __, 1996, the Expiration Date, or any date thereafter at
the discretion of the Holding Company. The Syndicated Community Offering will
terminate no more than 45 days following the Expiration Date, unless extended by
the Holding Company with any required regulatory approval, but in no case later
than ____________ __, 1997. The
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Syndicated Community Offering may run concurrent to the Subscription and Direct
Community Offering or subsequent thereto.
In the event the Association is unable to find purchasers from the
general public for all unsubscribed shares, other purchase arrangements will be
made by the Board of Directors of the Association, if feasible. Such other
arrangements will be subject to the approval of the OTS. The OTS may grant one
or more extensions of the offering period, provided that (i) no single extension
exceeds 90 days, (ii) subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and (iii) the
extensions do not go more than two years beyond the date on which the members
approved the Plan. If the Conversion is not consummated by ______________ __,
1996 (or, if the Offerings are fully extended, by ____________ __, 1997), either
all funds received will be returned with interest (and withdrawal authorizations
canceled) or, if the OTS has granted an extension of such period, all
subscribers will be given the right to increase, decrease or rescind their
subscriptions at any time prior to 20 days before the end of the extension
period. If an extension of time is obtained, all subscribers will be notified of
such extension and of their rights to modify their orders. If an affirmative
response to any resolicitation is not received by the Holding Company from a
subscriber, the subscriber's order will be rescinded and all funds received will
be promptly returned with interest (or withdrawal authorizations will be
canceled). No single extension can exceed 90 days.
Persons in Non-Qualified States. The Holding Company and the
Association will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for stock
pursuant to the Plan reside. However, the Holding Company and the Association
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which (i) a small number of persons otherwise eligible to subscribe
for shares of Common Stock reside in such state; or (ii) the Holding Company or
the Association determines that compliance with the securities laws of such
state would be impracticable for reasons of cost or otherwise, including but not
limited to a request or requirement that the Holding Company and the Association
or their officers, directors or trustees register as a broker, dealer, salesman
or selling agent, under the securities laws of such state, or a request or
requirement to register or otherwise qualify the Subscription Rights or Common
Stock for sale or submit any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small,
the Holding Company and the Association will base their decision as to whether
or not to offer the Common Stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
Limitations on Purchases of Shares
The Plan of Conversion provides for certain additional limitations to
be placed upon the purchase of Common Stock by eligible subscribers and others
in the Conversion. Each subscriber must subscribe for a minimum of 25 shares. No
person by himself shall purchase shares of Common Stock with an aggregate
Purchase Price that exceeds $125,000 (12,500 shares based on the $10.00 Purchase
Price) in the Conversion. Additionally, no person, together with any associates
or groups of persons acting in concert, shall purchase shares of Common Stock
with an aggregate Purchase Price that exceeds $350,000 (35,000 shares based on
the $10.00 Purchase Price) in the Conversion. Officers, directors and their
associates may not purchase, in the aggregate, more than 34% of the shares of
Common Stock offered in the Conversion. For purposes of the Plan, the directors
are not deemed to be acting in concert solely by reason of their Board
membership. Pro rata reductions within each Subscription Rights category will be
made in allocating shares to the extent that the maximum purchase limitations
are exceeded.
The Association's and the Holding Company's Boards of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of Common Stock sold in the Conversion, provided that
orders for shares which exceed 5% of the shares of Common Stock sold in the
Conversion may not exceed, in the aggregate, 10% of the shares sold in the
Conversion. The Association and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
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increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation above 12,500 shares of
Common Stock, all persons who subscribed for the maximum number of shares will
be given the opportunity to increase their orders accordingly, subject to the
rights and preferences of any person who has priority Subscription Rights.
The term "acting in concert" is defined in the Plan to mean (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. In
general, a person who acts in concert with another person ("other party") shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party. The Holding Company and the Association may
presume that certain persons are acting in concert based upon, among other
things, joint account relationships and the fact that such persons have filed
joint Schedules 13D with the SEC with respect to other companies.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Association or a majority-owned
subsidiary of the Association) of which such person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee plans); and
(iii) any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Association or any of its parents or subsidiaries. For example, a corporation of
which a person serves as an officer would be an associate of such person, and,
therefore, all shares purchased by such corporation would be included with the
number of shares which such person could purchase individually under the above
limitations.
The term "officer" is defined in the Plan to mean an executive officer
of the Association, including its President, Executive Vice Presidents, Senior
Vice Presidents, Vice Presidents in charge of principal business functions,
Secretary and Treasurer.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Association and the Holding Company and for shares purchased by National
Association of Securities Dealers, Inc. ("NASD") members. See "-- Restrictions
on Transferability by Directors and Officers and NASD Members."
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
The Holding Company and the Association have retained Webb to consult
with and to advise the Association and the Holding Company, and to assist the
Holding Company, on a best efforts basis, in the distribution of the shares of
Common Stock in the Subscription and Community Offering. The services that Webb
will provide include, but are not limited to (i) training the employees of the
Association who will perform certain ministerial functions in the Subscription
and Community Offering regarding the mechanics and regulatory requirements of
the stock offering process, (ii) managing the Stock Information Center by
assisting interested stock subscribers and by keeping records of all stock
orders, (iii) preparing marketing materials, and (iv) assisting in the
solicitation of proxies from the Association's members for use at the Special
Meeting. For its services, Webb will receive a management fee of $25,000 and a
success fee of 1.5% of the aggregate Actual Purchase Price of the shares of
Common Stock sold in the Offerings excluding shares purchased by the ESOP and
officers and directors of the Association (such success fee not to exceed 1.5%
of the gross offering proceeds at the midpoint of the Estimated Valuation Range,
or $294,000). In the event that selected dealers are used to assist in the sale
of shares of Common Stock in the Community Offering, such dealers will be paid a
fee of up to 5.5% of the aggregate Purchase Price of the shares sold by such
dealers. The Holding Company and the Association have agreed to reimburse Webb
for its out-of-pocket expenses, and its legal fees up to a total of $35,000, and
to indemnify Webb against certain claims or
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liabilities, including certain liabilities under the Securities Act, and will
contribute to payments Webb may be required to make in connection with any such
claims or liabilities.
Sales of shares of Common Stock will be made primarily by registered
representatives affiliated with Webb or by the broker-dealers managed by Webb. A
Stock Information Center will be established at the office of the Association.
The Holding Company will rely on Rule 3a4-1 of the Exchange Act and sales of
Common Stock will be conducted within the requirements of such Rule, so as to
permit officers, directors and employees to participate in the sale of the
Common Stock in those states where the law so permits. No officer, director or
employee of the Holding Company or the Association will be compensated directly
or indirectly by the payment of commissions or other remuneration in connection
with his or her participation in the sale of Common Stock.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
Stock Order Form will confirm receipt or delivery in accordance with Rule
15c2-8. Stock Order Forms will only be distributed with a Prospectus. The
Association will accept for processing only orders submitted on original Stock
Order Forms.
To purchase shares in the Subscription and Direct Community Offering,
the accompanying original Stock Order Form (facsimile copies and photocopies
will not be accepted) and a fully executed separate original Certification Form,
along with the required full payment for each share subscribed, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Association (which may be given by completing the
appropriate blanks in the Stock Order Form), must be received by the Association
by Noon, Mountain Time, on the Expiration Date. Stock Order Forms and
Certification Forms that are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions for full payment) are not required to be accepted. The Holding
Company and the Association have the right to waive or permit the correction of
incomplete or improperly executed Stock Order Forms, but do not represent that
they will do so. Pursuant to the Plan of Conversion, the interpretation by the
Holding Company and the Association of the terms and conditions of the Plan of
Conversion and of the Stock Order Form will be final. Once received, an executed
Stock Order Form or Certification Form may not be modified, amended or rescinded
without the consent of the Association, unless the Conversion has not been
consummated within 45 days after the end of the Subscription Offering, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (March 31,
1995) and/or the Supplemental Eligibility Record Date (_________ __, 1996)
and/or the Voting Record Date (__________ __, 1996) must list all accounts on
the Stock Order Form giving all names in each account, the account number and
the approximate account balance as of such date.
Full payment for subscriptions may be made (i) in cash only if
delivered in person at the Association, (ii) by check, bank draft, or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Association. Appropriate means by which such withdrawals may be
authorized are provided on the Stock Order Form. No wire transfers will be
accepted and full payment is required. Interest will be paid on payments made by
cash, check, bank draft or money order at the Association's passbook rate (___%
per annum as of the date hereof) from the date payment is received until the
consummation or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until consummation or termination of the Conversion (unless
the certificate matures after the date of receipt of the Stock Order Form but
prior to closing, in which case funds will earn interest at the passbook rate
from the date of maturity until consummation of the Conversion), but a hold will
be placed on such funds, thereby making them unavailable to the depositor until
consummation or termination of the Conversion. At the consummation of the
Conversion the funds received in the Offerings will be used to
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purchase the shares of Common Stock ordered. The shares issued in the Conversion
cannot and will not be insured by the FDIC or any other government agency. In
the event that the Conversion is not consummated for any reason, all funds
submitted will be promptly refunded with interest as described above.
If a subscriber authorizes the Association to withdraw the amount of
the Purchase Price from his or her deposit account, the Association will do so
as of the effective date of Conversion. The Association will waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
Association's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Conversion, provided that there is
in force from the time of its subscription until such time, a loan commitment
from an unrelated financial institution or the Holding Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
IRAs maintained in the Association do not permit investment in the
Common Stock. A depositor interested in using his or her IRA funds to purchase
Common Stock must do so through a self-directed IRA. Since the Association does
not offer such accounts, it will allow such a depositor to make a
trustee-to-trustee transfer of the IRA funds to a trustee offering a
self-directed IRA program with the agreement that such funds will be used to
purchase the Holding Company's Common Stock in the Offerings. There will be no
early withdrawal or IRS interest penalties for such transfers. The new trustee
would hold the Common Stock in a self-directed account in the same manner as the
Association now holds the depositor's IRA funds. An annual administrative fee
may be payable to the new trustee. Depositors interested in using funds in an
Association IRA to purchase Common Stock should contact the Stock Information
Center at the Association as soon as possible so that the necessary forms may be
forwarded for execution and returned prior to the Expiration Date. In addition,
the provisions of ERISA and IRS regulations require that officers, directors and
10% shareholders who use self-directed IRA funds to purchase shares of Common
Stock in the Subscription and Direct Community Offering make such purchases for
the exclusive benefit of IRAs.
Certificates representing shares of Common Stock purchased, and any
refund due, will be mailed to purchasers at such address as may be specified in
a properly completed Stock Order Form or to the last address of such person(s)
appearing on the records of the Association as soon as practicable following
completion of the sale of all shares of Common Stock. Any certificates returned
as undeliverable will be disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to subscribers and
purchasers, subscribers and purchasers may not be able to sell the shares of
Common Stock for which they subscribed or purchased.
Stock Pricing and Number of Shares to be Issued
OTS regulations require that the aggregate purchase price of the
securities sold in connection with the conversion of a thrift institution be
based upon an estimated pro forma value of the association and its holding
company (if any) as converted (i.e., taking into account the expected receipt of
proceeds from the sale of securities in the Conversion), as determined by an
independent appraisal. The Association and the Holding Company have retained
Keller to prepare an appraisal of the pro forma market value of the Holding
Company and the Association as converted, as well as a business plan. Keller
will receive a fee of $22,000 for its appraisal services and preparation of a
business plan, plus reasonable out-of-pocket expenses incurred in connection
with the appraisal not to exceed $1,000. The Association has agreed to indemnify
Keller under certain circumstances against liabilities and expenses (including
legal fees) arising out of, related to, or based upon the Conversion.
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Keller has prepared an appraisal of the estimated pro forma market
value of the Holding Company and the Association as converted taking into
account the formation of the Holding Company as the holding company for the
Association. For its analysis, Keller undertook substantial investigations to
learn about the Association's business and operations. Management supplied
financial information, including annual financial statements, information on the
composition of assets and liabilities, and other financial schedules. In
addition to this information, Keller reviewed the Association's Form AC
Application for Approval of Conversion and the Holding Company's Form SB-2
Registration Statement. Furthermore, Keller visited the Association's facilities
and had discussions with the Association's management and its special conversion
legal counsel, Breyer & Aguggia. No detailed individual analysis of the separate
components of the Holding Company's or the Association's assets and liabilities
was performed in connection with the evaluation.
In estimating the pro forma market value of the Holding Company and the
Association, as required by applicable regulatory guidelines, Keller's analysis
utilized three selected valuation procedures, the Price/Book ("P/B") method, the
Price/Earnings ("P/E") method, and Price/Assets ("P/A") method, all of which are
described in its report. Keller placed the greatest emphasis on the P/E and P/B
methods in estimating pro forma market value. In applying these procedures,
Keller reviewed, among other factors, the economic make-up of the Association's
primary market area, the Association's financial performance and condition in
relation to publicly-traded institutions that Keller deemed comparable to the
Association, the specific terms of the offering of the Holding Company's Common
Stock, the pro forma impact of the additional capital raised in the Conversion,
conditions of securities markets in general, and the market for thrift
institution common stock in particular. Keller's analysis provides an
approximation of the pro forma market value of the Holding Company and the
Association as converted based on the valuation methods applied and the
assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of the Holding Company after the
Conversion that were utilized in determining the appraised value. These
assumptions included expenses of $545,000, $585,000, $619,000 and $619,000 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, an assumed after-tax rate of return on the net Conversion
proceeds of 3.81%, purchases by the ESOP of 8% of the stock sold in the
Conversion and purchases in the open market by the MRP of a number of shares
equal to 4% of the stock sold in the Conversion at the Purchase
Price. See "PRO FORMA DATA" for additional information concerning these
assumptions. The use of different assumptions may yield somewhat different
results.
On the basis of the foregoing, Keller has advised the Holding Company
and the Association that, in its opinion, as of September 6, 1996, the aggregate
estimated pro forma market value of the Holding Company and the Association, as
converted, and, therefore, the Common Stock was within the valuation range of
$16.7 million to $22.5 million with a midpoint of $19.6 million. After reviewing
the methodology and the assumptions used by Keller in the preparation of the
appraisal, the Board of Directors established the Estimated Valuation Range
which is equal to the valuation range of $16.7 million to $22.5 million with a
midpoint of $19.6 million. Assuming that the shares are sold at $10.00 per share
in the Conversion, the estimated number of shares would be between 1,666,000 and
2,254,000 with a midpoint of 1,960,000. The Purchase Price of $10.00 was
determined by discussion among the Boards of Directors of the Association and
the Holding Company and Webb, taking into account, among other factors (i) the
requirement under OTS regulations that the Common Stock be offered in a manner
that will achieve the widest distribution of the stock and (ii) desired
liquidity in the Common Stock subsequent to the Conversion. Since the outcome of
the Offerings relate in large measure to market conditions at the time of sale,
it is not possible to determine the exact number of shares that will be issued
by the Holding Company at this time. The Estimated Valuation Range may be
amended, with the approval of the OTS, if necessitated by developments following
the date of such appraisal in, among other things, market conditions, the
financial condition or operating results of the Association, regulatory
guidelines or national or local economic conditions.
Keller's appraisal report is filed as an exhibit to the Registration
Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription and Direct Community Offering,
at least the minimum number of shares are subscribed for, Keller, after taking
into account factors similar to those involved in its prior appraisal, will
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determine its estimate of the pro forma market value of the Association and the
Holding Company as converted, as of the close of the Subscription and Direct
Community Offering.
No sale of the shares will take place unless prior thereto Keller
confirms to the OTS that, to the best of Keller's knowledge and judgment,
nothing of a material nature has occurred that would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the
Association as converted at the time of the sale. If, however, the facts do not
justify such a statement, the Offerings or other sale may be canceled, a new
Estimated Valuation Range and price per share set and new Subscription, Direct
Community and Syndicated Community Offerings held. Under such circumstances,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares shown above. In
the event the total amount of shares issued is less than 1,666,000 or more than
2,592,100 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $16.7 million or more than $25.9 million,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. In the event a new valuation range is established
by Keller, such new range will be subject to approval by the OTS.
If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by the Boards of Directors of the Association and the Holding Company, if
possible. Such other purchase arrangements will be subject to the approval of
the OTS and may provide for purchases for investment purposes by directors,
officers, their associates and other persons in excess of the limitations
provided in the Plan of Conversion and in excess of the proposed director
purchases set forth herein, although no such purchases are currently intended.
If such other purchase arrangements cannot be made, the Plan will terminate.
In formulating its appraisal, Keller relied upon the truthfulness,
accuracy and completeness of all documents the Association furnished it. Keller
also considered financial and other information from regulatory agencies, other
financial institutions, and other public sources, as appropriate. While Keller
believes this information to be reliable, Keller does not guarantee the accuracy
or completeness of such information and did not independently verify the
financial statements and other data provided by the Association and the Holding
Company or independently value the assets or liabilities of the Holding Company
and the Association. The appraisal by Keller is not intended to be, and must not
be interpreted as, a recommendation of any kind as to the advisability of voting
to approve the Conversion or of purchasing shares of Common Stock. Moreover,
because the appraisal is necessarily based on many factors which change from
time to time, there is no assurance that persons who purchase such shares in the
Conversion will later be able to sell shares thereafter at prices at or above
the Purchase Price.
Restrictions on Repurchase of Stock
Pursuant to OTS regulations, OTS-regulated savings associations (and
their holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan. Furthermore,
repurchases any of its common stock are prohibited if the effect thereof would
cause the association's regulatory capital to be reduced below (a) the amount
required for the liquidation account or (b) the regulatory capital requirements
imposed by the OTS. Repurchases are generally prohibited during the first year
following conversion. However, recent OTS policy has relaxed this restriction,
particularly during the second six months after conversion. While an applicant
needs to demonstrate the existence of "exceptional circumstances" during the
first six months after conversion, the OTS has indicated that it would analyze
repurchases during months seven through 12 after conversion on a case-by-case
basis. Upon 10 days' written
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notice to the OTS, and if the OTS does not object, an institution may make open
market repurchases of its outstanding common stock during years two and three
following the conversion, provided that (x) no more than 5% of the outstanding
common stock is to be purchased during any 12-month period, (y) the repurchases
do not cause the association to become undercapitalized as defined under the OTS
prompt corrective action regulations and (z) the repurchase would not adversely
affect the financial condition of the association. No assurances, however, can
be given that the OTS will approve a repurchase program under current policy or
that such policy will not change or become more restrictive.
Shares to be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information as to the
approximate purchases of Common Stock by each director and executive officer of
the Association, including their associates, as defined by applicable
regulations, assuming that sufficient shares will be available to satisfy
subscriptions in all categories. No individual has entered into a binding
agreement with respect to such intended purchases and, therefore, actual
purchases could be more or less than indicated below. Directors and officers of
the Association and their associates may not purchase in excess of 34% of the
shares sold in the Conversion. Directors, officers and staff members will pay
the same price for the shares for which they subscribe as the price that will be
paid by all other subscribers.
<TABLE>
<CAPTION>
Percent of
Shares at
Name and Maximum of
Position with Anticipated Number of Anticipated Dollar Estimated
the Association Shares Purchased(1) Amount Purchased(1) Valuation Range(1)
<S> <C> <C> <C>
Beverly D. Harris 22,500 $225,000 1.1%
President
Walter J. Peterson, Jr. 10,000 100,000 0.4
Chairman of the Board
and Director
Ernest A. Sandberg 12,500 125,000 0.6
Executive Vice President
Secretary and Director
John R. Boe 4,000 40,000 0.2
Director
Edwin H. Doig 10,000 100,000 0.4
Director
Sanroe J. Kaisler, Jr. 5,000 50,000 0.2
Director
Walter R. Sales 5,000 50,000 0.2
Director
69,000 $690,000 3.1%
</TABLE>
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of
the number of shares to be purchased by the ESOP and expected awards
under the MRP and Stock Option Plan, see "MANAGEMENT OF THE ASSOCIATION
-- Benefits
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-- Employee Stock Ownership Plan," "-- Benefits -- 1996 Stock Option
Plan" and "-- Benefits -- Management Recognition Plan."
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased in the Offerings by directors and
officers of the Holding Company may not be sold for a period of one year
following consummation of the Conversion, except in the event of the death of
the stockholder or in any exchange of the Common Stock in connection with a
merger or acquisition of the Holding Company. Shares of Common Stock received by
directors or officers through the ESOP, the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchases subsequent to the
Conversion are not subject to this restriction. Accordingly, shares of Common
Stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction, and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's Common Stock with respect to the restriction on transfers. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted Common Stock shall be subject to the same
restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company
by directors, executive officers (or any person who was an executive officer or
director of the Association after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement
under the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. The registration under the Securities Act of shares
of the Common Stock to be issued in the Conversion does not cover the resale of
such shares. Shares of Common Stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
In addition, under guidelines of the NASD, members of the NASD and
their associates are subject to certain restrictions on the transfer of
securities purchased in accordance with Subscription Rights and to certain
reporting requirements upon purchase of such securities.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal
law and regulations and Delaware corporate law, as well as the Certificate of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Certificate of Incorporation and Bylaws of the Holding
Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
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Conversion Regulations
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
Change of Control Regulations
FIRREA extended the scope of the Change in Bank Control Act to savings
associations and savings and loan holding companies and concurrently repealed
the Change in Savings and Loan Control Act of 1978. The Change in Bank Control
Act requires persons who at any time intend to acquire control of an insured
savings association or its parent holding company to give 60 days' prior written
notice to the "appropriate federal banking agency." The OTS is the "appropriate
federal banking agency" for savings associations and savings and loan holding
companies. Any company that acquires such control becomes a "savings and loan
holding company" subject to registration, examination and regulation by the OTS.
Control for these purposes exists when the acquiring party has voting control of
at least 25% of the institution's voting stock or the power to direct the
management or policies of an institution.
Under existing OTS regulations, "control" is presumed to exist where
the acquiring party (which includes a group "acting in concert") has voting
control of at least 10% of the institution's voting stock and any of the
following factors exist: (i) the acquiror would be one of the two largest
holders of any class of voting stock; (ii) the acquiror would hold more than 25%
of the total stockholders' equity; (iii) the acquiror would hold more than 35%
of the combined debt securities and stockholders' equity; (iv) the acquiror is
party to any agreement (A) pursuant to which the acquiror possesses a material
economic stake resulting from a profit-sharing arrangement, use of common names,
facilities or personnel or the provision of essential services; or (B) that
enables the acquiror to influence a material aspect of the management or
policies, other than agreements to which the insured institution is a party
containing restrictions customary under the circumstances and, in the case of an
acquisition agreement, applicable only during the period the acquiror is seeking
OTS approval to acquire the institution, prohibiting transactions between the
acquiror and the insured institution and their respective affiliates without OTS
approval during the pendency of the application process and containing no
material forfeiture provisions applicable in the event the acquisition is not
approved or not approved by a specified date; (v) the acquiror would have the
ability, other than through the holding of revocable proxies, to direct the
votes of more than 25% of a class of the voting stock or to vote more than 25%
of a class of voting stock upon the occurrence of a future event; (vi) the
acquiror would have the power to direct the disposition of more than 25% of the
voting stock other than by means of a widely dispersed or public offering; (vii)
the acquiror and/or the acquiror's representatives or nominees would constitute
more than one member of the board of directors; and (viii) the acquiror or a
nominee or management official of the acquiror would serve as the chairman of
the board of directors, chairman of the executive committee, chief executive
officer, chief financial officer or in any position with similar policy making
authority. There are also rebuttable presumptions in the regulations concerning
whether a group "acting in concert" exists, including presumed action
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in concert among members of an "immediate family." In the event a person or
entity acquires 10% or more of any class of an institution's voting stock but
does not also have one of the other eight factors to constitute a presumption of
control, he is required to file an informational report with the OTS disclosing
the ownership.
OTS regulations provide that no company may acquire "control" of a
savings association without the prior approval of the OTS. Any company that
acquires such control becomes a "savings and loan holding company" subject to
registration, examination and regulation by the OTS. Pursuant to OTS
regulations, control of an insured institution is conclusively deemed to have
been acquired by, among other things, the acquisition of more than 25% of any
class of voting stock of an insured institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, of an insured institution where
certain enumerated "control factors" are also present in the acquisition. The
OTS may prohibit an acquisition of control if it finds, among other things, that
(i) the acquisition would result in a monopoly or substantially lessen
competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
Anti-takeover Provisions in the Holding Company's Certificate of Incorporation
and Bylaws and Delaware Law
A number of provisions of the Holding Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of the Holding Company's Certificate of Incorporation and Bylaws and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual Holding Company stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of incumbent Board of Directors
or management of the Holding Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Holding Company is necessarily general, and reference should be made in each
case to such Certificate of Incorporation and Bylaws, which are incorporated
herein by reference. See "ADDITIONAL INFORMATION" as to how to obtain a copy of
these documents.
Restrictions on Acquisitions of Securities. The Certificate of
Incorporation provides that for a period of five years from the effective date
of the Conversion, no person may acquire directly or indirectly the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company, unless such offer or acquisition shall have been approved in advance by
a two-thirds vote of the Holding Company's Continuing Directors (as defined in
the Certificate of Incorporation). This provision does not apply to any employee
stock benefit plan of the Holding Company. In addition, during such five-year
period, no shares beneficially owned in violation of the foregoing percentage
limitation, as determined by the Holding Company's Board of Directors, shall be
entitled to vote in connection with any matter submitted to stockholders for a
vote. Additionally, the Certificate of Incorporation provides for further
restrictions on voting rights of shares owned in excess of 10% of any class of
equity security of the Holding Company beyond five years after the Conversion.
Specifically, the Certificate of Incorporation provides that if, at any time
after five years from the Conversion, any person acquires the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company, then, with respect to each vote in excess of 10%, the record holders of
voting stock of the Holding Company beneficially owned by such person shall be
entitled to cast only one-hundredth of one vote with respect to each vote in
excess of 10% of the voting power of the outstanding shares of voting stock of
the Holding Company which such record holders would otherwise be entitled to
cast without giving effect to the provision, and the aggregate voting power of
such record holders shall be allocated proportionately among such record
holders. An exception from the restriction is provided if the acquisition of
more than 10% of the securities received the prior approval by a two-thirds vote
of the Holding
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Company's "Continuing Directors." Under the Holding Company's Certificate of
Incorporation, the restriction on voting shares beneficially owned in violation
of the foregoing limitations is imposed automatically. In order to prevent the
imposition of such restrictions, the Board of Directors must take affirmative
action approving in advance a particular offer to acquire or acquisition. Unless
the Board took such affirmative action, the provision would operate to restrict
the voting by beneficial owners of more than 10% of the Holding Company's Common
Stock in a proxy contest.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class shall
be elected for a term of three years, with the terms of office of all members of
one class expiring each year so that approximately one-third of the total number
of directors are elected each year. The Holding Company's Certificate of
Incorporation provides that the size of the Board shall be as set forth in the
Bylaws. The Bylaws currently set the number of directors at seven. The
Certificate of Incorporation provides that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors, shall be
filled by a vote of two-thirds of the directors then in office and any director
so chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which the director has been
chosen expires. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the Holding
Company. The Certificate of Incorporation of the Holding Company provides that a
director may be removed from the Board of Directors prior to the expiration of
his or her term only for cause and only upon the vote of 80% of the outstanding
shares of voting stock. In the absence of this provision, the vote of the
holders of a majority of the shares could remove the entire Board, but only with
cause, and replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Certificate of Incorporation provides that special
meetings of stockholders of the Holding Company may be called only by the Board
of Directors of the Holding Company and that stockholders may take action only
at a meeting and not by written consent.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 4,000,000 shares of Common Stock and 250,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits, restricted stock grants and the exercise of stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
the Holding Company. The Board of Directors also has sole authority to determine
the terms of any one or more series of preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of preferred stock, the Board has the power to the
extent consistent with its fiduciary duty to issue a series of preferred stock
to persons friendly to management in order to attempt to block a tender offer,
merger or other transaction by which a third party seeks control of the Holding
Company, and thereby assist members of management to retain their positions. The
Holding Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares of Common Stock upon exercise of stock
options.
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Holding Company's outstanding shares of
voting stock to approve certain "Business Combinations" (as defined therein)
involving a "Related Person" (as defined therein) except in cases where the
proposed transaction has been approved in advance by a majority of those members
of the Holding Company's Board of Directors who are unaffiliated with the
Related Person and were directors prior to the time when the Related Person
became an Related Person. The term "Related Person" is defined to include any
individual, corporation, partnership or other entity (other than the Holding
Company or its subsidiary) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of the Holding
Company or an affiliate of such person or entity. This provision of the
Certificate of Incorporation applies to any "Business Combination," which is
defined to include: (i) any merger or consolidation
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of the Holding Company with or into any Related Person; (ii) any sale, lease,
exchange, mortgage, transfer, or other disposition of 25% or more of the assets
of the Holding Company or combined assets of the Holding Company and its
subsidiaries to a Related Person; (iii) any merger or consolidation of a Related
Person with or into the Holding Company or a subsidiary of the Holding Company;
(iv) any sale, lease, exchange, transfer, or other disposition of 25% or more of
the assets of a Related Person to the Holding Company or a subsidiary of the
Holding Company; (v) the issuance of any securities of the Holding Company or a
subsidiary of the Holding Company to a Related Person; (vi) the acquisition by
the Holding Company or a subsidiary of the Holding Company of any securities of
a Related Person; (vii) any reclassification of common stock of the Holding
Company or any recapitalization involving the common stock of the Holding
Company; or (viii) any agreement or other arrangement providing for any of the
foregoing.
Under Delaware law, absent this provision, business combinations,
including mergers, consolidations and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of the
Holding Company and any other affected class of stock. One exception under
Delaware law to the majority approval requirement applies to stockholders owning
15% or more of the common stock of a corporation for a period of less than three
years. Such 15% stockholder, in order to obtain approval of a business
combination, must obtain the approval of two-thirds of the outstanding stock,
excluding the stock owned by such 15% stockholder, or satisfy other requirements
under Delaware law relating to board of director approval of his or her
acquisition of the shares of the Holding Company. The increased stockholder vote
required to approve a business combination may have the effect of foreclosing
mergers and other business combinations which a majority of stockholders deem
desirable and place the power to prevent such a merger or combination in the
hands of a minority of stockholders.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by the Holding Company and
amendment of the Holding Company's Bylaws and Certificate of Incorporation. The
Holding Company's Bylaws may be amended by its Board of Directors, or by a vote
of 80% of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Stockholder Nominations and Proposals. The Certificate of Incorporation
of the Holding Company requires a stockholder who intends to nominate a
candidate for election to the Board of Directors or to raise new business at a
stockholder meeting to give not less than 30 nor more than 60 days' advance
notice to the Secretary of the Holding Company. The notice provision requires a
stockholder who desires to raise new business to provide certain information to
the Holding Company concerning the nature of the new business, the stockholder
and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Holding Company with certain information concerning the nominee and the
proposing stockholder.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the
Association believes that the provisions described above are prudent and will
reduce the Holding Company's vulnerability to takeover attempts and certain
other transactions which have not been negotiated with and approved by its Board
of Directors. These provisions will also assist the Association in the orderly
deployment of the Conversion proceeds into productive assets during the initial
period after the Conversion. The Board of Directors believes these provisions
are in the best interest of the Association and the Holding Company and its
stockholders. In the judgment of the Board of Directors, the Holding Company's
Board will be in the best position to determine the true value of the Holding
Company and to negotiate more effectively for what may be in the best interests
of its stockholders. Accordingly, the Board of Directors believes that it is in
the best interest of
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<PAGE>
the Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors of the Holding Company and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at a price reflective of the true value of the Holding Company and
which is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objective may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for Exchange Act deregistration.
Despite the belief of the Association and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
Certificate of Incorporation and Bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board of Directors of the Association and the Holding Company, however, have
concluded that the potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Delaware business corporation. The Holding Company and the
Association do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
The cumulative effect of the restrictions on acquisition of the Holding
Company contained in the Certificate of Incorporation and Bylaws and Holding
Company, federal law and Delaware law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of the Holding Company may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 4,000,000 shares of Common
Stock, par value of $0.01 per share, and 250,000 shares of preferred stock, par
value of $0.01 per share. The Holding Company currently expects to issue up to
2,254,000 shares of Common Stock and no shares of preferred stock in the
Conversion. Each share of the Holding Company's Common Stock will have the same
relative rights as, and will be identical in all respects
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<PAGE>
to, each other share of Common Stock. Upon payment of the Purchase Price for the
Common Stock, in accordance with the Plan of Conversion, all such stock will be
duly authorized, fully paid and nonassessable.
The Common Stock of the Holding Company will represent nonwithdrawable
capital, will not be an account of an insurable type, and will not be insured by
the FDIC or any other government agency.
Common Stock
Dividends. The Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "DIVIDEND
POLICY" and "REGULATION." The holders of Common Stock of the Holding Company
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Holding Company out of funds legally
available therefor. If the Holding Company issues preferred stock, the holders
thereof may have a priority over the holders of the Common Stock with respect to
dividends.
Stock Repurchases. The Plan and OTS regulations place certain
limitations on the repurchase of the Holding Company's capital stock. See "THE
CONVERSION -- Restrictions on Repurchase of Stock" and "USE OF PROCEEDS."
Voting Rights. Upon Conversion, the holders of Common Stock of the
Holding Company will possess exclusive voting rights in the Holding Company.
They will elect the Holding Company's Board of Directors and act on such other
matters as are required to be presented to them under Delaware law or as are
otherwise presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of Common
Stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If the Holding Company issues
preferred stock, holders of the Holding Company preferred stock may also possess
voting rights. Certain matters require a vote of 80% of the outstanding shares
entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federal mutual savings and loan association, corporate powers and
control of the Association are vested in its Board of Directors, who elect the
officers of the Association and who fill any vacancies on the Board of Directors
as it exists upon Conversion. Subsequent to Conversion, voting rights will be
vested exclusively in the owners of the shares of capital stock of the
Association, all of which will be owned by the Holding Company, and voted at the
direction of the Holding Company's Board of Directors. Consequently, the holders
of the Common Stock will not have direct control of the Association.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Association, the Holding Company, as holder of the Association's capital
stock, would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Association (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association -- Liquidation Account"), all assets
of the Association available for distribution. In the event of liquidation,
dissolution or winding up of the Holding Company, the holders of its common
stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Holding Company
available for distribution. If Holding Company preferred stock is issued, the
holders thereof may have a priority over the holders of the Common Stock in the
event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the Common Stock of the
Holding Company will not be entitled to preemptive rights with respect to any
shares that may be issued. The Common Stock is not subject to redemption.
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<PAGE>
Preferred Stock
None of the shares of the authorized Holding Company preferred stock
will be issued in the Conversion and there are no plans to issue the preferred
stock. Such stock may be issued with such designations, powers, preferences and
rights as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Certificate of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC
pursuant to Section 12(g) of the Exchange Act upon the completion of the
Conversion and will not deregister its Common Stock for a period of at least
three years following the completion of the Conversion. Upon such registration,
the proxy solicitation and tender offer rules, insider trading reporting and
restrictions, annual and periodic reporting and other requirements of the
Exchange Act will be applicable.
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Conversion have been opined upon by Breyer & Aguggia and the Montana income
tax consequences of the Conversion have been opined upon by Huppert and
Swindlehurst, P.C., Livingston, Montana. Breyer & Aguggia and Huppert and
Swindlehurst, P.C. have consented to the references herein to their opinions.
Certain legal matters will be passed upon for Webb by Elias, Matz, Tiernan &
Herrick LLP, Washington, D.C.
EXPERTS
The consolidated financial statements of the Association as of June 30,
1996 and 1995 and for the years then ended June 30, 1996 included in this
Prospectus and in the Registration Statement have been so included in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
letter to the Association setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Association as converted and
its opinion as to the value of Subscription Rights, and to the use of its name
and statements with respect to it appearing herein.
CHANGE IN FISCAL YEAR
The Holding Company's Bylaws provide for a fiscal year end of December
31. The Federal Stock Charter to be adopted by the Association in connection
with the Conversion also provides for a change of the Association's fiscal
year end from June 30 to December 31.
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<PAGE>
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form SB-2 (File No. 333-_____) under the Securities Act with respect to the
Common Stock offered in the Conversion. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 500 West
Madison Street, Suite 1400, Room 1100, Chicago, Illinois 60661; and 75 Park
Place, New York, New York 10007. Copies may be obtained at prescribed rates from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549.
The Association has filed with the OTS an Application for Approval of
Conversion, which includes proxy solicitation materials for the Association's
Special Meeting and certain other information. This Prospectus omits certain
information contained in such Application. The Application, including the proxy
solicitation materials, exhibits and certain other information that are a part
thereof, may be inspected, without charge, at the offices of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the office of the Regional Director
of the OTS at the West Regional Office of the OTS, 1 Montgomery Street, Suite
400, San Francisco, California 94104.
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<PAGE>
Index To Consolidated Financial Statements
Empire Federal Savings and Loan Association and Subsidiary
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report ............................................................................. F-1
Consolidated Statements of Financial Condition as of
June 30, 1996 and 1995 .................................................................................. F-2
Consolidated Statements of Income for the Years
Ended June 30, 1996 and 1995 ............................................................................ 18
Consolidated Statements of Equity for
the Years Ended June 30, 1996 and 1995 .................................................................. F-4
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1996 and 1995 ............................................................................ F-5
Notes to Consolidated Financial Statements................................................................ F-6
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for the Holding Company have not been
included since it will not engage in material transactions, if any, until after
the Conversion. The Holding Company, which has engaged only in organizational
activities to date, has no significant assets, liabilities, revenues, expenses
or contingent liabilities.
90
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN
ASSOCIATION AND SUBSIDIARY
Consolidated Financial Statements
June 30, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
(KPMG PEAT MARWICK LLP logo here)
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
Independent Auditors' Report
The Board of Directors
Empire Federal Savings and Loan Association:
We have audited the accompanying consolidated statements of financial condition
of Empire Federal Savings and Loan Association and subsidiary as of June 30,
1996 and 1995, and the related consolidated statements of income, equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Association's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Empire Federal
Savings and Loan Association and subsidiary as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
(Signature of KPMG Peat Marwick LLP)
August 9, 1996, except as to note 17
which is as of August 29, 1996
F-1
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,160,760 961,050
Interest-bearing deposits 1,337,948 1,234,856
Investment and mortgage-backed securities available-for-sale 13,876,659 1,191,934
Investment and mortgage-backed securities held-to-maturity 25,195,531 39,441,193
Loans receivable, net 41,882,298 39,432,375
Stock in Federal Home Loan Bank of Seattle, at cost 1,123,300 1,044,100
Accrued interest receivable 327,994 362,727
Income tax receivable 65,817 -
Premises and equipment, net 1,337,731 1,160,990
Prepaid expenses and other assets 502,333 665,979
-------------- ---------------
$ 86,810,371 85,495,204
============== ===============
Liabilities and Equity
Liabilities:
Deposits 68,547,802 67,063,722
Advances from Federal Home Loan Bank 1,500,000 1,750,926
Advances from borrowers for taxes and insurance 205,876 239,013
Accrued expenses and other liabilities 449,060 580,694
Income taxes payable - 46,177
Deferred income taxes 231,234 314,713
-------------- ---------------
Total liabilities 70,933,972 69,995,245
Equity:
Retained earnings, substantially restricted 15,620,702 14,989,025
Unrealized gain on securities available-for-sale, net of deferred taxes 255,697 510,934
-------------- ---------------
Total equity 15,876,399 15,499,959
-------------- ---------------
Commitments and contingencies
$ 86,810,371 85,495,204
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Consolidated Statements of Equity
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Retained gain on
earnings, securities
substantially available- Total
restricted for-sale equity
<S> <C> <C> <C>
Balances at June 30, 1994 $ 14,037,087 437,589 14,474,676
Net income 951,938 - 951,938
Change in unrealized gain on securities
available-for-sale - 73,345 73,345
-------------- ------------ ---------------
Balances at June 30, 1995 14,989,025 510,934 15,499,959
Net income 631,677 - 631,677
Change in unrealized gain on securities
available-for-sale - (255,237) (255,237)
-------------- ------------ ---------------
Balances at June 30, 1996 $ 15,620,702 255,697 15,876,399
============== ============ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 631,677 951,938
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 55,000 -
Depreciation 199,309 139,899
Loss on retirement of premises and equipment, net 17,430 3,462
Amortization of premiums and discounts on loans and
mortgage-backed securities, net 30,239 40,798
Stock dividends reinvested in Federal Home Loan Bank (79,200) (61,000)
Decrease (increase) in accrued interest receivable 34,733 (53,913)
Increase in income tax receivable (65,817) -
Decrease (increase) in prepaid expenses and other assets 163,646 (51,503)
Increase (decrease) in accrued expenses and other liabilities (131,634) 156,686
Decrease in income taxes payable (46,177) (89,561)
Decrease in deferred income taxes 48,007 (482)
--------------- ----------------
Net cash provided by operating activities 857,213 1,036,324
--------------- ----------------
Cash flows from investing activities:
Net change in interest-bearing deposits (103,092) 24,457
Net change in loans receivable (2,504,609) 1,955,888
Purchases of investment securities held-to-maturity (3,998,800) (1,497,500)
Proceeds from matured or called investment securities held-to-maturity 3,997,500 200,000
Purchases of mortgage-backed securities held-to-maturity (5,704,272) (4,869,975)
Principal payments on mortgage-backed securities held-to-maturity 4,535,653 5,489,487
Principal payments on mortgage-backed securities available-for-sale 2,313,580 -
Purchases of premises and equipment (393,480) (438,600)
--------------- ----------------
Net cash provided by (used in) investing activities (1,857,520) 863,757
--------------- ----------------
Cash flows from financing activities:
Net change in deposits 1,484,080 (1,272,116)
Proceeds from advances from Federal Home Loan Bank 1,500,000 1,000,000
Repayment of advances from Federal Home Loan Bank (1,750,926) (1,438,172)
Repayment of note payable - (70,000)
Net change in advances from borrowers for taxes and insurance (33,137) 2,739
--------------- ----------------
Net cash provided by (used in) financing activities 1,200,017 (1,777,549)
--------------- ----------------
Net increase in cash and cash equivalents 199,710 122,532
Cash and cash equivalents, beginning of year 961,050 838,518
--------------- ----------------
Cash and cash equivalents, end of year $ 1,160,760 961,050
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) General
Empire Federal Savings and Loan Association (Empire) operates with
a main office and two branches and provides services to customers
in south central Montana. Empire offers a variety of savings
products to its retail customers while concentrating its lending
activities on real estate mortgage loans. Lending activities focus
primarily on the origination of loans secured by one- to
four-family residential real estate. Lending activities also
include the origination of multi-family, commercial real estate
and home equity loans. Empire is subject to competition from other
financial service providers and is also subject to the regulations
of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities. Empire has a
wholly-owned subsidiary, Dime Service Corporation, which was
formed in December 1985 to conduct business as an insurance
agency. Empire and Dime Service Corporation are herein referred to
collectively as "the Association."
The accounting and consolidated financial statement reporting
policies conform with generally accepted accounting principles and
prevailing practices within the banking industry. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported and disclosed
amounts of assets and liabilities as of the date of the balance
sheet and income and expenses for the period. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the allowance for possible loan losses and the valuation of real
estate acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowances
for losses on loans and real estate owned, management obtains
independent appraisals for significant properties.
Management believes that the allowances for losses on loans and
real estate owned are adequate. While management uses available
information to recognize losses on loans and real estate owned,
future additions to the allowances may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Association's allowances for losses on
loans and real estate owned. Such agencies may require the
Association to recognize additions to the allowances based on
their judgments about information available to them at the time of
their examination.
(b) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Empire Federal Savings and Loan Association and Dime
Service Corporation. All significant intercompany transactions
have been eliminated in consolidation.
(c) Cash Equivalents
For purposes of the statements of cash flows, the Association
considers all cash, non-interest-bearing deposits with banks, and
interest-bearing deposits having original maturities of three
months or less to be cash equivalents.
F-5 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(d) Investment Securities
The Association's investment securities are classified and
accounted for as follows:
Trading Securities - Securities held principally for the
purpose of selling them in the near term are classified as
trading securities and are reported at fair value, with
unrealized net gains and losses included in earnings.
Securities Held-to-Maturity - Debt securities for which the
Association has the positive intent and ability to hold are
classified as held-to-maturity. Held-to-maturity securities
are stated at amortized cost.
Securities Available-for-Sale - Debt securities not classified
as held-to-maturity and debt or equity securities not
classified as trading are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with
any unrealized gains and losses net of deferred taxes,
reported as a separate component of equity.
The Association did not hold any trading securities during the
years ended June 30, 1996 and 1995.
Declines in the fair value of available-for-sale or
held-to-maturity securities below carrying value that are other
than temporary are charged to expense as realized losses and the
related carrying value reduced to fair value.
The amortized cost of debt securities is adjusted for amortization
of premium and accretion of discount using a method that
approximates the interest method over the term of each security.
The cost of investments sold is determined by specific
identification.
(e) Mortgage-Backed Securities
Mortgage-backed securities represent participating interests in
pools of long-term first mortgage loans originated and serviced by
issuers of the securities. These securities are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned
discounts. Premiums and discounts are amortized using a method
that approximates the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. The
cost of mortgage-backed securities sold is determined by specific
identification. The Association has classified its portfolio of
mortgage-backed securities as held-to-maturity or
available-for-sale as defined in "Investment Securities" above.
(f) Loans Receivable
Loans receivable are stated at unpaid principal balances less
unearned discounts and net deferred loan origination fees.
Interest on loans is credited to income as earned. Interest
receivable is accrued only if deemed collectible. Discounts on
purchased loans are amortized using a method that approximates the
level-yield method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.
F-6 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on
factors such as the Association's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral, current and prospective economic
conditions, and independent appraisals.
Accrued interest on loans that are contractually ninety days or
more past due is generally charged off against income. Interest is
subsequently recognized only to the extent cash payments are
received until, in management's judgment, the borrower's ability
to make periodic interest and principal payments is reasonably
assured, in which case the loan is returned to accrual status.
During the year ended June 30, 1996, the Association adopted the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan," and
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," (collectively, the
Statements). The Statements provide guidance for establishing an
allowance for losses on specific loans which are deemed to be
impaired. Groups of small-balance homogeneous loans (generally
residential real estate and consumer loans) are evaluated for
impairment collectively. A loan is considered impaired when, based
upon current information and events, it is probable that the
Company will be unable to collect, on a timely basis, all
principal and interest according to the contractual terms of the
loan's original agreement. When a specific loan is determined to
be impaired the allowance for loan losses is increased through a
charge to expense for the amount of the impairment. The amount of
the impairment is measured using cash flows discounted at the
loan's effective interest rate, except when it is determined that
the sole source of repayment for the loan is the operations or
liquidation of the underlying collateral. In such cases, the
current value of the collateral, reduced by anticipated selling
costs, will be used in place of discounted cash flows. The
Association uses the cash basis of income recognition on impaired
loans.
The Association's adoption of the Statements did not have a
material impact on the Association's financial position or results
of operations. During the year ended June 30, 1996 and 1995, the
Association had no impaired loans.
(g) Loan Origination Fees and Related Costs
Loan origination fees and certain direct loan origination costs
are deferred and the net fee or cost is recognized in interest
income using the level-yield method over the contractual life of
the loans. The amortization of deferred loan fees and costs and
the accretion of unearned discounts on non-performing loans is
discontinued during periods of non-performance.
(h) Stock in Federal Home Loan Bank
Federal law requires a member institution of the Federal Home Loan
Bank (FHLB) System to hold common stock of its district FHLB
according to predetermined formulas.
F-7 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(i) Real Estate Owned
Real estate owned represents real estate acquired through
foreclosure or in satisfaction of loans and is initially recorded
at the lower of fair market value less estimated costs to sell or
"cost" (defined as the fair market value at initial foreclosure).
Valuations are periodically performed by management and an
allowance for losses is established by a charge to operations if
the fair market value less estimated costs to sell is less than
"cost" or carrying value.
(j) Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over the estimated useful
lives, which range from 3 to 50 years, of the respective assets on
straight-line and accelerated methods. Leasehold improvements are
amortized on the straight-line method over their estimated useful
life or lease term, whichever is less.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(l) Reclassifications
Certain reclassifications have been made to the 1995 financial
statements to conform with the 1996 presentation.
(m) Future Accounting Changes
The Financial Accounting Standards Board has issued two Statements
of Financial Accounting Standards which the Association will be
required to adopt. SFAS No. 121 pertains to the accounting for
impairment of long-lived assets and long-lived assets to be
disposed of. SFAS No. 125 pertains to the accounting for mortgage
servicing rights and assets subject to prepayment. Adoption of the
Statements is not expected to have a material impact on the
Association's financial position and results of operations.
F-8 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) Investment and Mortgage-Backed Securities Available-For-Sale
The amortized cost, unrealized gains and losses, and estimated market
values of investment and mortgage-backed securities available-for-sale at
June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
<S> <C> <C> <C> <C>
FHLMC common and preferred stock $ 67,791 970,709 - 1,038,500
Mutual funds 350,000 - (3,463) 346,537
---------------- ----------- ------------ ---------------
417,791 970,709 (3,463) 1,385,037
Mortgage-backed securities:
FHLMC certificates 10,680,009 - (451,433) 10,228,576
FNMA certificates 2,391,439 - (128,393) 2,263,046
---------------- ----------- ------------ ---------------
13,071,448 - (579,826) 12,491,622
---------------- ----------- ------------ ---------------
$ 13,489,239 970,709 (583,289) 13,876,659
================ =========== ============ ===============
1995
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
FHLMC common and preferred stock $ 67,791 770,334 - 838,125
Mutual funds 350,000 5,558 (1,749) 353,809
------------ ----------- --------- -------------
$ 417,791 775,892 (1,749) 1,191,934
============ =========== ========= =============
</TABLE>
There were no sales of investment securities available-for-sale during
the years ended June 30, 1996 and 1995.
On November 15, 1995, the Financial Accounting Standards Board issued a
special report which provided for a "one-time reclassification" of
securities prior to December 31, 1995. The Association reclassified
approximately $14,200,000 of mortgage-backed securities from the
held-to-maturity classification to the available-for-sale classification.
Unrealized losses at the date of transfer were $158,214.
F-9 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities Held-to-Maturity
The amortized cost, unrealized gains and losses, and estimated market
values of investment and mortgage-backed securities held-to-maturity at
June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
<S> <C> <C> <C> <C>
United States Government and agency
obligations $ 2,498,800 - (94,050) 2,404,750
Other 200 - - 200
--------------- ----------- ------------ ---------------
2,499,000 - (94,050) 2,404,950
Mortgage-backed securities:
FHLMC certificates 14,029,147 77,388 (174,294) 13,932,241
FNMA certificates 7,686,880 31,942 (66,395) 7,652,427
GNMA certificates 980,504 34,996 - 1,015,500
--------------- ----------- ------------ ---------------
22,696,531 144,326 (240,689) 22,600,168
--------------- ----------- ------------ ---------------
$ 25,195,531 144,326 (334,739) 25,005,118
=============== =========== ============ ===============
1995
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
United States Government and agency
obligations $ 2,497,500 9,990 (9,925) 2,497,565
Other 200 - - 200
---------------- ----------- ------------ ---------------
2,497,700 9,990 (9,925) 2,497,765
Mortgage-backed securities:
FHLMC certificates 22,819,394 217,134 (231,653) 22,804,875
GNMA certificates 1,246,958 58,875 - 1,305,833
FNMA certificates 12,877,141 146,007 (107,062) 12,916,086
---------------- ----------- ------------ ---------------
36,943,493 422,016 (338,715) 37,026,794
---------------- ----------- ------------ ---------------
$ 39,441,193 432,006 (348,640) 39,524,559
================ =========== ============ ===============
</TABLE>
Maturities of securities held-to-maturity by contractual maturity at June
30, 1996 are shown below. Maturities of securities do not reflect
repricing opportunities present in many adjustable rate securities, nor
do they reflect expected shorter maturities based upon early prepayments
of principal.
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
<S> <C> <C>
Due after one year through five years $ 1,000,000 978,600
Due after five years through ten years 500,000 469,650
Due after ten years 998,800 956,500
-------------- --------------
2,498,800 2,404,750
Mortgage-backed securities and other 22,696,731 22,600,368
-------------- --------------
$ 25,195,531 25,005,118
============== ==============
</TABLE>
F-10 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
There were no sales of investment securities held-to-maturity during the
years ended June 30, 1996 or 1995.
The Association has not entered into any interest rate swaps, options and
future contracts. Included in U.S. Government agency obligations are
investments in structured notes which have contractual step-up interest
rates and call features.
(4) Loans Receivable
Loans receivable at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans, including multi-family and
commercial real estate $ 38,716,819 37,956,488
Construction loans 1,380,000 257,000
Loans to depositors, secured by savings 900,771 454,749
Other consumer loans 2,112,269 1,456,005
---------------- ----------------
43,109,859 40,124,242
Less:
Unearned discounts (5,174) (5,488)
Undisbursed portion of mortgage loans (770,190) (314,951)
Allowance for loan losses (200,000) (145,000)
Net deferred loan origination fees (252,197) (226,428)
---------------- ----------------
$ 41,882,298 39,432,375
================ ================
</TABLE>
The weighted average stated interest rate on loans receivable at June 30,
1996 and 1995 was approximately 7.59% and 7.64%, respectively. The
average yield on loans receivable, including amortization of unearned
discount and loan origination fees, was approximately 7.69% and 7.61% for
the years ended June 30, 1996 and 1995, respectively.
Loans receivable include approximately $4,440,000 and $5,510,000 in
adjustable rate mortgages at June 30, 1996 and 1995, respectively.
Real estate loans serviced for others totaled approximately $110,000 and
$140,000 at June 30, 1996 and 1995, respectively.
A summary of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 145,000 145,000
Provision charged to expense 55,000 -
----------- ----------
Balance at end of year $ 200,000 145,000
=========== ===========
</TABLE>
F-11 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Accrued Interest Receivable
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans receivable $ 211,440 191,421
Mortgage-backed securities 83,685 90,741
Investment securities and interest-bearing deposits 32,869 80,565
----------- -----------
$ 327,994 362,727
=========== ===========
</TABLE>
(6) Premises and Equipment
Premises and equipment at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buildings and leasehold improvements $ 2,160,134 1,782,741
Land and improvements 424,182 367,838
Furniture, fixtures and equipment 891,884 728,485
Construction in progress - 382,866
-------------- ---------------
3,476,200 3,261,930
Accumulated depreciation (2,138,469) (2,100,940)
-------------- ---------------
$ 1,337,731 1,160,990
============== ===============
</TABLE>
The Association is party to a long-term lease agreement with an officer
and relatives (lessor) for land on which the Livingston, Montana main
office is built. The lease expires in March 1997 at which time all
improvements made by the Association revert to the lessor. At June 30,
1996, these improvements had an amortized cost basis of $48,123. The
Association has negotiated with the lessor to purchase the building. If
the Association determines not to purchase the building, it will
negotiate and enter into a lease with the lessor for rental of the
building prior to the expiration of the current lease term. Total lease
expense under this agreement was $10,056 for the years ended June 30,
1996 and 1995.
(7) Deposits
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
average rate at 1996 1995
--------------------------- -------------------------
June 30, 1996 Amount % Amount %
<S> <C> <C> <C> <C> <C>
Balance by interest rate:
Passbook accounts 3.25% $ 14,948,530 21.8% $ 15,224,817 22.7%
NOW accounts 2.71% 13,624,016 19.9 13,300,943 19.8
-------------- ------- -------------- -------
Total passbook
and NOW accounts 28,572,546 41.7 28,525,760 42.5
--------------- ------- -------------- ---------
</TABLE>
F-12 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Weighted
average rate at 1996 1995
--------------------------- ---------------------------
June 30, 1996 Amount % Amount %
<S> <C> <C> <C> <C> <C>
Certificates of
deposit: 3.01 to 4.00 $ - - % $ 1,595,271 2.4%
4.01 to 5.00 4,626,075 6.8 10,469,108 15.6
5.01 to 6.00 26,196,709 38.2 13,306,507 19.8
6.01 to 7.00 6,764,071 9.9 10,035,367 15.0
7.01 to 8.00 2,156,573 3.1 2,682,412 4.0
8.01 to 9.00 231,828 .3 449,297 0.7
-------------- ------- -------------- -------
Total certificates
of deposit 39,975,256 58.3 38,537,962 57.5
-------------- ------- -------------- -------
$ 68,547,802 100.0% $ 67,063,722 100.0%
============== ======= ============== =======
</TABLE>
Scheduled maturities of certificates of deposit at June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Due within one year $ 27,431,057
Due within two to three years 9,176,808
Due within four to five years 2,300,630
Thereafter 1,066,761
--------------
$ 39,975,256
</TABLE>
The weighted average cost of deposits was approximately 4.7% and 4.6% at
June 30, 1996 and 1995, respectively. The average cost of deposits
approximated 4.7% and 4.1% for the years ending June 30, 1996 and 1995,
respectively.
Accrued interest payable on deposits (included in accrued expenses and
other liabilities) totaled approximately $107,000 and $154,000 at June
30, 1996 and 1995, respectively.
Cash payments for interest on deposits in 1996 and 1995 totaled
approximately $2,900,000 and $2,700,000, respectively.
Interest-bearing deposits with a carrying value of $100,000 were pledged
to secure public deposits at June 30, 1996.
(8) Advances from Federal Home Loan Bank
Advances from Federal Home Loan Bank at June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
5.27% advance, principal due September 1996, interest
payable monthly $ 250,000 -
6.02% advance, principal due July 1996, interest payable
monthly 750,000 -
5.82% advance, principal due July 1996, interest payable
monthly 500,000 -
5.80% advance, paid July 1995 - 1,000,000
5.8011% advance, paid June 1996 - 241,667
4.091% advance, paid April 1996 - 509,259
--------------- ----------------
$ 1,500,000 1,750,926
============== ==============
</TABLE>
F-13 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The advances are collateralized by Federal Home Loan Bank stock,
securities issued by the U.S. government or agency thereof,
mortgage-backed securities, and first mortgage loans not otherwise
pledged.
Cash payments for interest on advances in 1996 and 1995 totaled
approximately $95,000 and $145,000, respectively.
(9) Income Taxes
Income tax expense for the years ended June 30, 1996 and 1995 is
summarized as follows:
<TABLE>
<CAPTION>
Federal State Total
1996:
<S> <C> <C> <C>
Current $ 290,714 60,759 351,473
Deferred 41,212 6,795 48,007
----------- ----------- -----------
$ 331,926 67,554 399,480
=========== =========== ===========
1995:
Current $ 485,284 103,821 589,105
Deferred (400) (82) (482)
----------- ----------- -----------
$ 484,884 103,739 588,623
=========== =========== ===========
</TABLE>
Actual income tax expense for the years ended June 30 differs from
"expected" income tax expense (computed by applying the United States
Federal corporate income tax rate of 34% to income before income taxes)
as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computed "expected" tax expense $ 350,593 523,791
Increase (decrease) resulting from:
State taxes, net of Federal income tax effects 48,887 68,632
Other - (3,800)
------------- ------------
$ 399,480 588,623
============= ============
</TABLE>
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities. The types of temporary
differences that give rise to significant portions of the deferred tax
assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans:
Reserve for loan losses $ 76,910 55,760
Loan origination fees deferred for financial reporting
purposes 96,982 87,084
Premises and equipment, principally due to differences in
depreciation 7,691 26,922
Deferred compensation accrual 34,998 31,203
------------ ------------
Gross deferred tax assets 216,581 200,969
------------ ------------
</TABLE>
F-14 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Stock in Federal Home Loan Bank of Seattle, principally due to
dividends not recognized for tax purposes $ (276,453) (246,026)
Prepaid insurance premium (30,379) -
Unrealized gains on securities available-for-sale (131,723) (263,209)
Other, net (9,260) (6,447)
------------ ------------
Gross deferred tax liabilities (447,815) (515,682)
------------ ------------
Net deferred tax liability $ (231,234) (314,713)
============ ============
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the existence of, or generation of,
taxable income in the periods which those temporary differences are
deductible. Management considers the scheduled reversal of deferred tax
liabilities, taxes paid in carryback years, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projection for future taxable
income over the periods which the deferred tax assets are deductible, at
June 30, 1996 and 1995, management believes it is more likely than not
that the Association will realize the benefits of these deductible
differences.
Retained earnings at June 30, 1996 includes approximately $3,320,000 for
which no provision for Federal income tax has been made. This amount
represents the base year tax bad debt reserve which is essentially an
allocation of earnings to pre-1988 bad debt deductions for income tax
purposes only. This amount is treated as a permanent difference and
deferred taxes are not recognized unless it appears that this reserve
will be reduced and thereby result in taxable income in the foreseeable
future. The Association is not currently contemplating any changes in its
business or operations which would result in a recapture of this federal
bad debt reserve into taxable income.
Cash paid for income taxes for the years ended June 30, 1996 and 1995
totaled approximately $461,820 and $511,000, respectively.
(10) Pension Plan
All eligible employees are included in a noncontributory multi-employer
trusteed defined benefit pension plan. Actuarially determined pension
costs are funded as required by the trustee. Contributions were $108,000
and $101,000 for the plan years ended June 30, 1996 and 1995,
respectively.
(11) Regulatory Capital
The Association is required to meet three FIRREA-enacted capital
requirements: a tangible capital requirement equal to not less than 1.5%
of tangible assets (as defined in the regulations); a core capital
requirement, comprised of tangible capital adjusted for supervisory
goodwill and other defined factors equal to not less than 3.0% of
tangible assets; and a risk-based capital requirement equal to at least
8.0% of all risk-weighted assets. For risk-weighting, selected assets are
given a risk assignment of 0% to 100%. The Association's total
risk-weighted assets at June 30, 1996 were $32,794,000.
F-15 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Generally accepted accounting principles (GAAP) capital differs from
tangible, core, and risk-based capital as a result of the following:
<TABLE>
<CAPTION>
<S> <C>
Capital measured by GAAP(rounded) $ 15,876,000
Net effect of audit adjustments 54,000
----------------
Capital as reported in Thrift Financial Report 15,930,000
Non-includable assets of subsidiary (495,000)
Unrealized gains on certain available-for-sale securities (254,000)
----------------
Tangible and core capital 15,181,000
General valuation reserve 145,000
Assets required to be deducted (21,000)
----------------
Risk-based capital $ 15,305,000
================
</TABLE>
The following table demonstrates, in dollars and percents, the extent to
which the Association exceeds the minimum capital requirements as of June
30, 1996:
<TABLE>
<CAPTION>
Regulatory Capital
Actual Requirement Excess
<S> <C> <C> <C>
Tangible capital:
Dollar amount $ 15,181,000 1,292,000 13,889,000
Percent of tangible assets 17.6% 1.5% 16.1%
Core capital:
Dollar amount $ 15,181,000 2,583,000 12,598,000
Percent of adjusted tangible
assets 17.6% 3.0% 14.6%
Risk-based capital:
Dollar amount $ 15,305,000 2,624,000 12,681,000
Percent of risk-weighted assets 46.7% 8.0% 38.7%
</TABLE>
Failure to comply with applicable regulatory capital requirements can
result in capital directives from the director of the Office of Thrift
Supervision, restrictions on growth and other limitations on a savings
association's operations.
(12) Noncash Investing Activities
The Association recorded a decrease in unrealized gain on investment
securities available-for-sale of $386,723, net of deferred taxes of
$131,486, at June 30, 1996.
The Association recorded an increase in unrealized gain on investment
securities available-for-sale of $111,129, net of deferred taxes of
$37,784, at June 30, 1995.
F-16 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Commitments and Contingencies
The deposits of the Association are insured by the Savings Association
Insurance Fund (SAIF), one of two funds administered by the Federal
Deposit Insurance Corporation (FDIC). The Association currently pays
premiums of approximately $.23 per $100 of deposits. Under a plan to
recapitalize the SAIF, the U.S. Treasury Department, FDIC, OTS, and the
Congress are considering a plan to impose a "one-time" premium assessment
of .80% per $100 of deposits as of March 31, 1995. If this plan is
implemented, the Association would be assessed a one-time premium which
would result in a change to income of approximately $340,000 after income
taxes.
(14) Financial Instruments With Off-Balance-Sheet Risk
The Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and involve, to varying degrees, elements of
credit risk.
The Association's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments. The
Association uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Financial instruments outstanding at June 30, 1996 whose contract amounts
represent credit risk are fixed-rate commitments to extend credit
totaling approximately $304,000.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Association evaluates each customer's creditworthiness on a case by case
basis. The amount of collateral obtained by the Association upon
extension of credit, if deemed necessary, is based on management's
evaluation of the counter-party. Collateral held varies but may include
personal property, residential real property and income-producing
commercial properties.
(15) Financial Instruments With Concentration of Credit Risk
At June 30, 1996, approximately $2,000,000 of the Association's loans
receivable are secured by real property located outside of the
Association's trade area of south central Montana of this amount,
approximately $1,100,000 are secured by properties located in Southern
California.
(16) Fair Value of Financial Instruments
The Association is required to disclose the fair value for financial
instruments, whether recognized or not recognized on the statement of
financial condition. A financial instrument is defined as cash, evidence
of an ownership interest in an entity, or a contract that both imposes a
contractual obligation on one entity to deliver cash or another financial
instrument to a second entity.
F-17 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Quoted market prices are used for fair value when available, but do not
exist for some of the Bank's financial instruments, primarily loans and
time deposits. The fair value of these instruments has been derived from
the OTS Net Portfolio Value Model (OTS Model). This OTS Model primarily
employs the static discounted cash flow method which determines the
economic value of loans and time deposits by calculating the present
value of expected cash flows. The present value is determined by
discounting the cash flows the instruments are expected to generate by
the yields currently available to investors on instruments of comparable
risk and duration. Therefore, to calculate present value, the OTS makes
assumptions about the size and timing of expected cash flows and
appropriate discount rates. Different assumptions could materially change
these instruments' estimated values.
These disclosures exclude certain financial instruments and all
nonfinancial instruments. Therefore, the aggregate fair values presented
do not represent the Bank's underlying value.
The following assumptions and methods were used by the Bank in estimating
fair value:
FINANCIAL ASSETS. Due to the liquid nature of the instruments, the
carrying value of cash and cash equivalents and interest-bearing
deposits approximates market value. For all investment and
mortgage-backed securities, the fair value is based upon quoted
market prices. The fair value of loans receivable was obtained from
the OTS Model. The fair value of accrued interest receivable
approximates book value as the Association expects contractual
receipt in the short-term. The fair value of FHLB stock approximates
redemption value.
FINANCIAL LIABILITIES. The fair value of NOW and demand accounts and
non-term savings deposits approximates book values as these deposits
are payable on demand. The fair value of time deposits was obtained
from the OTS Model. The imputed interest rate on the borrowed funds
approximates the Company's current long-term borrowing rate.
Accordingly, the fair value of borrowed funds approximates the
carrying value.
OFF-BALANCE SHEET. Commitments made to extend credit represent
commitments for loan originations, the majority of which are
contracted for immediate sale and therefore no fair value adjustment
is necessary.
LIMITATIONS. Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Association's entire holdings of a particular instrument. Because no
market exists for a significant portion of the Association's
financial instruments, fair value estimates are based on judgments
regarding comparable market interest rates, future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates
are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
F-18 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. In addition, the tax
effect of the difference between the fair value and carrying value
of financial instruments can have a significant effect on fair value
estimates and have not been considered in the estimates presented
herein.
<TABLE>
<CAPTION>
June 30, 1996
Book Value Fair Value
Financial Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,160,760 1,160,760
Interest-bearing deposits 1,337,948 1,337,948
Investment and mortgage-backed securities
available-for-sale 13,876,659 13,876,659
Investment and mortgage-backed securities
held-to-maturity 25,195,531 25,005,118
Loans receivable, net 41,937,298 42,318,000
Stock in Federal Home Loan Bank of Seattle 1,123,300 1,123,300
Accrued interest receivable 327,994 327,994
Financial Liabilities:
Deposits 68,547,802 68,463,000
Borrowed funds 1,500,000 1,500,000
Off-Balance Sheet:
Commitments to extend credit 304,000 304,000
</TABLE>
(17) Subsequent Event
On August 29, 1996, the Board of Directors approved a plan under which
the Association would convert from a federally chartered mutual savings
and loan association to a federally chartered capital stock savings bank.
The conversion to a stock institution is subject to approval of the
Office of Thrift Supervision and members of the Association and includes
the filing of a registration statement with the Securities and Exchange
Commission. If such approvals are obtained, a holding company (of which
the Association will become a wholly-owned subsidiary) will issue and
sell shares of capital stock to eligible members of the Association and
the public.
The cost of issuing the Association's capital stock will be deferred and
deducted from the sales proceeds of the conversion. At June 30, 1996, the
Association had not incurred any conversion costs. In the event that the
conversion is not completed, any deferred conversion costs will be
charged to operations.
F-19 (Continued)
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
In accordance with OTS Regulations, at the time that the Association
converts from a mutual savings and loan association to a stock savings
bank, the Association will restrict a portion of retained earnings by
establishing a liquidation account. The liquidation account will be
maintained for the benefit of eligible holders who continue to maintain
their accounts at the Association after the conversion. The liquidation
account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases will
not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of the Association, and
only in such event, each account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to
the adjusted qualifying account balances then held. The Association may
not pay dividends if those dividends would reduce equity capital below
the required liquidation account amount.
F-20
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by the Holding Company or the Association. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person or in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Holding Company or the Association since any of the dates as of which
information is furnished herein or since the date hereof.
Table of Contents Page
Prospectus Summary............................................
Selected Consolidated Financial Information...................
Risk Factors..................................................
Empire Federal Bancorp, Inc...................................
Empire Federal Savings and Loan Association. .................
Use of Proceeds...............................................
Dividend Policy...............................................
Market for Common Stock.......................................
Capitalization................................................
Historical and Pro Forma Capital Compliance...................
Pro Forma Data................................................
Empire Federal Savings and Loan Association and Subsidiary
Consolidated Statements of Income............................
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................
Business of the Holding Company...............................
Business of the Association...................................
Management of the Holding Company.............................
Management of the Association.................................
Regulation....................................................
Taxation......................................................
The Conversion................................................
Restrictions on Acquisition of the Holding Company............
Description of Capital Stock of the Holding Company ..........
Registration Requirements.....................................
Legal and Tax Opinions........................................
Experts.......................................................
Change in Fiscal Year.........................................
Additional Information........................................
Index to Consolidated Financial Statements....................
Until the later of _____ __, 1996, or 25 days after commencement of the
Syndicated Community Offering of Common Stock, if any, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
EMPIRE FEDERAL BANCORP, INC.
[Logo]
(Proposed Holding Company for Empire Federal
Savings and Loan Association, to
be known as Empire Federal Savings Bank)
1,666,000 to 2,254,000 Shares of
Common Stock
Prospectus
Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
______________ ___, 1996
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Article XVII of the Certificate of Incorporation of Empire
Federal Bancorp, Inc. requires indemnification of directors,
officers and employees to the fullest extent permitted by
Delaware law.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and
agents may be insured or indemnified against liability which
they may incur in their capacities:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.--(a) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
II-1
<PAGE>
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
incurred by him any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agents, so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution(1)
Legal.................................................. $ 95,000
Securities marketing legal fees........................ 35,000
Printing, postage and mailing.......................... 65,000
Appraisal and business plan preparation................ 22,000
Accounting fees........................................ 30,000
Accounting advisor fee................................. 7,000
Securities marketing fees(1)........................... 285,130
Data processing fees................................... 7,500
SEC registration fee................................... 9,000
Blue Sky filing fees and expenses...................... 10,000
OTS filing fees........................................ 8,400
Other expenses......................................... 10,970
--------
Total............................................ $585,000
========
(1) Assumes a total offering of $22.5 million (midpoint of the
Estimated Valuation Range), a management fee payable to Webb equal to $25,000
and a success fee of 1.5% of the aggregate Purchase Price of the shares of
Common Stock sold in the Subscription and Direct Community Offering and the
Syndicated Community Offering, excluding shares purchased by the ESOP and
officers and directors of the Association (such success fee not to exceed 1.5%
of the gross offering proceeds at the midpoint of the Estimated Valuation Range,
or $294,000). See "THE CONVERSION -- Plan of Distribution for the Subscription,
Direct Community and Syndicated Community Offerings."
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits
The exhibits filed as part of this Registration Statement are as
follows:
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among Empire Federal Bancorp,
Inc., Empire Federal Savings and Loan Association of Livingston and
Charles Webb & Company (a)
1.2 -- Engagement Letter with Empire Federal Savings and Loan Association
of Livingston and Charles Webb & Company
2 -- Plan of Conversion of Empire Federal Savings and Loan Association
of Livingston (attached as an exhibit to the Proxy Statement
included herein as Exhibit 99.5)
3.1 -- Certificate of Incorporation of Empire Federal Bancorp, Inc.
3.2 -- Bylaws of Empire Federal Bancorp, Inc.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 -- Federal Tax Opinion of Breyer & Aguggia
II-3
<PAGE>
8.2 -- State Tax Opinion of Huppert & Swindlehurst, P.C. (a)
8.3 -- Opinion of Keller & Company, Inc. as to the value of subscription
rights
10.1 -- Proposed Form of Employment Agreement for Certain Executive
Officers
10.2 -- Proposed Form of Stock Option Plan
10.3 -- Proposed Form of Management Recognition and Development Plan
10.4 -- Proposed Form of Employee Stock Ownership Plan
21 -- Subsidiaries of Empire Federal Bancorp, Inc.
23.1 -- Consent of KPMG Peat Marwick, LLP
23.2 -- Consent of Breyer & Aguggia (contained in opinions included as
Exhibits 5 and 8.1)
23.3 -- Consent of Keller & Company, Inc.
23.4 -- Consent of Huppert & Swindlehurst, P.C. (contained in opinion
included as Exhibit 8.2) (a)
24 -- Power of Attorney (contained in the signature page to this
Registration Statement)
99.1 -- Order and Acknowledgement Form (contained in the marketing
materials included herein as Exhibit 99.2)
99.2 -- Solicitation and Marketing Materials
99.3 -- Appraisal Agreement with Keller & Company, Inc.
99.4 -- Appraisal Report of Keller & Company, Inc. (a)
99.5 -- Proxy Statement for Special Meeting of Members of Empire Federal
Savings and Loan Association
- ---------------------
(a) To be filed by amendment.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act of 1933, as amended ("Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the
II-4
<PAGE>
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time shall be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is therefore, unenforceable. In the event
that a claim for indemnification against liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Livingston, State of Montana on September 25, 1996.
EMPIRE FEDERAL BANCORP, INC.
By: /s/Beverly D. Harris
Beverly D. Harris
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Empire Federal Bancorp,
Inc. do hereby severally constitute and appoint Beverly D. Harris, our true and
lawful attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said Beverly D. Harris may deem
necessary or advisable to enable Empire Federal Bancorp, Inc. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the Registration
Statement on Form SB-2 relating to the offering of Empire Federal Bancorp,
Inc.'s Common Stock, including specifically but not limited to, power and
authority to sign for us or any of us in our names in the capacities indicated
below the Registration Statement and any and all amendments (including
post-effective amendments) thereto; and we hereby ratify and confirm all that
Beverly D. Harris shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/Beverly D. Harris President, Chief Executive September 25, 1996
- ------------------------------------------
Beverly D. Harris and Director
(Principal Executive Officer)
/s/Ernest A. Sandberg Treasurer, Chief Financial September 25, 1996
- -----------------------------------------
Ernest A. Sandberg Officer, Secretary and Director
(Principal Financial and
Accounting Officer)
/s/W. J. Peterson, Jr. Chairman of the Board September 25, 1996
- ---------------------------------------
W. J. Peterson, Jr.
/s/John R. Boe Director September 25, 1996
- ----------------------------------------
John R. Boe
/s/Sanroe J. Kaisler, Jr. Director September 25, 1996
- ----------------------------------------
Sanroe J. Kaisler, Jr.
II-6
<PAGE>
/s/Walter R. Sales Director September 25, 1996
- ----------------------------------------
Walter R. Sales
/s/Edwin H. Doig Director September 25, 1996
- -----------------------------------------
Edwin H. Doig
</TABLE>
II-7
<PAGE>
As filed with the Securities and Exchange Commission on September 25, 1996
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EMPIRE FEDERAL BANCORP, INC.
(Exact name of registrant as specified in charter)
Delaware 6035 [Applied for]
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
123 South Main Street
Livingston, Montana 59047
(406) 222-1981
(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East 1300 I Street, N.W.
Washington, D.C. 20005
(Name and address of agent for service)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
1.1 -- Form of proposed Agency Agreement among Empire Federal Bancorp, Inc., Empire Federal Savings
and Loan Association of Livingston and Charles Webb & Company (a)
1.2 -- Engagement Letter with Empire Federal Savings and Loan Association of Livingston and Charles
Webb & Company
2 -- Plan of Conversion of Empire Federal Savings and Loan Association of Livingston (attached as an
exhibit to the Proxy Statement included herein as Exhibit 99.5)
3.1 -- Certificate of Incorporation of Empire Federal Bancorp, Inc.
3.2 -- Bylaws of Empire Federal Bancorp, Inc.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities registered
8.1 -- Federal Tax Opinion of Breyer & Aguggia
8.2 -- State Tax Opinion of Huppert & Swindlehurst, P.C. (a)
8.3 -- Opinion of Keller & Company, Inc. as to the value of subscription rights
10.1 -- Proposed Form of Employment Agreement for Certain Executive Officers
10.2 -- Proposed Form of Stock Option Plan
10.3 -- Proposed Form of Management Recognition and Development Plan
10.4 -- Proposed Form of Employee Stock Ownership Plan
21 -- Subsidiaries of Empire Federal Bancorp, Inc.
23.1 -- Consent of KPMG Peat Marwick, LLP
23.2 -- Consent of Breyer & Aguggia (contained in opinions included as Exhibits 5 and 8.1)
23.3 -- Consent of Keller & Company, Inc.
23.4 -- Consent of Huppert & Swindlehurst, P.C. (contained in opinion
included as Exhibit 8.2) (a)
24 -- Power of Attorney (contained in the signature page to this Registration Statement)
99.1 -- Order and Acknowledgement Form (contained in the marketing
materials included herein as Exhibit 99.2)
99.2 -- Solicitation and Marketing Materials
99.3 -- Appraisal Agreement with Keller & Company, Inc.
99.4 -- Appraisal Report of Keller & Company, Inc. (a)
99.5 -- Proxy Statement for Special Meeting of Members of Empire Federal Savings and Loan Association
- ---------------------
(a) To be filed by amendment.
</TABLE>
<PAGE>
EXHIBIT 1.2
Engagement Letter with Empire Federal Savings and Loan
Association of Livingston and Charles Webb & Company
<PAGE>
(logo of Charles Webb & Company)
Charles Webb & Company
Investment Bankers and Financial Advisors
July 19, 1996
Ms. Beverly D. Harris
President & Chief Executive Officer
Empire Federal Savings & Loan Association
123 South Main Street
Livingston, MT 59047-1099
Dear Ms. Harris:
This proposal is in connection with Empire Federal Savings & Loan
Association's (the "Association") intention to convert from a mutual to a
capital stock form of organization (the "Conversion"). In order to effect the
Conversion, it is contemplated that all of the Association's common stock to be
outstanding pursuant to the Conversion will be issued to a holding company (the
"Company") to be formed by the Association, and that the Company will offer and
sell shares of its common stock first to eligible persons (pursuant to the
Association's Plan of Conversion) in a Subscription and Community Offering.
Charles Webb & Company ("Webb") will act as the Association's and the
Company's exclusive financial advisor and marketing agent in connection with the
Conversion. This letter sets forth selected terms and conditions of our
engagement.
1. Advisory/Conversion Services. As the Association's and Company's
financial advisor and marketing agent, Webb will provide the Association and the
Company with a comprehensive program of conversion services designed to promote
an orderly, efficient, cost-effective and long-term stock distribution. Webb
will provide financial and logistical advice to the Association and the Company
concerning the offering and related issues. Webb will assist in providing
conversion enhancement services intended to maximize stock sales in the
Subscription Offering and to residents of the Association's market area, if
necessary, in the Community Offering.
Webb shall provide financial advisory services to the Association
which are typical in connection with an equity offering and include, but are not
limited to, overall financial analysis of the client with a focus on identifying
factors which impact the valuation of the common stock and provide the
appropriate recommendations for the betterment of the equity valuation.
211 Bradenton o Dublin, Ohio 43017-3541 o 614-766-8400 o Fax: 614-766-8406
<PAGE>
Ms. Beverly D. Harris
July 19, 1996
Page 2 of 6
Additionally, post conversion financial advisory services will include
advice on shareholder relations, NASDAQ listing, dividend policy (for both
regular and special dividends), stock repurchase strategy and communication with
market makers. Prior to the closing of the offering, Webb shall furnish to
client a Post- conversion reference manual which will include specifics relative
to these items. (The nature of the services to be provided by Webb as the
Association's and the Company's financial advisor and marketing agent are
further described in Exhibit A attached hereto.)
2. Preparation of Offering Documents. The Association, the Company and
their counsel will draft the Registration Statement, Application for Conversion,
Prospectus and other documents to be used in connection with the Conversion.
Webb will attend meetings to review these documents and advise you on their form
and content. Webb and its counsel will draft appropriate agency agreement and
related documents as well as marketing materials other than the Prospectus.
3. Due Diligence Review. Prior to filing the Registration Statement,
Application for Conversion or any offering or other documents naming Webb as the
Association's and the Company's financial advisor and marketing agent, Webb and
their representatives will undertake substantial investigations to learn about
the Association's business and operations ("due diligence review") in order to
confirm information provided to us and to evaluate information to be contained
in the Association's and/or the Company's offering documents. The Association
agrees that it will make available to Webb all relevant information, whether or
not publicly available, which Webb reasonably requests,and will permit Webb to
discuss with management the operations and prospects of the Association. Webb
will treat all material non-public information as confidential. The Association
acknowledges that Webb will rely upon the accuracy and completeness of all
information received from the Association, its officers, directors, employees,
agents and representatives, accountants and counsel including this letter to
serve as the Association's and the Company's financial advisor and marketing
agent.
4. Regulatory Filings. The Association and/or the Company will cause
appropriate offering documents to be filed with all regulatory agencies
including, the Securities and Exchange Commission ("SEC"), the National
Association of Securities Dealers ("NASD"), Office of Thrift Supervision ("OTS")
and such state securities commissioners as may be determined by the Association.
5. Agency Agreement. The specific terms of the conversion services,
conversion offering enhancement and syndicated offering services contemplated in
this letter shall be set forth in an Agency Agreement between Webb and the
Association and the Company to be executed prior to
<PAGE>
Ms. Beverly D. Harris
July 19, 1996
Page 3 of 6
commencement of the offering, and dated the date that the Company's Prospectus
is declared effective and/or authorized to be disseminated by the appropriate
regulatory agencies, the SEC, the NASD, the OTS and such state securities
commissioners and other regulatory agencies as required by applicable law.
6. Representations, Warranties and Covenants. The Agency Agreement
will provide for customary representations, warranties and covenants by the
Association and Webb, and for the Company to indemnify Webb and their
controlling persons (and, if applicable, the members of the selling group and
their controlling persons), and for Webb to indemnify the Association and the
Company against certain liabilities, including, without limitation, liabilities
under the Securities Act of 1933.
7. Fees. For the services hereunder, the Association and/or Company
shall pay the following fees to Webb at closing unless stated otherwise:
(a) A Management Fee of $25,000 payable in four consecutive
monthly installments of $6,250 commencing with the signing of
this letter. Such fees shall be deemed to have been earned
when due. Should the Conversion be terminated for any reason
not attributable to the action or inaction of Webb, Webb
shall have earned and be entitled to be paid fees accruing
through the stage at which point the termination occurred.
(b) A Success Fee of 1.5% of the aggregate Purchase Price of
Common Stock sold in the Subscription Offering and Community
Offering excluding shares purchased by the Association's
officers, directors, or employees (or members of their
immediate families) plus any ESOP, tax-qualified or stock
based compensation plans (except IRA's) or similar plan
created by the Association for some or all of its directors
or employees. The amount payable pursuant to the Success Fee
shall not exceed 1.5% of the gross proceeds realized at the
Midpoint of the Valuation Range.
(c) If any shares of the Company's stock remain available
after the subscription offering, at the request of the
Association, Webb will seek to form a syndicate of registered
broker-dealers to assist in the sale of such common stock on
a best efforts basis, subject to the terms and conditions et
forth in the selected dealers agreement. Webb will endeavor
to distribute the common stock among dealers in a fashion
which best meets the distribution objectives of the
Association and the Plan of Conversion. Webb will be paid a
fee not to exceed 5.5% of the aggregate Purchase Price of the
shares of common stock sold by them. Webb will pass onto
selected broker-dealers, who assist in the syndicated
community, an amount
<PAGE>
Ms. Beverly D. Harris
July 19, 1996
Page 4 of 6
competitive with gross underwriting discounts charged at such
time for comparable amounts of stock sold at a comparable
price per share in a similar market environment. Fees with
respect to purchases affected with the assistance of a
broker/dealer other than Webb shall be transmitted by Webb to
such broker/dealer. The decision to utilize selected
broker-dealers will be made by the Association upon a
consultation with Webb. In the event, with respect to any
stock purchases, fees are paid pursuant to this subparagraph
7(c), such fees shall be in lieu of, and not in addition to,
payment pursuant to subparagraph 7(a) and 7(b).
8. Additional Services. Webb further agrees to provide financial
advisory assistance to the Company and the Association for a period of one year
following completion of the conversion, including formation of a dividend policy
and share repurchase program, assistance with shareholder reporting and
shareholder relations matters, general advice on mergers and acquisitions and
other related financial matters, without the payment by the Company and the
Association of any fees in addition to those set forth in Section 7 hereof.
Nothing in this Agreement shall require the Company and the Association to
obtain such services from Webb. Following this initial one year term, if both
parties wish to continue the relationship, a fee will be negotiated and an
agreement entered into at that time.
9. Expenses. The Association will bear those expenses of the proposed
offering customarily borne by issuers, including, without limitation, regulatory
filing fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of
the Association's accountants, attorneys, appraiser, transfer agent and
registrar, printing, mailing and marketing and syndicate expenses associated
with the Conversion; the fees set forth in Section 7; and fees for "Blue Sky"
legal work. If Webb incurs expenses on behalf of Client, Client will reimburse
Webb for such expenses.
Webb's reasonable out-of-pocket expenses, including costs of travel,
meals and lodging, photocopying, telephone, facsimile and couriers, and
reasonable fees of counsel (such fees of counsel will not be incurred without
the prior approval of Client). The selection of such counsel will be done by
Webb, with the approval of the Association. Such reimbursement of legal fees
will not exceed $35,000.
10. Conversion Agent. The Association shall pay Webb $7,500, plus
reimbursement of reasonable out-of-pocket expenses, for the performance of
conversion agent and other data processing duties related to the Conversion.
Webb shall sub-contract these duties.
11. Conditions. Webb's willingness and obligation to proceed hereunder
shall be subject to, among other things, satisfaction of the following
conditions in Webb's opinion, which opinion
<PAGE>
Ms. Beverly D. Harris
July 19, 1996
Page 5 of 6
shall have been formed in good faith by Webb after reasonable determination and
consideration of all relevant factors: (a) full and satisfactory disclosure of
all relevant material, financial and other information in the disclosure
documents and a determination by Webb,in its sole discretion, that the sale of
stock on the terms proposed is reasonable given such disclosures; (b) no
material adverse change in the condition or operations of the Association
subsequent to the execution of the agreement; and (c) no adverse market
conditions at the time of offering which in Webb's opinion make the sale of the
shares by the Company inadvisable.
12. Benefit. This Agreement shall inure to the benefit of the parties
hereto and their respective successors and to the parties indemnified pursuant
to the terms and conditions of the Agency Agreement and their successors, and
the obligations and liabilities assumed hereunder by the parties hereto shall be
binding upon their respective successors provided, however, that this Agreement
shall not be assignable by Webb.
13. Definitive Agreement. This letter reflects Webb's present
intention of proceeding to work with the Association on its proposed conversion.
It does not create a binding obligation on the part of the Association, the
Company or Webb except as to the agreement to maintain the confidentiality of
non-public information set forth in Section 3, the payment of certain fees as
set forth in Section 7(a) and 7(b) and the assumption of expenses as set forth
in Section 9, all of which shall survive the termination of this Agreement or
the completion of the services furnished hereunder and shall remain operative
and in full force and effect. You further acknowledge that any report or
analysis rendered by Webb pursuant to this engagement is rendered for use solely
by the management of the Association and its agents in connection with the
Conversion. Accordingly, you agree that you will not provide any such
information to any other person without our prior written consent.
Webb acknowledges that in offering the Company's stock no person will
be authorized to give any information or to make any representation not
contained in the offering prospectus and related offering materials filed as
part of a registration statement to be declared effective in connection with the
offering. Accordingly, Webb agrees that in connection with the offering it will
not give any unauthorized information or make any unauthorized representation.
We will be pleased to elaborate on any of the matters discussed in this letter
at your convenience.
<PAGE>
Ms. Beverly D. Harris
July 19, 1996
Page 6 of 6
If the foregoing correct sets forth our mutual understanding, please
so indicate by signing and returning the original copy of this letter to the
undersigned.
Very truly yours,
CHARLES WEBB & COMPANY
(signature of Patricia A. McJoynt)
By: /s/Patricia A. McJoynt
Patricia A. McJoynt
Executive Vice President
EMPIRE FEDERAL SAVINGS & LOAN ASSOCIATION
(signature of Beverly D. Harris)
By: /s/Beverly D. Harris August 2, 1996
BEVERLY D. HARRIS, Date
President & Chief Executive Officer
<PAGE>
EXHIBIT A
CONVERSION SERVICES PROPOSAL
TO EMPIRE FEDERAL SAVINGS & LOAN ASSOCIATION
Charles Webb & Company provides thrift institutions converting from mutual to
stock form of ownership with a comprehensive program of conversion services
designed to promote an orderly, efficient, cost-effective and long-term stock
distribution. The following list is representative of the conversion services,
if appropriate, we propose to perform on behalf of the Association.
General Services
Assist management and legal counsel with the design of the transaction
structure.
Analyze and make recommendations on bids from printing, transfer agent, and
appraisal firms.
Assist officers and directors in obtaining Association loans to purchase stock,
if requested.
Assist in drafting and distribution of press releases as required or
appropriate.
Conversion Offering Enhancement Services
Establish and manage Conversion Center at the Association. Conversion Center
personnel will track prospective investors; record stock orders; mail order
confirmations; provide the Association's senior management with daily reports;
answer customer inquiries; and handle special situations as they arise.
Assign Webb's personnel to be at the Association through completion of the
Subscription and Community Offerings to manage the Conversion Center, meet with
prospective shareholders at individual and community information meetings,
solicit local investor interest through a telemarketing campaign, answer
inquiries, and otherwise assist in the sale of stock in the Subscription and
Community Offerings. This effort will be lead by a Principal of Webb.
Create target investor list based upon review of the Association's depositor
base.
Provide intensive financial and marketing input for drafting of the prospectus.
<PAGE>
Conversion Offering Enhancement Services -- Continued
Prepare other marketing materials, including prospecting letters and brochures,
and media advertisements.
Arrange logistics of community information meeting(s) as required.
Prepare audio-visual presentation by senior management for community information
meeting(s).
Prepare management for question-and-answer period at community information
meeting(s).
Attend and address community information meeting(s) and be available to answer
questions.
Broker-Assisted Sales Services
Arrange for broker information meeting(s) as required.
Prepare audio-visual presentation for broker information meeting(s).
Prepare script for presentation by senior management at broker information
meeting(s).
Prepare management for question-and-answer period at broker information
meeting(s).
Attend and address broker information meeting(s) and be available to answer
questions.
Produce confidential broker memorandum to assist participating brokers in
selling the Association's common stock.
Aftermarket Support Services.
Webb will use their best efforts to secure market making and on-going research
commitment from at least two NASD firms.
<PAGE>
EXHIBIT 3.1
Certificate of Incorporation of
Empire Federal Bancorp, Inc.
<PAGE>
CERTIFICATE OF INCORPORATION
OF
EMPIRE FEDERAL BANCORP, INC.
ARTICLE I
Name
The name of the corporation is Empire Federal Bancorp, Inc. (herein
the "Corporation").
ARTICLE II
Registered Office
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Corporation Trust Center, in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to act as a
savings and loan holding company and to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware. The Corporation shall have all the powers of a corporation
organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
Term
The Corporation shall have perpetual existence.
ARTICLE V
Incorporators
The name and mailing address of the incorporator are:
Name Mailing Address
Beverly D. Harris 123 South Main Street
Livingston, Montana 59047
<PAGE>
ARTICLE VI
Initial Directors
The number of directors constituting the initial board of directors of
the Corporation is seven (7), and the names and addresses of the persons who are
to serve as the initial directors until their successors are elected and
qualified, together with the classes of directorships to which such persons have
been signed, are:
<TABLE>
<CAPTION>
Name Address Class
<S> <C> <C>
Walter J. Peterson, Jr. 123 South Main Street I
Livingston, Montana 59047
Sanroe J. Kaisler, Jr. 123 South Main Street I
Livingston, Montana 59047
Walter R. Sales 123 South Main Street I
Livingston, Montana 59047
Beverly D. Harris 123 South Main Street II
Livingston, Montana 59047
Edwin H. Doig 123 South Main Street II
Livingston, Montana 59047
Ernest A. Sandberg 123 South Main Street III
Livingston, Montana 59047
John R. Boe 123 South Main Street III
Livingston, Montana 59047
</TABLE>
ARTICLE VII
Capital Stock
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 4,250,000, of which 4,000,000 are to
be shares of common stock, $.01 par value per share, and of which 250,000 are to
be shares of serial preferred stock, $.01 par value per share. The shares may be
issued by the Corporation from time to time as approved by the board of
directors of the Corporation without the approval of stockholders except as
otherwise provided in this Article VII or the rules of a national securities
exchange, if applicable. The consideration for the issuance of the shares shall
be paid to or received by the Corporation in full before their issuance and
shall not be less than the par value per share. The consideration for the
issuance of the shares shall be cash, services rendered, personal property
(tangible or intangible), real property, leases of real property or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the judgment of the board of directors as to the value of such consideration
shall be conclusive. Upon payment of such consideration such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, the
part of the surplus of the Corporation which is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be the
consideration for their issuance.
2
<PAGE>
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate, the holders
of the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by such
holder.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock, and on any class
or series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when as declared
by the board of directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event, the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation.
B. Serial Preferred Stock. Except as provided in this Certificate, the
board of directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of preferred
stock in series and to fix and state the powers, designations, preferences and
relative, participating, optional or other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, including,
but not limited to determination of any of the following:
1. the distinctive serial designation and the number of shares
constituting such series;
2. the dividend rates or the amount of dividends to be paid on
the shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to dividends;
3. the voting powers, full or limited, if any, of the shares
of such series;
4. whether the shares of such series shall be redeemable and,
if so, the price or prices at which, and the terms and conditions upon which
such shares may be redeemed;
5. the amount or amounts payable upon the shares of such
series in the event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation;
6. whether the shares of such series shall be entitled to the
benefits of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and, if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which such shares
may be redeemed or purchased through the application of such funds;
7. whether the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the Corporation
3
<PAGE>
and, if so convertible or exchangeable, the conversion price or prices, or the
rate or rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions of such
conversion or exchange;
8. the subscription or purchase price and form of
consideration for which the shares of such series shall be issued; and
9. whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of the same or
any other series of serial preferred stock.
Each share of each series of preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.
ARTICLE VIII
Preemptive Rights
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates of indebtedness, debentures or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued pursuant to resolution of the board of directors of the Corporation to
such persons, firms, corporations or associations, whether or not holders
thereof, and upon such terms as may be deemed advisable by the board of
directors in the exercise of its sole discretion.
ARTICLE IX
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE X
Meetings of Stockholders; Cumulative Voting
A. Notwithstanding any other provision of this Certificate or the
Bylaws of the Corporation, no action required to be taken or which may be taken
at any annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically denied.
B. Special meetings of the stockholders of the Corporation for
any purpose or purposes may be called at any time by the board of directors of
the Corporation, or by a committee of the board of directors which has been duly
designated by the board of directors and whose powers and authorities, as
provided in a resolution of the board
4
<PAGE>
of directors or in the Bylaws of the Corporation, include the power and
authority to call such meetings, but such special meetings may not be called by
any other person or persons.
C. There shall be no cumulative voting by stockholders of any
class or series in the election of directors of the Corporation.
D. Meetings of stockholders may be held at such place as the
Bylaws may provide.
ARTICLE XI
Notice for Nominations and Proposals
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the board of directors of the Corporation or by any stockholder of the
Corporation entitled to vote generally in the election of directors. In order
for a stockholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than thirty days nor more than sixty days prior to any such
meeting; provided, however, that if less than thirty-one days' notice of the
meeting is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later than the
close of the tenth day following the day on which notice of the meeting was
mailed to stockholders. Each such notice given by a stockholder with respect to
nominations for election of directors shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of each such nominees,
(iii) the number of shares of stock of the Corporation which are beneficially
owned by each such nominee, (iv) such other information as would be required to
be included in a proxy statement soliciting proxies for the election of the
proposed nominee pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, including, without limitation, such person's written consent
to being named in the proxy statement as a nominee and to serving as a director,
if elected, and (v) as to the stockholder giving such notice (a) his or her name
and address as they appear on the Corporation's books and (b) the class and
number of shares of the Corporation which are beneficially owned by such
stockholder. In addition, the stockholder making such nomination shall promptly
provide any other information reasonably requested by the Corporation.
B. Each such notice given by a stockholder to the Secretary with
respect to business proposals to bring before a meeting shall set forth in
writing as to each matter: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in this Certificate to the contrary, no business shall be conducted at the
meeting except in accordance with the procedures set forth in this Article.
C. The Chairman of the annual or special meeting of stockholders may,
if the facts warrant, determine and declare to the meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if the
Chairman should so determine, the Chairman shall so declare to the meeting and
the defective nomination or proposal shall be disregarded and laid over for
action at the next succeeding adjourned, special or annual meeting of the
stockholders taking place thirty days or more thereafter. This provision shall
not require the holding of any adjourned or special meeting of stockholders for
the purpose of considering such defective nomination or proposal.
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ARTICLE XII
Directors
A. Number; Vacancies. The number of directors of the Corporation shall
be such number, not less than 5 nor more than 15 (exclusive of directors, if
any, to be elected by holders of preferred stock of the Corporation, voting
separately as a class), as shall be provided from time to time in or in
accordance with the Bylaws; provided, however, that no decrease in the number of
directors shall have the effect of shortening the term of any incumbent
director, and provided further, that no action shall be taken to decrease or
increase the number of directors from time to time unless at least two-thirds of
the directors then in office shall concur in said action. Vacancies in the board
of directors of the Corporation, however caused, and newly created directorships
shall be filled by a vote of two-thirds of the directors then in office, whether
or not a quorum, and any director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of the class to
which the director has been chosen expires and when the director's successor is
elected and qualified.
B. Classified Board. The board of directors of the Corporation shall be
divided into three classes of directors which shall be designated Class I, Class
II and Class III. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. Such classes shall
be as nearly equal in number as the then total number of directors constituting
the entire board of directors shall permit, with the terms of office of all
members of one class expiring each year. At the first annual meeting of
stockholders, directors in Class I shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. At the second annual
meeting of stockholders, directors of Class II shall be elected to hold office
for a term expiring at the third succeeding meeting thereafter. At the third
annual meeting of stockholders, directors of Class III shall be elected to hold
office for a term expiring at the third succeeding meeting thereafter.
Thereafter, at each succeeding annual meeting, directors of each class shall be
elected for three year terms. Notwithstanding the foregoing, the director whose
term shall expire at any annual meeting shall continue to serve until such time
as his successor shall have been duly elected and shall have qualified unless
his position on the board of directors shall have been abolished by action taken
to reduce the size of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as nearly as equal as possible.
The board of directors shall designate, by the name of the incumbent(s), the
position(s) to be abolished. Notwithstanding the foregoing, no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as nearly as equal
as possible.
Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the board of directors shall consist of
said directors so elected in addition to the number of directors fixed as
provided above in this Article XII. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
ARTICLE XIII
Removal of Directors
Notwithstanding any other provision of this Certificate or the Bylaws
of the Corporation, any director or the entire board of directors of the
Corporation may be removed, at any time, but only for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding shares of
capital stock of the Corporation entitled
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to vote generally in the election of directors (considered for this purpose as
one class) cast at a meeting of the stockholders called for that purpose.
Notwithstanding the foregoing, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the preceding
provisions of this Article XIII shall not apply with respect to the director or
directors elected by such holders of preferred stock.
ARTICLE XIV
Acquisition of Capital Stock
A. Five Year Prohibition. For a period of five years from the effective
date of the completion of the conversion of Empire Federal Savings and Loan
Association from mutual to stock form (which entity shall become a wholly-owned
subsidiary of the Corporation upon such conversion), 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 Corporation, unless such offer or
acquisition shall have been approved in advance by a two-thirds vote of the
Continuing Directors, as defined in Article XV. In addition, for a period for
five years from the completion of the conversion of Empire Federal Savings and
Loan Association from mutual to stock form (which entity shall become a
wholly-owned subsidiary of the Corporation upon such conversion), and
notwithstanding any provision to the contrary in this Certificate or in the
Bylaws of the Corporation, where any person directly or indirectly acquires
beneficial ownership of more than 10% of any class of equity security of the
Corporation in violation of this Article XIV, 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.
B. Prohibition after Five Years. If, at any time after five years from
the effective date of the completion of the conversion of Empire Federal Savings
and Loan Association from mutual to stock form (which entity shall become a
wholly-owned subsidiary of the Corporation upon such conversion), any person
shall acquire the beneficial ownership of more than 10% of any class of equity
security of the Corporation without the prior approval by a two-thirds vote of
the Continuing Directors (as defined in Article XV), then the record holders of
voting stock of the Corporation beneficially owned by such acquiring person
shall have only the voting rights set forth in this paragraph B on any matter
requiring their vote or consent. With respect to each vote in excess of 10% of
the voting power of the outstanding shares of voting stock of the Corporation
which such record holders would otherwise be entitled to cast without giving
effect to this paragraph B, the record holders in the aggregate shall be
entitled to cast only one-hundredth of a vote, and the aggregate voting power of
such record holders, so limited for all shares of voting stock of the
Corporation beneficially owned by such acquiring person, shall be allocated
proportionately among such record holders. For each such record holder, this
allocation shall be accomplished by multiplying the aggregate voting power, as
so limited, of the outstanding shares of voting stock of the Corporation
beneficially owned by such acquiring person by a fraction whose numerator is the
number of votes represented by the shares of voting stock of the Corporation and
whose denominator is the total number of votes represented by the shares of
voting stock of the Corporation that are beneficially owned by such acquiring
person. A person who is a record owner of shares of voting stock of the
Corporation that are beneficially owned simultaneously by more than one person
shall have, with respect to such shares, the right to cast the least number of
votes that such person would be entitled to cast under this paragraph B by
virtue of such shares being so beneficially owned by any of such acquiring
persons.
C. Definitions. The term "person" means an individual, a group acting
in concert, a corporation, a partnership, an association, a joint stock company,
a trust, an unincorporated organization or similar company, a syndicate or any
other group acting in concert formed for the purpose of acquiring, holding or
disposing of securities of the Corporation. The term "acquire" includes every
type of acquisition, whether effected by purchase, exchange, operation of law or
otherwise. The term "group acting in concert" includes (a) knowing participation
in a joint activity or conscious parallel action towards a common goal whether
or not pursuant to an express agreement, and
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(b) a combination or pooling of voting or other interest in the Corporation's
outstanding shares for a common purpose, pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. The term "beneficial ownership" shall have the meaning defined in
Rule 13d-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended.
D. Exclusion for Employee Benefit Plans, Directors, Officers, Employees
and Certain Proxies. The restrictions contained in this Article XIV shall not
apply to (i) any underwriter or member of an underwriting or selling group
involving a public sale or resale of securities of the Corporation or a
subsidiary thereof; provided, however, that upon completion of the sale or
resale of such securities, no such underwriter or member of such selling group
is a beneficial owner of more than 10% of any class of equity security of the
Corporation, (ii) any proxy granted to one or more Continuing Directors (as
defined in Article XV) by a stockholder of the Corporation or (iii) any employee
benefit plans of the Corporation. In addition, the Continuing Directors of the
Corporation, the officers and employees of the Corporation and its subsidiaries,
the directors of subsidiaries of the Corporation, the employee benefit plans of
the Corporation and its subsidiaries, entities organized or established by the
Corporation or any subsidiary thereof pursuant to the terms of such plans and
trustees and fiduciaries with respect to such plans acting in such capacity
shall not be deemed to be a group with respect to their beneficial ownership or
voting stock of the Corporation solely by virtue of their being directors,
officers or employees of the Corporation or a subsidiary thereof or by virtue of
the Continuing Directors of the Corporation, the officers and employees of the
Corporation and its subsidiaries and the directors of subsidiaries of the
Corporation being fiduciaries or beneficiaries of an employee benefit plan of
the Corporation or a subsidiary of the Corporation. Notwithstanding the
foregoing, no director, officer or employee of the Corporation or any of its
subsidiaries or group of any of them shall be exempt from the provisions of this
Article XIV should any such person or group become a beneficial owner of more
than 10% of any class or equity security of the Corporation.
E. Determinations. A majority of the Continuing Directors (as defined
in Article XV) shall have the power to construe and apply the provisions of the
Article and to make all determinations necessary or desirable to implement such
provisions, including but not limited to matters with respect to (i) the number
of shares beneficially owned by any person, (ii) whether a person has an
agreement, arrangement, or understanding with another as to the matters referred
to in the definition of beneficial ownership, (iii) the application of any other
definition or operative provision of this Article XIV to the given facts or (iv)
any other matter relating to the applicability or effect of this Article XIV.
Any constructions, applications, or determinations made by the Continuing
Directors pursuant to this Article XIV in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose
shall be conclusive and binding upon the Corporation and its stockholders.
ARTICLE XV
Approval of Certain Business Combinations
The stockholder vote required to approve Business Combinations (as
hereinafter defined) shall be as set forth in this section.
A. 1. Except as otherwise expressly provided in this Article XV, the
affirmative vote of the holders of (i) at least 80% of the outstanding shares
entitled to vote thereon (and, if any class or series of shares is entitled to
vote thereon separately, the affirmative vote of the holders of at least 80% of
the outstanding shares of each such class or series), and (ii) at least a
majority of the outstanding shares entitled to vote thereon, not including
shares deemed beneficially owned by a Related Person (as hereinafter defined),
shall be required in order to authorize any of the following:
(a) any merger or consolidation of the Corporation
with or into a Related Person (as hereinafter defined);
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(b) any sale, lease, exchange, transfer or other
disposition, including without limitation, a mortgage, or any other security
device, of all or any Substantial Part (as hereinafter defined) of the assets of
the Corporation (including without limitation any voting securities of a
subsidiary) or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person
with or into the Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other
disposition of all or any Substantial Part of the assets of a Related Person to
the Corporation or a subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation
or a subsidiary of the Corporation to a Related Person;
(f) the acquisition by the Corporation or a
subsidiary of the Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the
Corporation, or any recapitalization involving the common stock of the
Corporation; and
(h) any agreement, contract or other arrangement
providing for any of the transactions described in this Article.
2. Such affirmative vote shall be required notwithstanding any
other provision of this Certificate, any provision of law, or any agreement with
any regulatory agency or national securities exchange which might otherwise
permit a lesser vote or no vote.
3. The term "Business Combination" as used in this Article XV
shall mean any transaction which is referred to in any one or more of
subparagraphs A(1)(a) through (h) above.
B. The provisions of paragraph A shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by any other provision of this
Certificate, any provision of law, or any agreement with any regulatory agency
or national securities exchange, if the Business Combination shall have been
approved by a two-thirds vote of the Continuing Directors (as hereinafter
defined); provided, however, that such approval shall only be effective if
obtained at a meeting at which a Continuing Director Quorum (as hereinafter
defined) is present.
C. For the purposes of this Article XV the following definitions apply:
1. The term "Related Person" shall mean and include (a) any
individual, corporation, partnership or other person or entity which together
with its "affiliates" (as that term is defined in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended),
"beneficially owns" (as that term is defined in Rule 13d-3 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended) in the
aggregate 10% or more of the outstanding shares of the common stock of the
Corporation; and (b) any "affiliate" (as that term is defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended) of any such individual,
corporation, partnership or other person or entity. Without limitation, any
shares of the common stock of the Corporation which any Related Person has the
right to acquire pursuant to any agreement, or upon exercise or conversion
rights, warrants or options, or otherwise, shall be deemed "beneficially owned"
by such Related Person.
2. The term "Substantial Part" shall mean more than 25% of the
total assets of the Corporation, as of the end of its most recent fiscal year
ending prior to the time the determination is made.
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3. The term "Continuing Director" shall mean any member of the
board of directors of the Corporation who is unaffiliated with the Related
Person and was a member of the board prior to the time that the Related Person
became a Related Person, and any successor of a Continuing Director who is
unaffiliated with the Related Person and is recommended to succeed a Continuing
Director by a majority of Continuing Directors then on the board.
4. The term "Continuing Director Quorum" shall mean two-thirds
of the Continuing Directors capable of exercising the powers conferred on them.
ARTICLE XVI
Evaluation of Business Combinations
In connection with the exercise of its judgment in determining what is
in the best interests of the Corporation and its stockholders, when evaluating a
Business Combination (as defined in Article XV) or a tender or exchange offer,
the board of directors of the Corporation shall, in addition to considering the
adequacy of the amount of consideration to be paid in connection with any such
transaction, consider all of the following factors and any other factors which
it deems relevant: (i) the social and economic effects of the transaction on the
Corporation and its subsidiaries, employees, depositors, loan and other
customers, creditors and other elements of the communities in which the
Corporation and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity,
including, but not limited to, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
acquisition and other likely financial obligations of the acquiring person or
entity and the possible effect of such conditions upon the Corporation and its
subsidiaries and the other elements of the communities in which the Corporation
and its subsidiaries operate or are located; and (iii) the competence,
experience, and integrity of the acquiring person or entity and its or their
management.
ARTICLE XVII
Indemnification
A. Persons. The Corporation shall indemnify, to the extent provided in
paragraphs B, D or F:
1. any person who is or was a director, officer or employee of
the Corporation; and
2. any person who serves or served at the Corporation's
request as a director, officer, employee, agent, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify such person if such person satisfies the
standard in paragraph C, for expenses (including attorneys' fees but excluding
amounts paid in settlement) actually and reasonably incurred by such person in
connection with the defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
1. such person is successful on the merits or otherwise; or
2. such person acted in good faith in the transaction which is
the subject of the suit or action, and in a manner such person reasonably
believed to be in, or not opposed to, the best interest of the Corporation,
including, but not limited to, the taking of any and all actions in connection
with the Corporation's response to any
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tender offer or any offer or proposal of another party to engage in a Business
Combination (as defined in Article XV) not approved by the board of directors.
However, such person shall not be indemnified in respect of any claim, issue or
matter as to which such person has been adjudged liable to the Corporation
unless (and only to the extent that) the court in which the suit was brought
shall determine, upon application, that despite the adjudication but in view of
all the circumstances, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify such person if such person satisfies the standard in
paragraph E, for amounts actually and reasonably incurred by such person in
connection with the defense or settlement of the nonderivative suit, including,
but not limited to (i) expenses (including attorneys' fees), (ii) amounts paid
in settlement, (iii) judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
person named in paragraph A shall be indemnified only if:
1. such person is successful on the merits or otherwise; or
2. such person acted in good faith in the transaction which is
the subject of the nonderivative suit and in a manner such person reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
including, but not limited to, the taking of any and all actions in connection
with the Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article XV of
this Certificate) not approved by the board of directors and, with respect to
any criminal action or proceeding, such person had no reasonable cause to
believe his conduct was unlawful. The termination of a nonderivative suit by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not, in itself, create a presumption that the person failed
to satisfy the standard of this paragraph E.2.
F. Determination That Standard Has Been Met. A determination that the
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in paragraph C.2 (second sentence), the determination may be
made by:
1. a majority vote of the directors of the Corporation who are
not parties to the action, suit or proceeding, even though less than a quorum;
2. independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
3. the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation may pay in advance any expenses
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if (i) the board of directors authorizes the specific
payment; and (ii) the person receiving the payment undertakes in writing to
repay the same if it is ultimately determined that such person is not entitled
to indemnification by the Corporation under paragraphs A through G.
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I. Nonexclusive. The indemnification and advance of expenses provided
by paragraphs A through H shall not be exclusive of any other rights to which a
person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. Continuation. The indemnification provided by this Article XVII
shall be deemed to be a contract between the Corporation and the persons
entitled to indemnification thereunder, and any repeal or modification of this
Article XVII shall not affect any rights or obligations then existing with
respect to any state of facts then or theretofore existing or any action, suit
or proceeding theretofore or thereafter brought based in whole or in part upon
any such state of facts. The indemnification and advance payment provided by
paragraphs A through H shall continue as to a person who has ceased to hold a
position named in paragraph A and shall inure to such person's heirs, executors
and administrators.
K. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who holds or who has held any position named in paragraph
A, against any liability incurred by such person in any such position, or
arising out of such person's status as such, whether or not the Corporation
would have power to indemnify such person against such liability under
paragraphs A through H.
L. Savings Clause. If this Article XVII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVII that shall
not have been invalidated and to the full extent permitted by applicable law.
ARTICLE XVIII
Elimination of Directors' Liability
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except: (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not made in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for violations under Section 174 of the General Corporation Law of
the State of Delaware, or (iv) for any transaction from which a director derived
an improper personal benefit. If the General Corporation Law of the State of
Delaware is amended after the date of filing of this Certificate to further
eliminate or limit the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE XIX
Amendment of Bylaws
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
make, repeal, alter, amend and rescind the Bylaws of the Corporation by a
two-thirds vote of the board. Notwithstanding any other provision of this
Certificate or the Bylaws of the Corporation (and notwithstanding the fact that
some lesser percentage may be specified by law), the Bylaws shall not be
adopted, repealed, altered, amended or rescinded by the stockholders of the
Corporation except by the vote
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of the holders of not less than 80% of the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the stockholders
called for that purpose (provided that notice of such proposed adoption, repeal,
alteration, amendment or rescission is included in the notice of such meeting),
or, as set forth above, by the board of directors.
ARTICLE XX
Amendment of Certificate of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles VIII, X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII, XIX and
this Article XX may not be repealed, altered, amended or rescinded in any
respect unless the same is approved by the affirmative vote of the holders of
not less than 80% of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as a single class) cast at a meeting of the stockholders called for that
purpose (provided that notice of such proposed adoption, repeal, alteration,
amendment or rescission is included in the notice of such meeting).
* * *
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THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 17th day of September, 1996.
/s/Beverly D. Harris
Beverly D. Harris
Incorporator
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EXHIBIT 3.2
Bylaws of Empire Federal Bancorp, Inc.
<PAGE>
BYLAWS
OF
EMPIRE FEDERAL BANCORP, INC.
ARTICLE I
Home Office
The home office of Empire Federal Bancorp, Inc. (herein the
"Corporation") shall be at 123 South Main Street, Livingston, Montana. The
Corporation may also have offices at such other places within or without the
State of Montana as the board of directors shall from time to time determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the home office of the Corporation or at such
other place within or without the State in which the home office of the
Corporation is located as the board of directors may determine and as designated
in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for
any purpose or purposes may be called at any time by the majority of the board
of directors or by a committee of the board of directors in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. Notice of Meetings. Written notice stating the place, day
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be mailed by the secretary or the officer performing his duties,
not less than ten days nor more than sixty days before the meeting to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the stockholder at his address as it appears on the stock transfer
books or records of the Corporation as of the record date prescribed in Section
6 of this Article II, with postage thereon prepaid. If a stockholder be present
at a meeting, or in writing waive notice thereof before or after the meeting,
notice of the meeting to such stockholder shall be unnecessary. When any
stockholders' meeting, either annual or special, is adjourned for thirty days or
more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any meeting adjourned for less than thirty days or of the business to
be transacted at such adjourned meeting, other than an announcement at the
meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than sixty days, and in case of a meeting of stockholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a
<PAGE>
determination of stockholders entitled to vote at any meeting of stockholders
has been made as provided in this section, such determination shall apply to any
adjournment thereof.
SECTION 7. Voting Lists. The officer or agent, having charge of the
stock transfer books for shares of the Corporation shall make, at least ten days
before each meeting of shareholders, a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number of shares held by each. The record, for a period of ten days
before such meeting, shall be kept on file at the principal office of the
Corporation, and shall be subject to inspection by any shareholder for any
purpose germane to the meeting at any time during usual business hours. Such
record shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any stockholder for any purpose
germane to the meeting during the whole time of the meeting. The original stock
transfer books shall be prima facie evidence as to who are the stockholders
entitled to examine such record or transfer books or to vote at any meeting of
stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution unless otherwise provided in
the proxy.
SECTION 10. Voting. At each election for directors every stockholder
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. Unless otherwise provided in the Certificate of
Incorporation, by statute, or by these Bylaws, a majority of those votes cast by
stockholders at a lawful meeting shall be sufficient to pass on a transaction or
matter.
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a receiver
may be voted by such receiver, and shares held by or under the control of a
receiver may be voted by such receiver without the transfer thereof into his
name if authority to do so is contained in an appropriate order of the court or
other public authority by which such receiver was appointed.
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<PAGE>
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be one or more. If the board
of directors so appoints one or more inspectors, that appointment shall not be
altered at the meeting. If inspectors of election are not so appointed, the
chairman of the board or the president may make such appointment at the meeting.
In case any person appointed as inspector fails to appear or fails or refuses to
act, the vacancy may be filled by appointment by the board of directors in
advance of the meeting or at the meeting by the chairman of the board or the
president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least twenty days prior to the
date of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by stockholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of the Certificate of Incorporation.
SECTION 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Certificate of
Incorporation. This provision shall not prevent the consideration and approval
or disapproval at the annual meeting of reports of officers, directors and
committees, but in connection with such reports no new business shall be acted
upon at such annual meeting unless stated and filed as provided in the
Certificate of Incorporation.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its board of directors. The board of directors
shall annually elect a president from among its members and may also elect a
chairman of the board from among its members. The board of directors shall
designate, when present, either the chairman of the board or the president to
preside at its meetings.
SECTION 2. Number, Term and Election. The board of directors shall
initially consist of seven (7) members and shall be divided into three classes
as nearly equal in number as possible. The members of each class shall be
elected for a term of three years and until their successors are elected or
qualified. One class shall be elected by ballot annually. The board of directors
shall be classified in accordance with the provisions of the Certificate of
Incorporation.
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<PAGE>
SECTION 3. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the
Corporation.
SECTION 4. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this Bylaw immediately after,
and at the same place as, the annual meeting of stockholders. The board of
directors may provide, by resolution, the time and place for the holding of
additional regular meetings without other notice than such resolution.
SECTION 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board or the
president, or by one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place in the State of
Montana as the place for holding any special meeting of the board of directors
called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person.
SECTION 6. Notice. Written notice of any special meeting shall be given
to each director at least two days previous thereto delivered personally or by
telegram or at least five days previous thereto delivered by mail at the address
at which the director is most likely to be reached. Such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with
postage thereon prepaid if mailed or when delivered to the telegraph company if
sent by telegram. Any director may waive notice of any meeting by a writing
filed with the secretary. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
SECTION 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
SECTION 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the laws of Delaware.
SECTION 9. Action Without a Meeting. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
SECTION 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office or the administrative
office of the Corporation addressed to the chairman of the board or the
president. Unless otherwise specified herein such resignation shall take effect
upon receipt thereof by the chairman of the board or the president.
SECTION 11. Vacancies. Any vacancy occurring in the board of directors
shall be filled in accordance with the provisions of the Certificate of
Incorporation. Any directorship to be filled by reason of an increase in the
number of directors may be filled by the affirmative vote of two-thirds of the
directors then in office. The term of such director shall be in accordance with
the provisions of the Certificate of Incorporation.
SECTION 12. Removal of Directors. Any director or the entire board of
directors may be removed only in accordance with the provisions of the
Certificate of Incorporation.
4
<PAGE>
SECTION 13. Compensation. Directors, as such, may receive a stated fee
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
actual attendance at committee meetings as the board of directors may determine.
Nothing herein shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving remuneration therefor.
SECTION 14. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who votes in favor of such action.
SECTION 15. Advisory Directors. The board of directors may by
resolution appoint advisory directors to the board, and shall have such
authority and receive such compensation and reimbursement as the board of
directors shall provide. Advisory director or directors emeriti shall not have
the authority to participate by vote in the transaction of business.
ARTICLE IV
Committees of the Board of Directors
SECTION 1. Appointment. The board of directors may, by resolution
adopted by a majority of the full board, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the board of
directors. The board of directors may designate one or more directors as
alternate members of any committee, who may replace any absent member at any
meeting of any such committee.
SECTION 2. Authority. Any such committee shall have all the authority
of the board of directors, except to the extent, if any, that such authority
shall be limited by the resolution appointing the committee; and except also
that no committee shall have the authority of the board of directors with
reference to: the declaration of dividends; the amendment of the Certificate of
Incorporation or these Bylaws, or recommending to the shareholders a plan of
merger, consolidation, or conversion; the sale, lease, or other disposition of
all or substantially all of the property and assets of the Corporation otherwise
than in the usual and regular course of its business; a voluntary dissolution of
the Corporation; a revocation of any of the foregoing; the approval of a
transaction in which any member of the committee, directly or indirectly, has
any material beneficial interest; the filling of vacancies on the board of
directors or in any committee; or the appointment of other committees of the
board of directors or members thereof.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of a committee shall hold office until the next regular
annual meeting of the board of directors following his or her designation and
until a successor is designated as a member of the committee.
SECTION 4. Meetings. Unless the board of directors shall otherwise
provide, regular meetings of any committee appointed pursuant to this Article IV
shall be at such times and places as are determined by the board of directors,
or by any such committee. Special meetings of any such committee may be held at
the principal executive office of the Corporation, or at any place which has
been designated from time to time by resolution of such committee or by written
consent of all members thereof, and may be called by any member thereof upon not
less than one day's notice stating the place, date, and hour of the meeting,
which notice shall been given in the manner provided for the giving of notice to
members of the board of directors of the time and place of special meetings of
the board of directors.
5
<PAGE>
SECTION 5. Quorum. A majority of the members of any committee shall
constitute a quorum for the transaction of business at any meeting thereof.
SECTION 6. Action Without a Meeting. Any action required or permitted
to be taken by any committee at a meeting may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the members of any such committee.
SECTION 7. Resignations and Removal. Any member of any committee may be
removed at any time with or without cause by resolution adopted by a majority of
the full board of directors. Any member of any committee may resign from any
such committee at any time by giving written notice to the president or
secretary of the Corporation. Unless otherwise specified, such resignation shall
take effect upon its receipt; the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 8. Procedure. Unless the board of directors otherwise provides,
each committee shall elect a presiding officer from its members and may fix its
own rules of procedure which shall not be inconsistent with these bylaws. It
shall keep regular minutes of its proceedings and report the same to the board
of directors for its information at the meeting held next after the proceedings
shall have occurred.
ARTICLE V
Officers
SECTION 1. Positions. The officers of the Corporation shall be a
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may also
designate the chairman of the board as an officer. The president shall be the
chief executive officer unless the board of directors designates the chairman of
the board as chief executive officer. The president shall be a director of the
Corporation. The offices of the secretary and treasurer may be held by the same
person and a vice president may also be either the secretary or the treasurer.
The board of directors may designate one or more vice presidents as executive
vice president or senior vice president. The board of directors may also elect
or authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform such
duties as the board of directors may from time to time authorize or determine.
In the absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the shareholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment contract with any officer in accordance with state law; but
no such contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds of
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
6
<PAGE>
SECTION 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a
director of the Corporation.
ARTICLE VI
Contracts, Borrowings, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Certificate of Incorporation or these
Bylaws with respect to certificates for shares, the board of directors may
authorize any officer, employee, or agent of the Corporation to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the Corporation. Such authority may be general or confined to specific
instances.
SECTION 2. Borrowings. No borrowings shall be contracted on behalf of
the Corporation and no evidence of indebtedness shall be issued in its name
unless authorized by the board of directors. Such authority may be general or
confined to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any of its duly authorized depositories as the board of directors may select.
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Corporation shall
be represented by certificates signed by the chairman of the board of directors
or by the president or a vice president and by the treasurer or by the secretary
of the Corporation, and may be sealed with the seal of the Corporation or a
facsimile thereof. Any or all of the signatures upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent, or
registered by a registrar, other than the Corporation itself or an employee of
the Corporation. If any officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such officer before
the certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any shareholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Corporation is organized under the laws of the State of Delaware; the
name of the person to whom issued; the number and class of shares; the date of
issue; the designation of the series, if any, which such certificate represents;
the par value of each share represented by such certificate, or a statement that
the shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
7
<PAGE>
SECTION 3. Payment for Shares. No certificate shall be issued for any
share(s) until such share(s) is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the
issuance of shares shall be paid in accordance with the provisions of the
Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of such authority, or by
his attorney thereunto authorized by power of attorney duly executed and filed
with the Corporation. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name shares
of capital stock stand on the books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes.
SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 7. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 8. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the 31st day of
December of each year. The Corporation shall be subject to an annual audit as of
the end of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Certificate of Incorporation and
applicable law, the board of directors may, at any regular or special meeting,
declare dividends on the Corporation's outstanding capital stock. Dividends may
be paid in cash, in property or in the Corporation's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Corporation shall be in such form as the
board of directors shall prescribe.
8
<PAGE>
ARTICLE XI
Amendments
In accordance with the Certificate of Incorporation, these Bylaws may
be repealed, altered, amended or rescinded by the stockholders of the
Corporation only by vote of not less than 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting). In addition, the board of directors may repeal, alter, amend or
rescind these Bylaws by vote of two-thirds of the board of directors at a legal
meeting held in accordance with the provisions of these Bylaws.
9
<PAGE>
EXHIBIT 4
Form of Certificate for Common Stock
<PAGE>
EMPIRE FEDERAL BANCORP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK CUSIP
See Reverse For
Certain Definitions
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE, OF
Empire Federal Bancorp, Inc., a stock corporation incorporated under the laws of
the State of Delaware. The shares represented by this Certificate are
transferable only on the stock transfer books of the Corporation by the holder
of record hereof or by his duly authorized attorney or legal representative upon
the surrender of this Certificate properly endorsed. Such shares are
non-withdrawable and not insurable. Such shares are not insured by the Federal
government. The Certificate and shares represented hereby are issued and shall
be held subject to all provisions of the Articles of Incorporation and Bylaws of
the Corporation and any amendments thereto (copies of which are on file with the
Transfer Agent), to all of which provisions the holder by acceptance hereof,
assents.
IN WITNESS WHEREOF, Empire Federal Bancorp, Inc. has caused this Certificate to
be executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
CORPORATE SECRETARY PRESIDENT
TRANSFER AGENT
[SEAL]
<PAGE>
Empire Federal Bancorp, Inc.
The Board of Directors of the Corporation is authorized by resolution
or resolutions, from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences and relative participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. The Corporation will furnish to any shareholder upon request and
without charge a full description of each class of stock and any series thereof.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as through they were written out in full
according to applicable laws or regulations.
TEN COM -as tenants in common
TEN ENT -as tenants by the entireties
JT TEN -as joint tenants with right of survivorship and
not as tenants in common
UNIF GIFT MIN ACT -_______Custodian_______ under Uniform Gifts
(Cust) (Minor)
to Minors Act _________
(State)
Additional abbreviations may also be used though not in the above list
For value received, ___________________________________________ hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address,
including postal zip code, of assignee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
__________________________________________________________________________
shares of the Common Stock evidenced by this Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________ Attorney, to transfer the said
shares on the books of the within named Corporation, with full power of
substitution.
Dated _________________
----------------------------------
Signature
------------------------------------
Signature
NOTICE: The
signature to this
assignment must
correspond with
the name as
written upon the
face of the
Certificate in
every particular,
without alteration
or enlargement or
any change
whatever.
<PAGE>
EXHIBIT 5
Opinion of Breyer & Aguggia Regarding
Legality of Securities Registered
<PAGE>
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
Telephone (202) 737-7900
Breyer & Aguggia Facsimile (202) 737-7979
Attorneys at Law
September 24, 1996
Board of Directors
Empire Federal Savings and Loan Association
of Livingston
123 S. Main Street
Livingston, Montana 59047
RE: Empire Federal Bancorp, Inc.
Registration Statement on Form SB-2
To the Board of Directors:
You have requested our opinion as special counsel for Empire Federal
Bancorp, Inc., a Delaware corporation, in connection with the above-referenced
registration statement filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.
In rendering this opinion, we understand that the common stock of
Empire Federal Bancorp, Inc. will be offered and sold in the manner described in
the Prospectus, which is part of the Registration Statement. We have examined
such records and documents and made such examination as we have deemed relevant
in connection with this opinion.
Based upon the foregoing, it is our opinion that the shares of common
stock of Empire Federal Bancorp, Inc. will upon issuance be legally issued,
fully paid and nonassessable.
This opinion is furnished for use as an exhibit to the Registration
Statement. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal and
Tax Opinions."
Sincerely,
(Signature of Breyer & Aguggia)
/s/BREYER & AGUGGIA
BREYER & AGUGGIA
Washington, D.C.
<PAGE>
EXHIBIT 8.1
Form of Federal Tax Opinion of Breyer & Aguggia
<PAGE>
Form of Federal Tax Opinion
____________, 1996
Boards of Directors
Empire Federal Savings
and Loan Association
Empire Federal Bancorp, Inc.
123 S. Main Street
Livingston, Montana 59047-1099
Re: Certain Federal Income Tax Consequences Relating to
Proposed Holding Company Conversion of Empire Federal
Savings and Loan Association
Gentlemen:
In accordance with your request, set forth herein is the opinion of
this firm relating to certain federal income tax consequences of (i) the
proposed conversion of Empire Federal Savings and Loan Association (the
"Association") from a federally-chartered mutual savings and loan association to
a federally-chartered stock savings bank (the "Converted Savings Bank") (the
"Stock Conversion") and (ii) the concurrent acquisition of 100% of the
outstanding capital stock of the Converted Savings Bank by a parent holding
company formed at the direction of the Board of Directors of the Association and
to be known as Empire Federal Bancorp, Inc. (the "Holding Company").
For purposes of this opinion, we have examined such documents and
questions of law as we have considered necessary or appropriate, including but
not limited to, the Plan of Conversion as adopted by the Association's Board of
Directors on August 29, 1996 (the "Plan"); the federal mutual charter and bylaws
of the Association; the certificate of incorporation and bylaws of Holding
Company; the Affidavit of Representations dated __________, 1996 provided to us
by the Association and the Holding Company (the "Affidavit"), and the Prospectus
(the "Prospectus") included in the Registration Statement on Form SB-2 filed
with the Securities and Exchange Commission ("SEC") on _______, 1996 (the
"Registration Statement"). In such examination, we have assumed, and have not
independently verified, the genuineness of all signatures on original documents
where due execution and delivery are requirements to the effectiveness thereof.
Terms used but not defined herein, whether capitalized or not, shall have the
same meaning as defined in the Plan.
BACKGROUND
Based solely upon our review of such documents, and upon such
information as the Association has provided to us (which we have not attempted
to verify in any respect), and in reliance upon such documents and information,
we set forth herein a general summary of the relevant facts and proposed
transactions, qualified in its entirety by reference to the documents cited
above.
The Association is a federally-chartered mutual savings and loan
association which is in the process of converting to a federally-chartered stock
savings bank. The Association was initially organized in 1923. The Association
is also a member of the Federal Home Loan Bank System and its deposits are
federally insured under
<PAGE>
Boards of Directors
Empire Federal Savings and
Loan Association
Empire Federal Bancorp, Inc.
_________, 1996
Page 2
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation. The Association operates out of its main office in Livingston,
Montana and two branch offices in neighboring communities.
The Association is primarily engaged in the business of attracting
deposits from the general public and originating permanent loans secured by
first mortgages on one- to four-family residential properties. At June 30, 1996,
the Association had total assets of $86.9 million, deposits of $68.6 million,
and total equity of $15.9 million.
As a federally-chartered mutual savings and loan association, the
Association has no authorized capital stock. Instead, the Association, in mutual
form, has a unique equity structure. A savings depositor of the Association is
entitled to payment of interest on his account balance as declared and paid by
the Association, but has no right to a distribution of any earnings of the
Association except for interest paid on his deposit. Rather, such earnings
become retained earnings of the Association.
However, a savings depositor does have a right to share pro rata, with
respect to the withdrawal value of his respective savings account, in any
liquidation proceeds distributed if the Association is ever liquidated. Savings
depositors and certain borrowers are members of the Association and thereby have
voting rights in the Association. Each savings depositor is entitled to cast
votes in proportion to the size of their account balances or fraction thereof
held in a withdrawable deposit account of the Association, and each borrower
member (hereinafter "borrower") is entitled to one vote in addition to the votes
(if any) to which such person is entitled in such borrower's capacity as a
savings depositor of the Association. All of the interests held by a savings
depositor in the Association cease when such depositor closes his accounts with
the Association.
The Holding Company was incorporated in September 1996 under the laws
of the State of Delaware as a general business corporation in order to act as a
savings institution holding company. The Holding Company has an authorized
capital structure of four million shares of common stock and 250,000 shares of
preferred stock.
PROPOSED TRANSACTION
Management of the Association believes that the Stock Conversion offers
a number of advantages which will be important to the future growth and
performance of the Converted Savings Bank in that it is intended to (i) provide
substantially increased capital for investment in its business to expand the
operations of the Converted Savings Bank; (ii) provide future access to capital
markets; (iii) enhance the ability to diversify its operations into new business
activities; and (iv) afford depositors and others the opportunity to become
stockholders of the Converted Savings Bank and thereby participate more directly
in any future growth of the Converted Savings Bank.
Accordingly, pursuant to the Plan, the Association will undergo the
Stock Conversion whereby it will be converted from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings bank. As
part of the Stock Conversion, the Association will amend its existing mutual
savings bank charter and bylaws to read in the form of a Federal Stock Charter
and Bylaws. The Converted Savings Bank will then issue to the Holding Company
shares of the Converted Savings Bank's common stock, representing all of the
shares of capital stock to be issued by the Converted Savings Bank in the
Conversion, in exchange for payment by the Holding Company of 50% of the net
proceeds realized by the Holding Company from such sale of its Common Stock,
less amounts necessary to fund the Employee Stock Ownership Plan of the
Association, or such other percentage as the Office of Thrift Supervision
("OTS") may authorize or require.
<PAGE>
Boards of Directors
Empire Federal Savings and
Loan Association
Empire Federal Bancorp, Inc.
_________, 1996
Page 3
Also pursuant to the Plan, the Holding Company will offer its shares of
Common Stock for sale in a Subscription Offering and, if necessary, a Direct
Community Offering. The aggregate purchase price at which all shares of Common
Stock will be offered and sold pursuant to the Plan and the total number of
shares of Common Stock to be offered in the Conversion will be determined by the
Boards of Directors of the Association and the Holding Company on the basis of
the estimated pro forma market value of the Converted Savings Bank as a
subsidiary of the Holding Company. The estimated pro forma market value will be
determined by an independent appraiser. Pursuant to the Plan, all such shares
will be issued and sold at a uniform price per share. The Stock Conversion,
including the sale of newly issued shares of the stock of the Converted Savings
Bank to the Holding Company, will be deemed effective concurrently with the
closing of the sale of the Common Stock.
Under the Plan and in accordance with regulations of the OTS, the
shares of Common Stock will first be offered through the Subscription Offering
pursuant to nontransferable subscription rights on the basis of preference
categories in the following order of priority:
(1) Eligible Account Holders;
(2) Tax-Qualified Employee Stock Benefit Plans of the Association;
(3) Supplemental Eligible Account Holders; and
(4) Other Members.
Any shares of Common Stock not subscribed for in the Subscription
Offering may be offered in the Direct Community Offering in the following order
of priority:
(a) Natural persons who are permanent residents of Park, Gallatin or
Sweet Grass Counties, Montana; and
(b) The general public.
Any shares of Common Stock not subscribed for in the Direct Community
Offering may be offered to certain members of the general public on a best
efforts basis by a selling group of broker dealers in a Syndicated Community
Offering.
The Plan also provides for the establishment of a Liquidation Account
by the Converted Savings Bank for the benefit of all Eligible Account Holders
and any Supplemental Eligible Account Holders in an amount equal to the net
worth of the Association as of the date of the latest statement of financial
condition contained in the final prospectus issued in connection with the
Conversion. The establishment of the Liquidation Account will not operate to
restrict the use or application of any of the net worth accounts of the
Converted Savings Bank. The account holders will have an inchoate interest in a
proportionate amount of the Liquidation Account with respect to each savings
account held and will be paid by the Converted Savings Bank in event of
liquidation prior to any liquidation distribution being made with respect to
capital stock.
Following the Stock Conversion, voting rights in the Converted Savings
Bank shall be vested in the sole holder of stock in the Converted Savings Bank,
which will be the Holding Company. Voting rights in the Holding Company after
the Stock Conversion will be vested in the holders of the Common Stock.
<PAGE>
Boards of Directors
Empire Federal Savings and
Loan Association
Empire Federal Bancorp, Inc.
_________, 1996
Page 4
The Stock Conversion will not interrupt the business of the
Association. The Converted Savings Bank will continue to engage in the same
business as the Association immediately prior to the Stock Conversion, and the
Converted Savings Bank will continue to have its savings accounts insured by the
SAIF. Each depositor will retain a withdrawable savings account or accounts
equal in dollar amount to, and on the same terms and conditions as, the
withdrawable account or accounts at the time of Stock Conversion except to the
extent funds on deposit are used to pay for Common Stock purchased in the Stock
Conversion. All loans of the Association will remain unchanged and retain their
same characteristics in the Converted Savings Bank.
The Plan must be approved by the OTS and by an affirmative vote of at
least a majority of the total votes eligible to be cast at a meeting of the
Association's members called to vote on the Plan.
Immediately prior to the Conversion, the Association will have a
positive net worth determined in accordance with generally accepted accounting
principles.
OPINION
Based on the foregoing and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed transaction.
1. The Stock Conversion will constitute a reorganization within
the meaning of Section 368(a)(1)(F) of the Internal Revenue
Code of 1986, as amended (the "Code"), and no gain or loss
will be recognized to either the Association or the
Converted Savings Bank as a result of the Stock Conversion
(see Rev. Rul. 80-105, 1980-1 C.B. 78).
2. The assets of the Association will have the same basis in
the hands of the Converted Savings Bank as in the hands of
the Association immediately prior to the Stock Conversion
(Section 362(b) of the Code).
3. The holding period of the assets of the Association to be
received by the Converted Savings Bank will include the
period during which the assets were held by the Association
prior to the Stock Conversion (Section 1223(2) of the Code).
4. No gain or loss will be recognized by the Converted Savings
Bank on the receipt of money from the Holding Company in
exchange for shares of common stock of the Converted Savings
Bank (Section 1032(a) of the Code). The Holding Company will
be transferring solely cash to the Converted Savings Bank in
exchange for all the outstanding capital stock of the
Converted Savings Bank and therefore will not recognize any
gain or loss upon such transfer. (Section 351(a) of the
Code; see Rev. Rul. 69-357, 1969-1 C.B. 101).
5. No gain or loss will be recognized by the Holding Company
upon receipt of money from stockholders in exchange for
shares of Common Stock (Section 1032(a) of the Code).
6. No gain or loss will be recognized by the Eligible Account
Holders and Supplemental Eligible Account Holders of the
Association upon the issuance of them of deposit accounts in
the Converted Savings Bank in the same dollar amount and on
the same terms and conditions in exchange for
<PAGE>
Boards of Directors
Empire Federal Savings and
Loan Association
Empire Federal Bancorp, Inc.
_________, 1996
Page 5
their deposit accounts in the Association held immediately
prior to the Stock Conversion (Section 1001(a) of the Code;
Treas. Reg. ss.1.1001-1(a)).
7. The tax basis of the Eligible Account Holders' and
Supplemental Eligible Account Holders' savings accounts in
the Converted Savings Bank received as part of the Stock
Conversion will equal the tax basis of such account holders'
corresponding deposit accounts in the Association
surrendered in exchange therefor (Section 1012 of the Code).
8. Gain or loss, if any, will be realized by the deposit
account holders of the Association upon the constructive
receipt of their interest in the liquidation account of the
Converted Savings Bank and on the nontransferable
subscription rights to purchase stock of the Holding Company
in exchange for their proprietary rights in the Association.
Any such gain will be recognized by the Association deposit
account holders, but only in an amount not in excess of the
fair market value of the liquidation account and
subscription rights received. (Section 1001 of the Code;
Paulsen v. Commissioner, 469 U.S. 131 (1985); Rev. Rul.
69-646, 1969-2 C.B. 54.)
9. The basis of each account holder's interest in the
Liquidation Account received in the Stock Conversion and to
be established by the Converted Savings Bank pursuant to the
Stock Conversion will be equal to the value, if any, of that
interest.
10. No gain or loss will be recognized upon the exercise of a
subscription right in the Stock Conversion. (Rev. Rul.
56-572, 1956-2 C.B. 182).
11. The basis of the Common Stock acquired in the Stock
Conversion will be equal to the purchase price of such
stock, increased, in the case of such stock acquired
pursuant to the exercise of subscription rights, by the fair
market value, if any, of the subscription rights exercised
(Section 1012 of the Code).
12. The holding period of the Common Stock acquired in the Stock
Conversion pursuant to the exercise of subscription rights
will commence on the date on which the subscription rights
are exercised (Section 1223(6) of the Code). The holding
period of the Common Stock acquired in the Community
Offering will commence on the date following the date on
which such stock is purchased (Rev. Rul. 70-598, 1970-2 C.B.
168; Rev. Rul. 66-97, 1966-1 C.B. 190).
SCOPE OF OPINION
Our opinion is limited to the federal income tax matters described
above and does not address any other federal income tax considerations or any
federal, state, local, foreign or other tax considerations. If any of the
information upon which we have relied is incorrect, or if changes in the
relevant facts occur after the date hereof, our opinion could be affected
thereby. Moreover, our opinion is based on the case law, Code, Treasury
Regulations thereunder and Internal Revenue Service rulings as they now exist.
These authorities are all subject to change, and such change may be made with
retroactive effect. We can give no assurance that, after such change, our
opinion would not be different. We undertake no responsibility to update or
supplement our opinion. This opinion is not binding on the Internal Revenue
Service and there can be no assurance, and none is hereby given, that the
Internal Revenue Service will not take a position contrary to one or more of the
positions reflected in the foregoing opinion, or that our opinion will be upheld
by the courts if challenged by the Internal Revenue Service.
<PAGE>
Boards of Directors
Empire Federal Savings and
Loan Association
Empire Federal Bancorp, Inc.
_________, 1996
Page 6
CONSENTS
We hereby consent to the filing of this opinion with the OTS as an
exhibit to the Application H-(e)1-S filed by the Holding Company with the OTS in
connection with the Conversion and the reference to our firm in the Application
H-(e)1-S under Item 110.55 therein.
We also hereby consent to the filing of this opinion with the SEC and
the OTS as exhibits to the Registration Statement and the Association's
Application for Conversion on Form AC ("Form AC"), respectively, and the
reference on our firm in the Prospectus, which is a part of both the
Registration Statement and the Form AC, under the headings "THE CONVERSION --
Effect of Conversion to Stock Form on Depositors and Borrowers of the
Association -- Tax Effects" and "LEGAL AND TAX OPINIONS."
Very truly yours,
BREYER & AGUGGIA
<PAGE>
EXHIBIT 8.3
Opinion of Keller & Company, Inc.
as to the Value of Subscription Rights
<PAGE>
KELLER & COMPANY, INC.
555 METRO PLACE NORTH
SUITE 524
DUBLIN, OHIO 43017
(614) 766-1426
(614) 766-1459 FAX
September 19, 1996
Board of Directors
Empire Federal Savings and Loan Association
123 S. Main Street
Livingston, MT 59624
Re: Subscription Rights -- Conversion of Empire Federal Savings
and Loan Association Livingston, Montana
Gentlemen:
The purpose of this letter is to provide an opinion of the value of the
subscription rights of the "to be issued" common stock of Empire Federal
Bancorp, Inc. ("Empire Federal Bancorp" or the "Corporation"), Livingston,
Montana, in regard to the conversion of Empire Federal Savings and Loan
Association ("Empire Federal") from a federally-chartered mutual savings and
loan association to a federally-chartered stock savings and loan association.
Because the Subscription Rights to purchase shares of Common Stock in Empire
Federal, which are to be issued to the depositors of Empire Federal and the
other members of Empire Federal and will be acquired by such recipients without
cost, will be nontransferable and of short duration and will afford the
recipients the right only to purchase shares of Common Stock at the same price
as will be paid by members of the general public in a Direct Community Offering,
we are of the opinion that:
(1) The Subscription Rights will have no ascertainable fair
market value, and;
(2) The price at which the Subscription Rights are exercisable
will not be more or less than the fair market value of the
shares on the date of the exercise.
Further, it is our opinion that the Subscription Rights will have no economic
value on the date of distribution or at the time of exercise, whether or not a
community offering takes place.
Sincerely,
KELLER & COMPANY, INC.
(signature of Michael R. Keller)
/s/Michael R. Keller
Michael R. Keller
President
<PAGE>
EXHIBIT 10.1
Proposed Form of Employment Agreement
for Certain Executive Officers
<PAGE>
Form of Employment Agreement for Certain Executive Officers
THIS AGREEMENT is made effective as of ________________, 1996, by and
between EMPIRE FEDERAL SAVINGS BANK (the "Savings Bank"), EMPIRE FEDERAL
BANCORP, INC., a Delaware corporation (the "Company"); and ________________ (the
"Executive").
WHEREAS, the Savings Bank wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Savings
Bank on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to
serve as _________________________________________________. [During said period,
Executive also agrees to serve, if elected, as an officer and director of the
Company or any subsidiary or affiliate of the Company or the Savings Bank.]
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of thirty-six (36)
full calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
Savings Bank (the "Board") may extend the Agreement for an additional year.
Prior to the extension of the Agreement as provided herein, the Board of
Directors of the Savings Bank will conduct a formal performance evaluation of
Executive for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Savings Bank; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time to
time, Executive may serve, or continue to serve, on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which,
in such Board's judgment, will not present any conflict of interest with the
Savings Bank, or materially affect the performance of Executive's duties
pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Sections 1 and 2. The
Savings Bank shall pay Executive as compensation a salary of $____________ per
year ("Base Salary"). Such Base Salary shall be payable in accordance with the
customary payroll practices of the Savings Bank. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase Executive's Base Salary. In addition to the
Base Salary provided in this Section 3(a), the Savings Bank shall provide
Executive
<PAGE>
at no cost to Executive with all such other benefits as are provided uniformly
to permanent full-time employees of the Savings Bank.
(b) The Savings Bank will provide Executive with employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Savings Bank will not,
without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder. Without limiting the generality of the foregoing provisions
of this Subsection (b), Executive will be entitled to participate in or receive
benefits under any employee benefit plans including, but not limited to,
retirement plans, supplemental retirement plans, pension plans, profit-sharing
plans, health-and-accident plan, medical coverage or any other employee benefit
plan or arrangement made available by the Savings Bank in the future to its
senior executives and key management employees, subject to, and on a basis
consistent with, the terms, conditions and overall administration of such plans
and arrangements. Executive will be entitled to incentive compensation and
bonuses as provided in any plan, or pursuant to any arrangement of the Savings
Bank, in which Executive is eligible to participate. Nothing paid to Executive
under any such plan or arrangement will be deemed to be in lieu of other
compensation to which Executive is entitled under this Agreement, except as
provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Savings Bank shall pay or reimburse Executive for all
reasonable travel and other obligations under this Agreement and may provide
such additional compensation in such form and such amounts as the Board may from
time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Savings Bank of Executive's full-time employment hereunder for any reason
other than a Change in Control, as defined in Section 5(a) hereof; disability,
as defined in Section 6(a) hereof; death; retirement, as defined in Section 7
hereof; or Termination for Cause, as defined in Section 8 hereof; (ii)
Executive's resignation from the Savings Bank's employ, upon (A) unless
consented to by Executive, a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above (any such material change shall be
deemed a continuing breach of this Agreement), (B) a relocation of Executive's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the effective date of
this Agreement, (C) the liquidation or dissolution of the Savings Bank, or (D)
any breach of this Agreement by the Savings Bank. Upon the occurrence of any
event described in clauses (A), (B), (C) or (D), above, Executive shall have the
right to elect to terminate his employment under this Agreement by resignation
upon not less than sixty (60) days prior written notice given within a
reasonable period of time not to exceed, except in case of a continuing breach,
four (4) calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Savings Bank
shall pay Executive, or, in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to the payments due to Executive for
the remaining term of the Agreement, including Base Salary, bonuses, and any
other cash or deferred compensation paid or to be paid (including the value of
employer contributions that would have been made on Executive's behalf over the
remaining term of the agreement to any tax-qualified retirement plan sponsored
by the Savings Bank as of the Date of Termination), to Executive for the term of
the Agreement provided, however, that if the Savings Bank is not in compliance
with its minimum capital requirements or if such payments would cause the
Savings Bank's capital to be reduced below its minimum capital requirements,
such payments shall be deferred until such time as the Savings Bank is in
capital compliance. All payments made pursuant to this Section 4(b) shall be
paid in substantially equal
2
<PAGE>
monthly installments over the remaining term of this Agreement following
Executive's termination; provided, however, that if the remaining term of the
Agreement is less than one (1) year (determined as of Executive's Date of
Termination), such payments and benefits shall be paid to Executive in a lump
sum within thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Savings Bank
will cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Savings Bank for
Executive prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall
have occurred a Change in Control of the Company or the Savings Bank. For
purposes of this Agreement, a "Change in Control" of the Company or the Savings
Bank shall be deemed to occur if and when (a) an offeror other than the Company
purchases shares of the common stock of the Company or the Savings Bank 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 Securities Exchange Act of 1934) is
or becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Savings Bank representing 25% or more of the combined voting
power of the Company's then outstanding securities, (c) the membership of the
board of directors of the Company or the Savings Bank changes as the result of a
contested election, such that individuals who were directors at the beginning of
any twenty-four (24) month period (whether commencing before or after the date
of adoption of this Plan) do not constitute a majority of the Board at the end
of such period, or (d) shareholders of the Company or the Savings Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.
(b) If any of the events described in Section 5(a) hereof constituting
a Change in Control have occurred or the Board of the Savings Bank or the
Company has reasonably determined that a Change in Control has occurred,
Executive shall be entitled to the benefits provided in paragraphs (c), (d) and
(e) of this Section 5 upon his subsequent involuntary termination following the
effective date of a Change in Control (or voluntary termination following the
effective date of a Change in Control following any demotion, loss of title,
office or significant authority, reduction in his annual compensation or
benefits (other than a reduction affecting the Savings Bank's personnel
generally), or relocation of his principal place of employment by more than
thirty-five (35) miles from its location immediately prior to the Change in
Control), unless such termination is because of his death, retirement as
provided in Section 7, termination for Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Savings Bank shall pay Executive, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
2.99 times Executive's "base amount," within the meaning of ss.280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made
in a lump sum paid within ten (10) days of Executive's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Savings Bank will cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Savings Bank for Executive prior to his severance. In
addition, Executive shall be entitled to receive the value of employer
contributions that would have been made on Executive's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the
Savings Bank as of the Date of Termination. Such coverage and payments shall
cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive shall be
entitled to receive benefits due him under, or contributed by the Company or the
Savings Bank on his behalf, pursuant to any retirement, incentive, profit
sharing, bonus, performance, disability or other employee benefit plan
maintained by the Savings Bank or the
3
<PAGE>
Company on Executive's behalf to the extent that such benefits are not otherwise
paid to Executive upon a Change in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under ss.280G of the Code, such payments or benefits shall be payable
or provided to Executive over the minimum period necessary to reduce the present
value of such payments or benefits to an amount which is one dollar ($1.00) less
than three (3) times Executive's "base amount" under ss.280G(b)(3) of the Code.
6. TERMINATION FOR DISABILITY.
(a) If Executive shall become disabled as defined in the Savings Bank's
then current disability plan (or, if no such plan is then in effect, if
Executive is permanently and totally disabled within the meaning of Section
22(e)(3) of the Code as determined by a physician designated by the Board), the
Savings Bank may terminate Executive's employment for "Disability."
(b) Upon Executive's termination of employment for Disability, the
Savings Bank will pay Executive, as disability pay, a bi-weekly payment equal to
three-quarters (3/4) of Executive's bi-weekly rate of Base Salary on the
effective date of such termination. These disability payments shall commence on
the effective date of Executive's termination and will end on the earlier of (i)
the date Executive returns to the full-time employment of the Savings Bank in
the same capacity as he was employed prior to his termination for Disability and
pursuant to an employment agreement between Executive and the Savings Bank; (ii)
Executive's full-time employment by another employer; (iii) Executive attaining
the age of sixty-five (65); or (iv) Executive's death; or (v) the expiration of
the term of this Agreement. The disability pay shall be reduced by the amount,
if any, paid to Executive under any plan of the Savings Bank providing
disability benefits to Executive.
(c) The Savings Bank will cause to be continued life, medical, dental
and disability coverage substantially identical to the coverage maintained by
the Savings Bank for Executive prior to his termination for Disability. This
coverage and payments shall cease upon the earlier of (i) the date Executive
returns to the full-time employment of the Savings Bank, in the same capacity as
he was employed prior to his termination for Disability and pursuant to an
employment agreement between Executive and the Savings Bank; (ii) Executive's
full-time employment by another employer; (iii) Executive's attaining the age of
sixty-five (65); (iv) Executive's death; or (v) the expiration of the term of
this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Savings Bank of Executive based on "Retirement"
shall mean retirement at age sixty-five (65) or in accordance with any
retirement arrangement established with Executive's consent with respect to him.
Upon termination of Executive upon Retirement, Executive shall be entitled to
all benefits under any retirement plan of the Savings Bank or the Company and
other plans to which Executive is a party. Upon the death of Executive during
the term of this Agreement, the Savings Bank shall pay to Executive's estate the
compensation due to Executive through the last day of the calendar month in
which his death occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar
4
<PAGE>
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. For purposes of this Section, no act, or the failure to act,
on Executive's part shall be "willful" unless done, or omitted to be done, not
in good faith and without reasonable belief that the action or omission was in
the best interest of the Savings Bank or its affiliates. Notwithstanding the
foregoing, Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a copy of a resolution
duly adopted by the affirmative vote of not less than three-fourths (3/4) of the
members of the Board at a meeting of the Board called and held for that purpose
(after reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying termination for Cause
and specifying the reasons thereof. Executive shall not have the right to
receive compensation or other benefits for any period after termination for
Cause. Any stock options granted to Executive under any stock option plan or any
unvested awards granted under any other stock benefit plan of the Savings Bank,
the Company, or any subsidiary or affiliate thereof, shall become null and void
effective upon Executive's receipt of Notice of Termination for Cause pursuant
to Section 9 hereof, and shall not be exercisable by Executive at any time
subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Savings Bank may terminate Executive's employment at any time,
but any termination by the Savings Bank, other than Termination for Cause, shall
not prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 8
herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank may, in its discretion, (i) pay Executive all or part of the compensation
withheld while its contract obligations were suspended and (ii) reinstate (in
whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this paragraph shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank): (i) by the Director of the Office of
Thrift Supervision (the "Director") or his designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Savings Bank under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director, or his
designee at the time the Director or such designee approves a supervisory merger
to resolve problems related to operation of the Savings Bank or when the Savings
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k) and any regulations promulgated thereunder.
5
<PAGE>
10. NOTICE.
(a) Any purported termination by the Savings Bank or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Savings Bank will continue
to pay Executive his full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, Base Salary) and continue
him as a participant in all compensation, benefit and insurance plans in which
he was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant
to an Event of Termination as provided in Section 4 hereof, Executive agrees not
to compete with the Savings Bank and/or the Company for a period of one (1) year
following such termination in any city, town or county in which the Savings Bank
and/or the Company has an office or has filed an application for regulatory
approval to establish an office, determined as of the effective date of such
termination. Executive agrees that during such period and within said cities,
towns and counties, Executive shall not work for or advise, consult or otherwise
serve with, directly or indirectly, any entity whose business materially
competes with the depository, lending or other business activities of the
Savings Bank and/or the Company. The parties hereto, recognizing that
irreparable injury will result to the Savings Bank and/or the Company, its
business and property in the event of Executive's breach of this Subsection
11(a) agree that in the event of any such breach by Executive, the Savings Bank
and/or the Company will be entitled, in addition to any other remedies and
damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employers, employees and all
persons acting for or with Executive. Executive represents and admits that in
the event of the termination of his employment pursuant to Section 8 hereof,
Executive's experience and capabilities are such that Executive can obtain
employment in a business engaged in other lines and/or of a different nature
than the Savings Bank and/or the Company, and that the enforcement of a remedy
by way of injunction will not prevent Executive from earning a livelihood.
Nothing herein will be construed as prohibiting the Savings Bank and/or the
Company from pursuing any other remedies available to the Savings Bank and/or
the Company for such breach or threatened breach, including the recovery of
damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Savings Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
6
<PAGE>
and unique asset of the business of the Savings Bank. Executive will
not, during or after the term of his employment, disclose any knowledge of the
past, present, planned or considered business activities of the Savings Bank or
affiliates thereof to any person, firm, corporation, or other entity for any
reason or purpose whatsoever. Notwithstanding the foregoing, Executive may
disclose any knowledge of banking, financial and/or economic principles,
concepts or ideas which are not solely and exclusively derived from the business
plans and activities of the Savings Bank. In the event of a breach or threatened
breach by Executive of the provisions of this Section, the Savings Bank will be
entitled to an injunction restraining Executive from disclosing, in whole or in
part, the knowledge of the past, present, planned or considered business
activities of the Savings Bank or affiliates thereof, or from rendering any
services to any person, firm, corporation, other entity to whom such knowledge,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein will be construed as prohibiting the Savings Bank from pursuing
any other remedies available to the Savings Bank for such breach or threatened
breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided by
the Savings Bank, such amounts and benefits shall be paid or provided by the
Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Savings Bank or
any predecessor of the Savings Bank and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Savings Bank, the Company and their respective successors and
assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
7
<PAGE>
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Montana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, the provisions of such law or regulation shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within one
hundred (100) miles from the location of the Savings Bank, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Savings Bank, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Savings Bank shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify Executive (and his heirs, executors and administrators) to the fullest
extent permitted under law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Savings Bank (whether or not he continues to be a directors or
officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgment, court costs and
attorneys' fees and the cost of reasonable settlements.
22. SUCCESSOR TO THE SAVINGS BANK OR THE COMPANY.
The Savings Bank and the Company shall require any successor or
assignee, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to all or substantially all the business or assets of the Savings
Bank or the Company, expressly and unconditionally to assume and agree to
perform the Savings Bank's or the Company's obligations under this Agreement, in
the same manner and to the same extent that the Savings Bank or the Company
would be required to perform if no such succession or assignment had taken
place.
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<PAGE>
IN WITNESS WHEREOF, the Savings Bank and the Company hereto have caused
this Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer or director, and Executive has signed this Agreement, all on
the ____ day of _____________, 1996.
<TABLE>
<CAPTION>
ATTEST: EMPIRE FEDERAL SAVINGS BANK
<S> <C>
_______________________________ BY:_______________________________________
[SEAL]
ATTEST: EMPIRE FEDERAL BANCORP, INC.
_______________________________ BY:_______________________________________
[SEAL]
WITNESS:
- ------------------------------- ------------------------------------------
Executive
</TABLE>
9
<PAGE>
EXHIBIT 10.2
Proposed Form of Stock Option Plan
<PAGE>
Empire Federal Bancorp, Inc.
1996 Stock Option Plan
SECTION 1. Purpose. The purposes of the Empire Federal Bancorp, Inc. 1996 Stock
Option Plan are to promote the interests of the Company, its affiliates, and its
stockholders by (i) attracting and retaining exceptional executive personnel and
other key employees and directors of the Company and its affiliates; (ii)
motivating such employees and Eligible Directors by means of performance-related
incentives to achieve longer-range performance goals; and (iii) enabling such
employees and Eligible Directors to participate in the long-term growth and
financial success of the Company.
SECTION 2. Definitions. As used in the Plan, the following terms shall have the
meanings set forth below:
"Affiliate" shall mean the Bank or any present or future corporation
that would be a "subsidiary" corporation as defined in Sections 424(f), of the
Code.
"Award" shall mean any grant of Options or Director Options.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant or Eligible Director.
"Bank" shall mean Empire Federal Savings Bank, Livingston, Montana.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean an event deemed to occur if and when (a)
an offeror other than the Company purchases shares of the common stock of the
Company or the Bank 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 Company or the Bank representing twenty-five percent (25%) or more of the
combined voting power of the Company's or the Bank's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four month period (whether
commencing before or after the date of adoption of this Plan) do not constitute
a majority of the Board at the end of such period, or (d) shareholders of the
Company or the Bank approve a merger, consolidation, sale or disposition of all
or substantially all of the Company's or the Bank's assets, or a plan of partial
or complete liquidation. If any of the events enumerated in clauses (a) - (d)
occur, the Board shall determine the effective date of the change in control
resulting therefrom, for purposes of the Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean a committee of the Board designated by the Board
to administer the Plan.
"Company" shall mean Empire Federal Bancorp, Inc., a Delaware
corporation.
"Director Option" shall mean a Non-Qualified Stock Option granted to an
Eligible Director pursuant to Section 6(e).
"Disability" shall have the meaning set forth in Section 22(e)(3) of
the Code. For purposes of the Plan, all determinations as to whether a
Participant has become disabled shall be made by a majority of the Board upon
the basis of such evidence as its deems necessary or desirable, and shall be
final and binding on all interested persons.
"Effective Date" shall mean the date of shareholder approval of the
Plan.
<PAGE>
"Eligible Director" shall mean, on any date, a person who is serving as
a member of the Board but shall not include a person who is an Employee.
"Employee" shall mean an employee of the Company or any Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall be determined as follows:
(a) If the Shares are traded or quoted on the Nasdaq Stock Market
at the time of grant of the Award, then the Fair Market Value
shall be the average of the highest and lowest selling price
on such exchange on the date such Award is granted or, if
there were no sales on such date, then on the next prior
business day on which there was a sale.
(b) If the Shares are not traded or quoted on the Nasdaq Stock
Market, then the Fair Market Value shall be a value determined
by the Committee in good faith on such basis as it deems
appropriate.
"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to meet
the requirements of Section 422 of the Code or any successor provision thereto.
"Initial Award" shall means any grant of Options made prior to the date
of the second annual meeting of stockholders of the Company.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from
the Company that is granted under Section 6 of the Plan and that is not intended
to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option but shall not include a Director Option.
"Participant" shall mean any Employee or Eligible Director selected by
the Committee to receive an Award of Options Director Options, as appropriate.
"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, government
or political subdivision thereof or other entity.
"Plan" shall mean the Empire Federal Bancorp, Inc. 1996 Stock Option
Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by
the SEC under the Exchange Act, or any successor rule or regulation thereto as
in effect from time to time.
"SEC" shall mean the Securities and Exchange Commission or any
successor thereto and shall include the staff thereof.
"Shares" shall mean common shares of the Company, or such other
securities of the Company as may be designated by the Committee from time to
time.
"Ten Percent Stockholder" shall mean any stockholder who, at the time
an Incentive Stock Option is granted to such stockholder, owns (within the
meaning of Section 424(d) of the Code) more than ten percent (10%) of the voting
power of all classes of stock of the Company.
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<PAGE>
"Termination for Cause" shall mean termination because of a
Participant's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or material breach of any provision of any
employment agreement between the Company, the Bank and a Participant.
SECTION 3. Administration.
(a) The Plan shall be administered by the Committee. Subject to the
terms of the Plan and applicable law, and in addition to other express powers
and authorizations conferred on the Committee by the Plan, the Committee shall
have full power and authority to: (i) designate Participants; (ii) determine the
type or types of Awards to be granted to an eligible Employee; (iii) determine
the number of Shares to be covered by, or with respect to which payments,
rights, or other matters are to be calculated in connection with, Awards; (iv)
determine the terms and conditions of any Award; (v) determine whether, to what
extent, and under what circumstances Awards may be settled or exercised in cash,
Shares, other securities, other Awards or other property, or canceled,
forfeited, or suspended; (vi) determine whether, to what extent, and under what
circumstances cash, Shares, other securities, other Awards, other property, and
other amounts payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any instrument or agreement relating
to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Plan; and (ix) make any other determination
and take any other action that the Committee deems necessary or desirable for
the administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations, and other decisions under or with respect to
the Plan or any Award shall be within the sole discretion of the Committee, may
be made at any time and shall be final, conclusive, and binding upon all
Persons, including the Company, and Participant, any holder or beneficiary of
any Award, any shareholder and any Employee.
SECTION 4. Shares Available for Awards.
(a) Shares Available. Subject to adjustment as provided in Section
4(b), the number of Shares with respect to which Options and Director Options
may be granted under the Plan shall be ____________. If, after the effective
date of the Plan, any Shares covered by an Option or Director Option granted
under the Plan, or to which such an Option or Director Option relates, are
forfeited, or if an Option or Director Option otherwise terminates or is
canceled without the delivery of Shares, then the Shares covered by such Option
or Director Option, or to which such Option or Director Option relates, or the
number of Shares otherwise counted against the aggregate number of Shares with
respect to which Options and Director Options may be granted, to the extent of
any such settlement, forfeiture, termination or cancellation, shall again be, or
shall become, Shares with respect to which Options and Director Options may be
granted. In the event that any Option or Director Option is exercised through
the delivery of Shares, the number of Shares available for Awards under the plan
shall be increased by the number of Shares surrendered.
(b) Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Shares, other securities, or other property),
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
Shares or other securities of the Company, issuance of warrants or other rights
to purchase Shares or other securities of the Company, or other similar
corporate transaction or event affects the Shares such that an adjustment is
necessary in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall proportionately adjust any or all (as necessary) of (i) the
number of Shares or other securities of the Company (or number and kind of other
securities or property) with respect to which Awards may be granted, including
an Award pursuant to Section 6(e), (ii) the number of Shares or other securities
of the Company (or number and kind of other securities or property) subject to
outstanding Awards, and (iii) the grant or exercise price with respect to any
Award; provided, in each case, that with respect to Awards of Incentive Stock
Option no such adjustment shall
- 3 -
<PAGE>
be authorized to the extent that such authority would cause the Plan to violate
Section 422(b)(1) of the Code, as from time to time amended.
(c) Sources of Shares. Any Shares delivered pursuant to an Option or
Director Option may consist, in whole or in part, of authorized and unissued
Shares or of treasury Shares.
SECTION 5. Eligibility. An Employee, including any officer or employee-director
of the Company, who is not a member of the Committee shall be eligible to be
designated a Participant. Each Eligible Director shall be eligible to receive
Director Options in accordance with Section 6(e) hereof.
SECTION 6. Options and Director Options.
(a) Grant. Subject to the provisions of the Plan, the Committee shall
have sole and complete authority to determine the Employees to whom Options
shall be granted, the number of Shares to be covered by each Option, the option
price therefor and the conditions and limitations applicable to the exercise of
the option. The Committee shall have the authority to grant Incentive Stock
Options, or to grant Non-Qualified Stock Options, or to grant both types of
options. In such case of Incentive Stock Options, the terms and conditions of
such grants shall be subject to and comply with such rules as may be prescribed
by Section 422 of the Code, as from time to time amended, and any regulations
implementing such statute, including without limitation, the requirements of
Code Section 422(d), which limits the aggregate fair market value of Shares of
which Incentive Stock Options are exercisable for the first time to one hundred
thousand dollars ($100,000) per calendar year. Each provision of the Plan and of
each written option agreement relating to an Option designated an Incentive
Stock Option shall be construed so that such Option qualifies as an Incentive
Stock Option, and any provision that cannot be so construed shall be
disregarded.
(b) Exercise Price. The Committee shall establish the exercise price at
the time each Option or Director Option is granted, which price shall not be
less than one hundred percent (100%) of the per Share Fair Market Value on the
date of grant. Notwithstanding any provision contained herein, in the case of an
Incentive Stock Option, the exercise price at the time such Incentive Stock
Option is granted to any Employee who, at the time of such grant, is a Ten
Percent Stockholder, shall not be less than one hundred ten percent (110%) of
the per Share Fair Market Value on the date of grant.
(c) Exercise. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Award Agreement or thereafter; provided,
in the case of an Incentive Stock Option, a Participant may not exercise such
Option as an Incentive Stock Option after the earlier of (i) the date which is
ten (10) years (five (5) years in the case of a Participant who is a Ten Percent
Stockholder) after the date on which such Incentive Stock Option is granted, or
(ii) the date which is three (3) months (twelve (12) months in the case of a
Participant who becomes Disabled, or who dies) after the date on which he ceases
to be an employee of the Company or an Affiliate, and provided, further, that no
Initial Award of Options under the Plan shall vest more rapidly than ratably
over a five-year whereby twenty percent (20%) of the Award shall vest on each of
the first through the fifth anniversaries of the date of grant; provided,
further, that an Award of Options shall be one hundred (100) percent vested upon
a Participant's death or Disability. In the event of an Employee's Termination
for Cause, his Options shall be canceled on the date he ceases to be an
Employee. The Committee may impose such conditions with respect to the exercise
of Options, including without limitation, any relating to the application of
federal or state securities laws, as it may deem necessary or advisable. Except
with respect to the vesting of an Initial Award, the Committee shall have the
right to accelerate the exercisability of any Option or outstanding Options in
its discretion.
(d) Payment. No Shares shall be delivered pursuant to any exercise of
an Option or Director Option until payment in full of the option price therefor
is received by the Company. Such payment may be made in cash or its equivalent,
or, if and to the extent permitted by the Committee, by exchanging Shares owned
by the optionee (which are not the subject of any pledge or other security
interest), or by a combination of the foregoing, provided
- 4 -
<PAGE>
that the combined value of all cash and cash equivalents and the Fair Market
Value of any such Shares so tendered to the Company as of the date of such
tender is at least equal to such option price.
(e) Director Options. Subject to the provisions of the Plan, the
Committee shall have sole and complete authority to determine the Eligible
Directors to whom Director Options shall be granted, the number of shares to be
covered by each Director Option and the condition and limitations applicable to
the exercise of each Director Option. Each Award of Director Options shall vest
ratably over a five (5) year period whereby twenty percent (20%) of the Award
shall vest on each of the first through the fifth anniversaries of the date of
grant; provided, however, that the Award shall be one hundred percent (100%)
vested in the event of the Eligible Director's death or Disability. A Director
Option shall be exercisable until the earlier to occur of the following two (2)
dates (i) the tenth anniversary of the date of grant of such Director Option or
(ii) one (1) year (two (2) years in the case of an Eligible Director who becomes
Disabled, or who dies) after the date the Eligible Director ceases to be a
member of the Board, except that if the Eligible Director ceases to be a member
of the Board upon Termination for Cause, his Director Option shall be canceled
on the date he ceases to be a member of the Board. An Eligible Director may pay
the exercise price of a Director Option in the manner described in Section 6(d).
(f) Effect of a Change in Control. In the event of a Change in Control,
all then outstanding Options and Director Options, shall (to the extent
authorized or not prohibited by applicable law or regulations) become one
hundred percent (100%) vested and exercisable as of the effective date of the
Change in Control. If, in connection with or as a consequence of a Change in
Control, the Company or the Bank is merged into or consolidated with another
corporation, or if the Company or the Bank sells or otherwise disposes of
substantially all of its assets to another corporation, then unless provisions
are made in connection with such transaction for the continuance of the Plan
and/or the assumption or substitution of then outstanding Options and Director
Options with new options covering the stock of the successor corporation, or
parent or subsidiary thereof, with appropriate adjustments as to the number and
kind of shares and prices, such Options or Director Options shall be canceled as
of the effective date of the merger, consolidation, or sale and the Participant
or Eligible Director shall be paid in cash an amount equal to the difference
between the Fair Market Value of the Shares subject to the Options or Director
Options as of the effective date of the such corporate event and the exercise
price of the Options or Director Options, as appropriate.
(g) Limitation on Awards. Notwithstanding anything herein to the
contrary, if this plan is implemented within one year of the consummation of the
Bank's mutual-to-stock conversion, (i) no Employee shall receive an Award
covering in excess of twenty five (25) percent, (ii) no Eligible Director shall
receive in excess of five (5) percent and (iii) Eligible Directors as of the
Effective Date shall not receive in excess of thirty (30) percent in the
aggregate, of the number of shares reserved for issuance under the Plan.
SECTION 7. Amendment and Termination.
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement.
(b) Amendments to Awards. Except as provided under Section 3, the
Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any Award theretofore granted,
prospectively or retroactively; provided that any such waiver, amendment,
alteration, suspension, discontinuance, cancellation or termination that would
impair the rights of any Participant or any holder or beneficiary of any Award
theretofore granted shall not to that extent be effective without the consent of
the affected Participant, holder or beneficiary.
(c) Cancellation. Any provision of this Plan or any Award Agreement to
the contrary notwithstanding, the Committee may cause any Award of Options
granted hereunder to be canceled in consideration of the granting
- 5 -
<PAGE>
to the holder of an alternative Award of Options having a Fair Market Value
equal to the Fair Market Value of such canceled Award.
SECTION 8. General Provisions.
(a) Nontransferability.
(i) Each Award, and each right under any Award, shall be
exercisable only by the Participant's lifetime, or, if permissible under
applicable law, by the Participant's guardian or legal representative or a
transferee receiving such Award pursuant to a domestic relations order, as
determined by the Committee.
(ii) No Award may be assigned, alienated, pledged, attached,
sold or otherwise transferred or encumbered by a Participant otherwise than by
will or by the laws of descent and distribution or pursuant to a domestic
relations order, and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable
against the Company; provided that the designation of a beneficiary shall not
constitute an assignment, alienation, pledge, attachment, sale, transfer or
encumbrance.
(iii) The restrictions set forth in clause (ii) of this
Section 8(a) shall not apply to any Non- Qualified Stock Option after the Board
has determined that such restrictions are not then required for grants under the
Plan to satisfy the requirements for exemption provided by Rule 16b-3 under the
Exchange Act (in the form then applicable to the Company) or for members of the
Committee to qualify as "disinterested persons" for purposes of such Rule;
provided, however, that (A) any transfer of a Non-Qualified Stock Option is to
be made for no consideration to any of the following permissible transferees (1)
any member of the Immediate Family of the Participant to which such
Non-Qualified Stock Option was granted, (2) any trust solely for the benefit of
the Participant's Immediate Family, or (3) any partnership whose only partners
are members of the Participant's Immediate Family and (B) the transferee shall
remain subject to all of the terms and conditions applicable to such
Non-Qualified Stock Option prior to such transfer. For purposes of this clause
(iii), "Immediate Family" shall mean, with respect to a particular Participant,
such Participant's spouse, children and grandchildren.
(b) No Rights to Awards. No Employee, Participant or other Person shall
have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of Awards. The terms and conditions of Awards need not be the same with respect
to each recipient.
(c) Share Certificates. All Shares or other securities of the Company
delivered under the Plan pursuant to any Award or the exercise thereof shall be
subject to such stop transfer orders and other restrictions as the Committee may
deem advisable under the Plan or the rules, regulations, and other requirements
of the SEC, any stock exchange or national securities association upon which
such Shares or other securities are then listed, and any applicable Federal or
state laws, and the Committee may cause a legend or legends to be put on any
certificates representing such Shares or other securities to make appropriate
reference to such restrictions.
(d) Delegation. Subject to the terms of the Plan and applicable law,
the Committee may delegate to one or more officers or managers of the Company,
or to a committee of such officers or managers, the authority, subject to such
terms and limitations as the Committee shall determine, to grant Awards to, or
to cancel, modify or waive rights with respect to, or to alter, discontinue,
suspend, or terminate Awards held by, Employees who are not officers or
directors of the Company for purposed of Section 16 of the Exchange Act, or any
successor section thereto, or who are otherwise not subject to such Section.
(e) Withholding. A Participant may be required to pay to the Company
and the Bank shall have the right and is hereby authorized to withhold from any
Award, from any payment due or transfer made under any Award or from any
compensation or other amount owing to a Participant the amount of any applicable
withholding taxes in respect of an Award, its exercise, or any payment or
transfer under an Award and take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for the payment of such taxes.
With
- 6 -
<PAGE>
respect to Participants who are not subject to Section 16 of the Exchange Act,
the withholding may be in the form of cash, Shares, or other property as the
Committee may allow. With respect to Participants who are subject to Section 16
of the Exchange Act, the withholding shall be in cash or in any other property
permitted by Rule 16b-3 as the Committee may allow.
(f) Award Agreements. Each Award hereunder shall be evidenced by an
Award Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Award and any rules applicable thereto.
(g) No Limit on Other Compensation Arrangements. Nothing contained in
the Plan shall prevent the Company or any Affiliate from adopting or continuing
in effect other compensation arrangements, which may, but need not, provide for
the grant of options, restricted stock, Shares and other types of Awards
provided for hereunder (subject to shareholder approval if such approval is
required), and such arrangements may be either generally applicable or
applicable only in specific cases.
(h) No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ of the
Company or an Affiliate. Further, the Company may at any time dismiss a
Participant from employment, free from any liability or any claim under the
Plan, unless otherwise expressly provide in the Plan or in any Award Agreement.
(i) No Rights as Stockholder. Subject to the provisions of the
applicable Award, no Participant or holder or beneficiary of any Award shall
have any rights as a stockholder with respect to any Shares to be distributed
under the Plan until he or she has become the holder of such Shares.
(j) Governing Law. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan and any Award Agreement shall
be determined in accordance with the laws of the State of Montana, without
giving effect to the choice of law principles thereof.
(k) Severability. If any provisions of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to the applicable laws, or if it cannot
be construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.
(l) Other Laws. The Committee may refuse to issue or transfer any
Shares or other consideration under an Award if, acting in its sole discretion,
it determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recovery under Section 16(b) of the Exchange Act, and any payment
tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Award granted hereunder shall be construed as an offer to sell
securities of the Company, and no such offer shall be outstanding, unless and
until the Committee in its sole discretion has determined that any such offer,
if made, would be in compliance with all applicable requirements of the U.S.
federal securities laws.
(m) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company pursuant to an Award, such rights shall be no greater than the right
of any unsecured general creditor of the Company.
(n) Rule 16b-3 Compliance. With respect to persons subject to Section
16 of the Exchange Act, transactions under this Plan are intended to comply with
all applicable terms and conditions of Rule 16b-3 and any
- 7 -
<PAGE>
successor provisions. To the extent that any provision of the Plan or action by
the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
(o) Headings. Heading are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
(p) No Impact on Benefits. Unless specifically provided under any other
benefit plan of the Company or its Affiliates, Awards shall not be treated as
compensation for purposes of calculating an Employee's or Eligible Director's
rights under such benefit plans.
(q) Indemnification. Each person who is or shall have been a member of
the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be made a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Company's approval, or paid by him in satisfaction of any
judgement in any such action, suit, or proceeding against him, provided he shall
give the Company an opportunity, at its own expense, to handle and defend the
same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive and shall be
independent of any other rights of indemnification to which such persons may be
entitled under the Company's articles of incorporation or bylaws, by contract,
as a matter of law, or otherwise.
SECTION 9. Term of the Plan.
(a) Effective Date. The Plan shall become effective only upon approval
by a majority of the Company's stockholders at an annual or special meeting of
stockholders of the Company held not less than six (6) months after the date of
consummation of the Company's mutual-to-stock conversion nor more than twelve
(12) months after the date of adoption of the Plan by the Board.
(b) Expiration Date. The Plan shall terminate on and no Award shall be
granted under the Plan after the tenth anniversary of the Effective Date. Unless
otherwise expressly provided in the Plan or in an applicable Award Agreement,
any Award granted hereunder may, and the authority of the Board or the Committee
to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to
waive any conditions or rights under any such Award shall, continue after the
tenth anniversary of the Effective Date.
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<PAGE>
EXHIBIT 10.3
Proposed Form of Management Recognition and Development Plan
<PAGE>
Empire Federal Bancorp, Inc.
1996 Management Recognition and Development Plan
1. Purpose; Definitions.
The purpose of the Plan is to increase the proprietary and vested
interest of the key Employees and Eligible Directors of the Company and its
Affiliates in the growth, development and financial success of the Bank by
granting them awards of Restricted Shares.
Whenever the following terms are used in the Plan, they shall have the
meaning specified below unless the context clearly indicated to the contrary.
"Affiliate" shall mean the Bank and any other "subsidiary" of the
Company as defined in Section 424(f) of the Code.
"Award" shall mean an award of Restricted Shares under the Plan.
"Bank" shall mean Empire Federal Savings Bank, Livingston, Montana, or
any successor thereto.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean an event deemed to occur if and when (a)
an offeror other than the Company purchases shares of the common stock of the
Company or the Bank 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 Company or Bank representing twenty-five percent (25%) or more of the
combined voting power of the Company's or the Bank's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four (24) month period (whether
commencing before or after the date of adoption of this Plan) do not constitute
a majority of the Board at the end of such period, or (d) shareholders of the
Company or the Bank approve a merger, consolidation, sale or disposition of all
or substantially all of the Company's or the Bank's assets or a plan of partial
or complete liquidation. If any of the events enumerated in clauses (a) - (d)
occur, the Board shall determine the effective date of the change in control
resulting therefrom.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the committee of the Board designated by the
Board to administer the Plan.
"Company" shall mean Empire Federal Bancorp, Inc., a Delaware
corporation.
"Designated Beneficiary" shall have the meaning set forth in Section
2.2 hereof.
"Disability" shall have the meaning set forth in Section 22(e)(3) of
the Code. For purposes of the Plan, all determinations as to whether a
Participant has become disabled shall be made by a majority of the Board, a
majority upon the basis of such evidence as its deems necessary or desirable,
and shall be final and binding on all interested persons.
"Effective Date" shall have the meaning set forth in Section 5.1 hereof.
"Eligible Director" shall mean, on any date, a person who is serving as
a member of the Board but shall not include a person who is an Employee.
<PAGE>
"Employee" shall mean any person who is currently employed by the Bank
or an Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Participant" shall mean an Employee or Eligible Director to whom an
award of Restricted Shares is granted pursuant to the Plan.
"Plan" shall mean this Empire Federal Bancorp, Inc. 1996 Management
Recognition and Development Plan, as hereinafter amended from time to time.
"Restricted Shares" shall mean Shares which are awarded to an Employee
or Eligible Director that are subject to the transfer and forfeitability
restrictions described in Section 4.2.
"Share" shall mean a share of the Company's common stock, par value
$.01 per share.
2. Administration.
2.1 Administration
The Plan shall be administered by the Committee, which shall have the
power to interpret the Plan and to adopt such rules for the administration,
interpretation and application of the Plan and Awards thereunder as are
consistent with its terms and provisions and to interpret, amend or revoke any
such rules. All actions taken and all interpretations and determinations made by
the Committee shall be binding upon all persons, including the Bank,
stockholders, Participants and Designated Beneficiaries. The Secretary of the
Company shall be authorized to implement the Plan in accordance with its terms,
and to take such actions of a ministerial nature as shall be necessary to
effectuate the intent and purposes thereof. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan or the awards hereunder, and all members of the
Board shall be fully protected by the Company in respect to any such action,
determination or interpretation.
2.2 Designated Beneficiaries
If a Participant dies prior to receiving any payment due under the
Plan, such payment shall be made to his Designated Beneficiary. A Participant's
Designated Beneficiary shall be the beneficiary specifically designated by a
Participant in writing to receive amounts due the Participant in the event of
the Participant's death. In the absence of an effective designation by the
Participant, Designated Beneficiary shall mean the Participant's surviving
spouse or, if none, his estate.
3. Shares Subject To The Plan.
3.1 Shares Subject to the Plan
The maximum number of Shares that may be the subject of Awards under
this Plan shall be __________. The Company shall reserve such number of Shares
for the purposes of the Plan out of its authorized but unissued Shares or out of
Shares held in the Company's treasury, or partly out of each. In the event that
a trust is established in connection with the Plan pursuant to Section 5.4, the
Company may authorize the trustees of the trust to purchase Shares in the open
market with funds contributed by the Company and such shares shall be included
in the number of shares that may be the subject of Awards. In the event that
Restricted Shares are forfeited for any reason, such Shares shall thereafter
again be available for award pursuant to the Plan.
- 2 -
<PAGE>
3.2 Changes in the Company's Shares
In the event that the Committee shall determine that any
recapitalization, reorganization, merger, consolidation, stock split, spin-off,
combination, or exchange of Shares, or other similar corporate event affects the
Shares such that an adjustment is required in order to preserve the benefits or
potential benefits intended under this Plan, the Committee shall, in such manner
as it may deem equitable, adjust any or all of the number and kind of Shares
which thereafter may be awarded under the Plan, or the number and kind of Shares
subject to outstanding awards; provided, however, that the number of Shares
subject to any award shall always be a whole number.
4. Restricted Shares
4.1 Eligibility; Awards Under the Plan
(a) Eligibility. Employees (including officers and employee directors
of the Bank) and Eligible Directors shall be eligible to participate in the Plan
upon designation by the Committee. To the extent that Shares are available for
grant under the Plan, the Committee may determine which of the Employees and
Eligible Directors shall be granted an Award and the number of Restricted Shares
covered by each Award. In selecting those Employees to whom Awards will be
granted and the number of Shares covered by such Awards, the Committee shall
consider the position and responsibilities of the eligible Employees, the length
and value of their services to the Company and its Affiliates, the compensation
paid to the Employees and any other factors the Committee may deem relevant, and
the Committee may request the written recommendation of the chief executive
officer and other senior executive officers of the Company and its Affiliates.
(b) Limitation on Awards. Notwithstanding anything herein to the
contrary, if this plan is implemented within one year of the consummation of the
Bank's mutual-to-stock conversion, no Employee shall receive an Award covering
in excess of twenty five (25) percent, no Eligible Director shall receive in
excess of five (5) percent and Eligible Directors serving as of the Effective
Date shall not receive in excess of thirty (30) percent in the aggregate, of the
number of shares reserved for issuance under the Plan.
(c) Fractions of Shares. Whenever under the terms of the Plan a
fractional share would be required to be issued, the fractional share shall be
rounded up to the next full share.
4.2 Terms of Awards
The Restricted Shares awarded hereunder shall be awarded only pursuant
to a written agreement, which shall be executed by the Participant and a duly
authorized officer of the Company and which shall contain the following terms
and conditions:
(a) Acceptance of Award. An award of Restricted Shares must be accepted
by the Participant within a period of sixty (60) days (or such other period as
the Board may specify at grant) after the award date by the execution of a
Restricted Share award agreement in the form provided by the Company.
(b) Restrictions and Conditions. The Restricted Shares awarded to a
Participant pursuant to this Section 4 shall be subject to the following
restrictions and conditions:
(i) A Participant shall not be permitted to vote, sell,
transfer, pledge, assign or otherwise encumber Restricted Shares awarded under
the Plan prior to the date on which such shares vest in accordance with clause
(iii), except in accordance with the laws of descent and distribution.
(ii) On the date an Award of Restricted Shares vests in
accordance with clause (iii), a Participant (or his beneficiary) shall be
entitled to receive any cash dividends previously paid with respect to the
Restricted Shares, together with interest accrued thereon. Prior to such date,
cash dividends shall be held by the
- 3 -
<PAGE>
Company for the account of the Participant. Stock dividends, if any, issued with
respect to Resotected Shares shall be treated as additional Restricted Shares
that are subject to the same restrictions and other terms and conditions that
apply with respect to the Restricted Shares with respect to which such dividends
are paid.
(iii) Subject to the applicable provisions of the Restricted
Share award agreement and this Section, a Participant's interest in Shares shall
immediately become fully vested and nonforfeitable, and the restrictions set
forth in this Section 4.2 shall lapse (x) ratably over a five (5) year period
whereby twenty percent (20%) of the Award shall vest on each of the first
through the fifth anniversaries of the date of grant (y) upon the Participant's
death or Disability, or (z) upon a Change in Control (to the extent such
treatment is authorized or not prohibited by applicable law or regulations).
4.3 Stock Certificates
A stock certificate registered in the name of each Participant
receiving a Restricted Share award (or in the name of a trustee for the benefit
of each Participant) shall be issued in respect of such shares. Such certificate
shall bear whatever appropriate legend referring to the terms, conditions, and
restrictions applicable to such award as the Board shall determine. The Board
may, in its sole discretion, require that the stock certificates evidencing
Restricted Shares be held in custody by the Company (or in trust by a trustee)
until the restrictions thereon shall have lapsed.
5. Miscellaneous.
5.1 Shareholder Approval; Effective Date; Term
The Plan shall become effective only upon approval by a majority of the
Bank's shareholders at an annual or special meeting of shareholders of the
Company held not less than six (6) months after the date of consummation of the
Bank's mutual-to-stock conversion nor more than twelve (12) months after the
date of adoption of the Plan by the Board, and shall continue in effect until
the tenth anniversary of the Effective Date.
5.2 Amendment, Suspension or Termination of the Plan
The Plan may be wholly or partially amended or otherwise modified,
suspends or terminated at any time or from time to time by the Board; provided,
however, that no amendment or modification shall be made without shareholder
approval if such approval is necessary to comply with any tax or regulatory
requirement.
From and after the Effective Date, neither the amendment, suspension
nor termination of the Plan shall, without the consent of the Participant, alter
or impair any rights or obligations under any award theretofore granted. No
awards may be granted during any period of suspension nor after termination or
expiration of the Plan.
5.3 Regulations and Other Approvals
(a) The obligation of the Company to deliver Shares with respect to any
award granted under the Plan shall be subject to all applicable laws, rules and
regulations, including all applicable federal and state securities laws, and the
obtaining of all such approvals by governmental agencies as may be deemed
necessary or appropriate by the Board.
(b) The Board may make such changes to the Plan as may be necessary or
appropriate to comply with the rules or requirements of any governmental
authority.
(c) Each award of Shares is subject to the requirement that, if at any
time the Board determines, in its sole discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any United States, state or federal
law, or the consent or approval of any governmental regulatory body is necessary
or desirable as a condition of, or in connection with, issuance of Shares,
- 4 -
<PAGE>
no Shares shall be issued, in whole or in part, unless listing, registration,
qualification, consent or approval has been effected or obtained free of any
conditions as acceptable to the Board.
(d) In the event that the disposition of Shares acquired pursuant to
the Plan is not covered by a then current registration statement under the
Securities Act of 1933, and is not otherwise exempt from such registration, such
Shares shall be restricted against transfer to the extent required by the
Securities Act of 1933 or regulations thereunder, and the Board may require any
individual receiving Shares pursuant to the Plan, as a condition precedent to
receipt of such Shares, to represent to the Company in writing that the Shares
acquired by such individual are acquired for investment only and not with a view
to distribution. The certificate for any Shares acquired pursuant to the Plan
shall include any legend that the Board deems appropriate to reflect any
restrictions on transfer.
(e) At the time of grant of any award, the Board may provide in the
Restricted Share award agreement that any Shares received as a result of such
grant shall be subject to a right of first refusal in favor of the Company,
pursuant to which the Participant shall be required to offer to the Company any
Shares that he wishes to sell, with the price being the then fair market value
of such Shares, subject to such other terms and conditions as the Board may
specify in the award agreement.
(f) Rule 16b-3 Compliance. With respect to persons subject to Section
16 of the Exchange Act, transactions under this Plan are intended to comply with
all applicable terms and conditions of Rule 16b-3 and any successor provisions.
To the extent that any provision of the Plan or action by the Committee fails to
so comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
5.4 Trust Arrangement
All benefits under the Plan represent an unsecured promise to pay by
the Company. The Plan shall be unfunded and the benefits hereunder shall be paid
only from the general assets of the Company resulting in the Participants having
no greater rights than the Company's general creditors; provided, however, that
nothing herein shall prevent or prohibit the Company from establishing a trust
or other arrangement for the purpose of providing for the payment of the
benefits payable under the Plan.
5.5 Governing Law
The Plan and the rights of all persons claiming hereunder shall be
construed and determined in accordance with the laws of the State of Montana
without giving effect to the choice of law principles thereof.
5.6 Titles; Construction
Titles are provided herein for convenience only and are not to serve as
a basis for interpretation or construction of the Plan. The masculine pronoun
shall include the feminine and neuter and the singular shall include the plural,
when the context so indicates.
5
<PAGE>
EXHIBIT 10.4
Proposed Form of Employee Stock Ownership Plan
<PAGE>
EMPIRE FEDERAL SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
(Effective January 1, 1996)
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
I. Purpose of the Plan................................................................................... 1
II. Definitions
2.1 "Adjusted Balance".............................................................................2
2.2 "Annual Additions".............................................................................2
2.3 "Beneficiary"..................................................................................2
2.4 "Board"........................................................................................2
2.5 "Break in Service".............................................................................2
2.6 "Code".........................................................................................3
2.7 "Committee"....................................................................................3
2.8 "Company"......................................................................................3
2.9 "Company Contribution Account".................................................................4
2.10 "Company Stock"................................................................................4
2.11 "Company Stock Account"........................................................................4
2.12 "Compensation".................................................................................4
2.13 "Debt".........................................................................................5
2.14 "Early Retirement Date"........................................................................5
2.15 "Employee".....................................................................................5
2.16 "Employment Year"..............................................................................5
2.17 "ERISA"........................................................................................5
2.18 "Highly Compensated Participant"...............................................................5
2.19 "Hour of Service"..............................................................................6
2.20 "Limitation Year"..............................................................................7
2.21 "Loan".........................................................................................7
2.22 "Maximum Permissible Amount"...................................................................7
2.23 "Normal Retirement Date".......................................................................7
2.24 "Other Investments Account"....................................................................7
2.25 "Participant"..................................................................................7
2.26 "Plan".........................................................................................7
2.27 "Plan Year"....................................................................................8
2.28 "Qualified Election Period"....................................................................8
2.29 "Qualified Participant"........................................................................8
2.30 "Related Employer".............................................................................8
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2.31 "Related Plan".................................................................................8
2.32 "Service"......................................................................................8
2.33 "Spouse".......................................................................................8
2.34 "Suspense Account".............................................................................8
2.35 "Trust" or "Trust Fund"........................................................................9
2.36 "Trust Agreement"..............................................................................9
2.37 "Trustee"......................................................................................9
2.38 "Valuation Date"...............................................................................9
III. Participation
3.1 Eligibility Requirement.......................................................................10
3.2 Reemployment of Participant...................................................................10
IV. Contributions
4.1 Company Contributions.........................................................................11
4.2 Exclusive Benefit of Employees................................................................12
V. Investment of Trust Assets
5.1 Investments...................................................................................13
5.2 Valuation of Company Stock....................................................................13
5.3 Suspense Account..............................................................................13
5.4 Sales and Resales of Company Stock............................................................13
VI. Exempt Loans
6.1 Loans.........................................................................................14
6.2 Loan Payments.................................................................................15
6.3 Right of First Refusal........................................................................17
6.4 Put Option....................................................................................17
6.5 Continuation of Rights or Put Option..........................................................18
VII. Allocations to Participants' Accounts
7.1 Separate Accounts.............................................................................19
7.2 Company Stock.................................................................................19
7.3 Other Investments.............................................................................19
7.4 Allocations of Company Contributions and Forfeitures..........................................19
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7.5 Maximum Allocation............................................................................20
7.6 Vesting.......................................................................................22
7.7 Net Income (or Loss) of the Trust.............................................................23
7.8 Accounting for Allocations....................................................................23
7.9 Special Allocation Provisions.................................................................24
7.10 Special Limitations on Allocations............................................................24
VIII. Retirement Payments, Disability Payments and Other Benefits
8.1 Payments on Retirement........................................................................25
8.2 Payments on Death.............................................................................25
8.3 Payments on Disability........................................................................26
8.4 Payments on Termination for Other Reasons.....................................................26
8.5 Property Distributed..........................................................................28
8.6 Methods of Payment............................................................................28
8.7 Administrative Powers Relating to Payments....................................................34
8.8 Dividends.....................................................................................34
8.9 Diversification of Investments................................................................34
IX. Voting of Company Stock
9.1 Company Common Stock - Voting and Consent.....................................................37
X. Plan Administration
10.1 Company Responsibility........................................................................38
10.2 Powers and Duties of Committee................................................................38
10.3 Organization and Operation of Committee.......................................................38
10.4 Records and Reports of Committee..............................................................39
10.5 Claims Procedure..............................................................................39
10.6 Compensation and Expenses of Committee........................................................40
10.7 Indemnity of Committee Members................................................................40
XI. Trust and Trustee
11.1 Trust Agreement...............................................................................41
11.2 Exclusive Benefit of Employees................................................................41
11.3 Trustee.......................................................................................41
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XII. Amendment and Termination
12.1 Amendment of Plan.............................................................................42
12.2 Voluntary Termination of or Permanent Discontinuance of Contributions
to the Plan................................................................................42
12.3 Limitation on Amendment or Termination........................................................42
12.4 Involuntary Termination of Plan...............................................................42
12.5 Payments on Termination of or Permanent Discontinuance of Contributions
to the Plan................................................................................43
XIII. Miscellaneous
13.1 Duty To Furnish Information and Documents.....................................................44
13.2 Committee's Annual Statements and Available Information.......................................44
13.3 No Enlargement of Employment Rights...........................................................44
13.4 Applicable Law................................................................................44
13.5 No Guarantee..................................................................................44
13.6 Unclaimed Funds...............................................................................45
13.7 Merger or Consolidation of Plan...............................................................45
13.8 Interest Nontransferable......................................................................45
13.9 Prudent Man Rule..............................................................................46
13.10 Limitations on Liability......................................................................46
13.11 Federal and State Security Law Compliance.....................................................46
13.12 Headings......................................................................................46
13.13 Gender and Number.............................................................................46
13.14 ERISA and Approval Under Internal Revenue Code................................................46
13.15 Extension of Plan to Related Employers........................................................47
13.16 Administrative Changes Without Amendment......................................................47
XIV. Top-Heavy Provisions
14.1 Top-Heavy Status..............................................................................48
14.2 Definitions...................................................................................48
14.3 Determination of Top-Heavy Status.............................................................48
14.4 Vesting.......................................................................................49
14.5 Minimum Contribution..........................................................................50
14.6 Compensation..................................................................................50
14.7 Collective Bargaining Agreements..............................................................50
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</TABLE>
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ARTICLE I
PURPOSE OF THE PLAN
The purpose of this Plan is to enable participating Employees of Empire
Federal Savings Bank to share in the growth and prosperity of the Company, to
provide Employees with an opportunity to accumulate capital for their future
economic security, to furnish additional security to Employees who become
permanently disabled, and to enable Employees to acquire stock ownership
interests in the Company. Consequently, Company contributions to the Plan will
be invested primarily in Company Stock. The Plan, effective as of January 1,
1996, shall constitute an employee stock ownership plan under Section 4975(e)(7)
of the Code and Section 407(d)(6) of ERISA and a stock bonus plan under Section
401(a) of the Code.
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ARTICLE II
DEFINITIONS
Whenever used herein the following words and phrases shall have the
meanings stated below unless a different meaning is plainly required by the
context:
2.1 "Adjusted Balance" means the balance in a Participant's account or
accounts, as adjusted in accordance with Sections 7.8 and 7.9 of the Plan as of
the applicable Valuation Date.
2.2 "Annual Additions" means the total of: (a) Company contributions
allocated to a Participant's Accounts under this Plan and any Related Plan
during any Limitation Year; (b) the amount of employee contributions made by the
Participant under any Related Plan; and (c) forfeitures allocated to a
Participant's Accounts under the Plan and any Related Plan.
2.3 "Beneficiary" means the person, persons, or entity designated or
determined pursuant to the provisions of Section 8.2 of the Plan.
2.4 "Board" means the Board of Directors of the Company.
2.5 "Break in Service" means the termination of employment of an
Employee followed by the expiration of an Employment Year in which the Employee
accumulated fewer than 501 Hours of Service. For purposes of this Section:
(a) A Break in Service shall not be deemed to have occurred if
(i) the employment of a terminated Employee is resumed prior to the expiration
of an Employment Year in which he accumulates fewer than 501 Hours of Service;
(ii) the Employee is absent with the prior consent of the Company for a period
not exceeding 12 months (which consent shall be granted under uniform rules
applied to all Employees on a nondiscriminatory basis) and he returns to active
employment with the Company upon the expiration of the period of authorized
absence; or (iii) he leaves the Company to serve in the armed forces of the
United States for a period during which his reemployment rights are guaranteed
by law and he returns or offers to return to work for the Company prior to the
expiration of his reemployment rights.
(b) An Employee who is absent from work with the Company
because of (i) the Employee's pregnancy, (ii) the birth of the Employee's child,
(iii) the placement of a child with the Employee in connection with the
Employee's adoption of the child, or (iv) caring for such child immediately
following such birth or placement
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shall receive credit, solely for purposes of determining whether a Break in
Service has occurred under this Section, for the Hours of Service described in
subsection (c) of this Section; provided that the total number of hours credited
as Hours of Service under this subsection shall not exceed 501 Hours of Service.
(c) In the event of an Employee's absence from work for any of
the reasons set forth in subsection (b) of this Section, the Hours of Service
that the Employee will be credited with under subsection (b) are (i) the Hours
of Service that otherwise would normally have been credited to the Employee but
for such absence, or (ii) eight Hours of Service per day of such absence if the
Committee is unable to determine the Hours of Service described in clause (i).
(d) An Employee who is absent from work for any of the reasons
set forth in subsection (b) of this Section shall be credited with Hours of
Service under subsection (b), (i) only in the Employment Year in which the
absence begins, if the Employee would be prevented from incurring a Break in
Service in that Year solely because the period of absence is treated as credited
Hours of Service, as provided in subsections (b) and (c), or (ii) in any other
case, in the immediately following Employment Year.
(e) No credit for Hours of Service will be given pursuant to
subsections (b), (c) and (d) of this Section unless the Employee furnished to
the Committee such timely information that the Committee may reasonably require
to establish (i) that the absence from work is for one of the reasons specified
in subsection (b) and (ii) the number of days for which there was such an
absence. No credit for Hours of Service will be given pursuant to subsections
(b), (c), and (d) for any purpose of the Plan other than the determination of
whether an Employee has incurred a Break in Service pursuant to this Section.
2.6 "Code" means the Internal Revenue Code of 1986 as amended.
Reference to a section of the Code shall include that section and any comparable
section or sections of any future legislation that amends, supplements or
supersedes said sections.
2.7 "Committee" means the Plan Administrative Committee described in
Section 10.1 of the Plan.
2.8 "Company" means Empire Federal Savings Bank, a federally-chartered
savings bank and any successor corporation resulting from a merger or
consolidation with the Company or transfer of substantially all of the assets of
the Company, if such successor or transferee shall adopt and continue the Plan
by appropriate corporate action, pursuant to Section 12.4 of the Plan.
2.9 "Company Contribution Account" means the Company Stock and other
assets held by the Trustee for the Plan derived from Company contributions to
the Trust.
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2.10 "Company Stock" means any qualifying employer security within the
meaning of Section 4975(e)(8) of the Code and 407(d)(1) of ERISA and Regulations
thereunder.
2.11 "Company Stock Account" means an account of a Participant which is
credited with his allocable share of Company Stock purchased and paid for by the
Trust or contributed to the Trust.
2.12 "Compensation" means a Participant's total earning from the
Company paid during a Plan Year for services rendered, including bonuses,
overtime and commissions, but excluding any contributions or benefits under this
Plan or any other pension, profit sharing, insurance, hospitalization or other
plan or policy maintained by the Company for the benefit of such Participant,
and all other extraordinary and unusual payments. For purposes of Sections 2.18
and 2.22, Compensation means wages, salaries, fees for professional services,
and other amounts received for personal services actually rendered in the course
of employment with the Company (including, but not limited to, commissions paid
salesmen, compensation for services on the basis of percentage of profits, tips,
and bonuses); shall include all compensation actually paid or made available to
a Participant for an entire Limitation Year; and shall not include any other
items or amounts paid to or for the benefit of a Participant. The limit of
Compensation for any participant for a Plan Year or Limitation Year shall be the
dollar limitation in effect under Section 401(a)(17) of the Code and the
Regulations thereunder for such Year. In addition to other applicable
limitations set forth in the Plan, and notwithstanding any other provision of
the plan to the contrary, for plan years beginning on or after January 1, 1994,
the annual compensation of each employee taken into account under the plan shall
not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual
compensation limit is $150,000, as adjusted by the Commissioner for increased in
the cost of living in accordance with Section 401(a)(17)(B) of the Code. The
cost-of-living adjustment in effect for a calendar year applies to any period,
not exceeding 12 months, over which compensation is determined (determination
period) beginning in such calendar year. If a determination period consists of
fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied
by a fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is the number of months in
the determination period, and the denominator of which is 12. For plan years
beginning on or after January 1, 1994, any reference in this Plan to the
limitation under section 401(a)(17) of the Code shall mean the OBRA '93 annual
compensation limit set forth in this provision. If Compensation for any prior
determination period is taken into account in determining an employee's benefits
accruing in the current plan year, the Compensation for that prior determination
period is subject to the OBRA '93 annual compensation limit in effect for that
prior determination period. For this purpose, for determination periods
beginning before the first date of the first plan year beginning on or after
January 1, 1994, the OBRA '93 annual compensation limit is $150,000.
2.13 "Debt" means any borrowing obligation incurred by the Trustee that
is not a Loan.
2.14 "Early Retirement Date" means the date a Participant attains age
55.
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<PAGE>
2.15 "Employee" means an individual employed by the Company; provided,
however, that "Employee" does not include an hourly employee or any individual
covered by a collective bargaining agreement between employee representatives
and the Company if retirement benefits were the subject of good faith bargaining
between such employee representatives and the Company. A person who is not
employed by the Company but who performs services for the Company pursuant to an
agreement between the Company and a leasing organization shall be considered a
"leased employee" after such person performs such services for a 12-month period
and the services are of a type historically performed by employees. A person who
is considered a leased employee of the Company shall not be considered an
Employee for purposes of the Plan. If a leased employee subsequently becomes an
Employee, and thereafter participates in the Plan, he shall be given credit for
Hours of Service and Years of Service for his period of employment as a leased
employee, except to the extent that Section 414(n)(5) of the Code was satisfied
with respect to such Employee while he was a leased employee.
2.16 "Employment Year" means a 12 consecutive month period commencing
with an Employee's initial date of hire (or last date of rehire if he has
incurred a Break in Service) or with any anniversary thereof. For purposes
hereof, an Employee's date of hire shall be the first day on which he completes
an Hour of Service and his date of rehire shall be the first day on which he
completes an Hour of Service following a Break in Service.
2.17 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
2.18 "Highly Compensated Participant" means a Participant who, during
the current Plan Year or the preceding Plan Year, (a) was at any time a five
percent (5%) owner of the Company, (b) received Compensation from the Company in
excess of $75,000 (or such greater amount provided by the Secretary of the
Treasury pursuant to Section 414(q) of the Code), (c) received Compensation from
the Company in excess of $50,000 (or such greater amount provided by the
Secretary of the Treasury pursuant to Section 414(q) of the Code) and was in the
top-paid group of Employees for such Year, or (d) was at any time an officer of
the Company and received Compensation from the Company greater than 150% of the
amount in effect under Section 415(c)(1)(A) of the Code for such Plan Year. The
provisions of Section 414(q) of the Code shall apply in determining whether a
Participant is a Highly Compensated Participant. The Company for any Plan Year
may elect to identify Highly Compensated Participants based upon only the
current Plan Year to the extent permitted by Section 414(q) of the Code and
Regulations issued thereunder.
2.19 "Hour of Service" means (i) each hour for which an Employee is
paid or entitled to payment for the performance of duties for the Company or a
Related Employer; and (ii) each hour for which an Employee is directly or
indirectly paid by the Company or a Related Employer during which no duties are
performed by reason of vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence (but
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<PAGE>
not in excess of 501 hours in any continuous period during which no duties are
performed). Each Hour of Service for which back pay, irrespective of mitigation
of damages, is either awarded or agreed to by the Company or a Related Employer
shall be included under either (i) or (ii) as may be appropriate. Hours of
Service shall be credited:
(a) in the case of Hours referred to in clause (i) of the
first sentence of this section, for the computation period in which the duties
are performed;
(b) in the case of Hours referred to in clause (ii) of the
first sentence of this section, for the computation period or periods in which
the period during which no duties are performed occurs; and
(c) in the case of Hours for which back pay is awarded or
agreed to by the Company or a Related Employer, for the computation period or
periods to which the award or agreement pertains rather than the computation
period in which the award, agreement or payment is made.
In determining Hours of Service an Employee who is employed by the
Company or a Related Employer on other than an hourly rated basis shall be
credited with ten Hours of Service per day for each day the Employee would, if
hourly rated, be credited with service pursuant to clause (i) of the first
sentence of this Section 2.19. If an Employee is paid for reasons other than the
performance of duties pursuant to clause (ii) of the first sentence of this
Section 2.19: (i) in the case of a payment made or due which is calculated on
the basis of units of time, an Employee shall be credited with the number of
regularly scheduled working hours included in the units of time on the basis of
which the payment is calculated; and (ii) an Employee without a regular work
schedule shall be credited with eight Hours of Service per day (to a maximum of
40 Hours of Service per week) for each day that the Employee is so paid. Hours
of Service shall be calculated in accordance with Department of Labor
Regulations Section 2530.200b-2 or any future legislation or Regulation that
amends, supplements or supersedes said section.
Solely for purposes of determining an Employee's
(i) eligibility to participate in the Plan under Section 3.1, and
(ii) vesting under Section 7.6,
Hours of Service shall include Hours during an approved leave
of absence granted by an Employer to an Employee on or after
August 5, 1993 pursuant to the Family and Medical Leave Act,
if the Employee returns to work for an Employer at the end of
such leave of absence. Such Hours of Service shall be
calculated pursuant to the second sentence of this paragraph.
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2.20 "Limitation Year" means the Plan Year.
2.21 "Loan" means any loan as described in Section 4975(d)(1) of the
Code to the Trustee made or guaranteed by a disqualified person (within the
meaning of Section 4975(e)(2) of the Code), including, but not limited to, a
direct loan of cash, a purchase money transaction, an assumption of an
obligation of the Trustee, an unsecured guarantee or the use of assets of a
disqualified person (within the meaning of Section 4975(e)(2) of the Code) as
collateral for a loan.
2.22 "Maximum Permissible Amount" means the lesser of: (a) $30,000 (or,
if greater, one-quarter of the dollar limitation in effect pursuant to Section
415(b)(1)(A) of the Code); or (b) 25% of a Participant's Compensation.
2.23 "Normal Retirement Date" means the date a Participant attains age
65.
2.24 "Other Investments Account" means an account of a Participant
which is credited with his share of the net income (or loss) or the Trust and
Company contributions and forfeitures in other than Company Stock, and which is
debited with payments made to pay for Company Stock
2.25 "Participant" means an Employee who becomes a Participant under
the provisions of Section 3.1 of the Plan.
2.26 "Plan" means this Empire Federal Savings Bank Employee Stock
Ownership Plan. It is hereby intended that this Plan shall constitute a stock
bonus plan.
2.27 "Plan Year" means the period beginning January 1 and ending
December 31 of each year.
2.28 "Qualified Election Period" means the six Plan Year period
beginning with the first Plan Year in which a Participant first becomes a
Qualified Participant.
2.29 "Qualified Participant" means any Participant who has attained age
55 and has been a Participant in the Plan for at least ten years.
2.30 "Related Employer" means (i) any corporation that is a member of a
controlled group of corporations (as defined in Section 414(b) of the Code) that
includes the Company; (ii) any trade or business (whether incorporated or
unincorporated) that is under common control (as defined in Section 414(c) of
the Code) with the Company; and (iii) any member of an affiliated service group
(as defined in Section 414(m) of the Code)
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<PAGE>
that includes the Company. For purposes of Section 7.5, paragraphs (i) and (ii)
shall be as amended by Section 415(h) of the Code.
2.31 "Related Plan" means any other defined contribution plan (as
defined in Section 415 of the Code) maintained by the Company or by any Related
Employer.
2.32 "Service" means a period of time, measured in whole Employment
Years, commencing with the Employment Year in which an Employee is initially
employed and ending with the Employment Year in which a Break in Service occurs;
provided, however, that Service shall not include any Employment Year in which
the Employee accrues less than 1,000 Hours of Service. Service shall include an
approved leave of absence granted to an Employee on or after August 3, 1993
pursuant to the Family and Medical Leave Act, if the Employee returns to work
for an Employer at the end of such leave of absence. Without regard to the
preceding provisions of this Section 2.28, a Participant's years of Service
after a period of five consecutive one-year Breaks in Service shall be
disregarded for purposes of determining his nonforfeitable interest in his
Accounts as of the Valuation Date coincident with or next preceding the date he
incurs such five consecutive one-year Breaks in Service.
2.33 "Spouse" means the person who is legally married to a Participant
immediately prior to the Participant's death.
2.34 "Suspense Account" means an account to which securities purchased
with any Loans are allocated pending their release and allocation to other
accounts as the Loan is repaid.
2.35 "Trust" or "Trust Fund" means all money, securities and other
property held under the Trust Agreement for the purposes of the Plan.
2.36 "Trust Agreement" means the agreement between the Company and the
Trustee (or any successor Trustee) governing the administration of the Trust, as
it may be amended.
2.37 "Trustee" means the corporation or individuals appointed by the
Board of Directors of the Company to administer the Trust and which executes the
Trust Agreement.
2.38 "Valuation Date" means the last day of each Plan Year and such
other date, if any, as shall be selected by the Company.
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ARTICLE III
PARTICIPATION
3.1 Eligibility Requirement. Any Employee who was in the employ of the
Company on the effective date shall participate in the Plan as of the effective
date if he has completed an Employment Year as of such date and has attained the
age of 21. Each other Employee shall be eligible to participate upon: (i) the
completion of one Employment Year during which the Employee has completed 1,000
Hours of Service and (ii) attainment of the age of 21. An Employee who is
eligible to participate shall commence participation in the Plan on the January
1 or July 1 next following the date on which the Employee is first eligible to
participate in the Plan.
3.2 Reemployment of Participant. For purposes of Section 3.1 of the
Plan pertaining to eligibility and Section 7.7 of the Plan pertaining to
vesting, if a Participant shall incur a Break in Service and shall thereafter be
reemployed by the Company: (i) Years of Service completed before such Break
shall not be required to be taken into account until the Participant has
completed a Year of Service after his return to employment with the Company at
which time such Years of Service shall be restored and the Participant shall
participate in the Plan retroactively from the date of his return to employment
with the Company; and (ii) if no part of the Participant's Company stock and
Other Investments Accounts was nonforfeitable when he incurred such Break, Years
of Service with the Company completed prior to such Break shall not be required
to be taken into account in any event if the number of consecutive one-year
Breaks in Service equals or exceeds the greater of (a) five or (b) the aggregate
number of years of Service prior to such Break.
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ARTICLE IV
CONTRIBUTIONS
4.1 Company Contributions.
(a) For each Plan Year, Company contributions under the Plan
may be paid to the Trust in such amounts (or under such formula) and at such
times as may be determined by the Company's Board of Directors. Company
contributions under the Plan for a Plan Year may be paid during the Plan Year
and shall in any event be paid not later than the due date for filing the
Company's federal income tax return for that year, including any extensions of
such due date. Company contributions for any Plan Year shall not be paid to the
Trust in amounts that would exceed the limitations of Section 404 of the Code.
In no event shall Company contributions in any Limitation year exceed an amount
which would cause: (a) Annual Additions to the accounts of any Participant to
exceed the Maximum Permissible Amount for that Limitation Year (except as
provided in Section 7.5); or (b) the sum of the defined benefit plan fraction
(as defined in Section 7.5) and the defined contribution plan fraction (as
defined in Section 7.5) to exceed one for that Limitation Year.
(b) Company contributions may be paid to the Trust in cash or
in shares of Company Stock, as determined by the Company's Board of Directors;
provided that Company contributions shall be paid in cash in such amounts, and
at such times (subject to the limitations described in Section 7.5) as needed to
provide the Trust with funds sufficient to pay in full when due any principal
and interest payments required by a Loan incurred by the Trustee pursuant to
Article VI to finance the acquisition of Company Stock.
(c) All Company contributions for a Plan Year shall be
allocated to the Company Contribution Account when paid. The Company
Contribution Account shall be subdivided into a Company Stock Contribution
Account and a Company Other Investments Contribution Account. As of the last day
of each Plan Year amounts in the Company Contribution Account, including amounts
contributed after such last day under paragraph (a) above shall be allocated to
Participants' accounts as provided in Article VIII.
(d) No participants shall be required or permitted to make
contributions to the Plan or Trust.
(e) All Company contribution made under the Plan are
conditioned upon the qualification of the Plan under Section 401(a) of the Code
and upon the deductibility of the contribution under Section 404 of the Code.
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4.2 Exclusive Benefit of Employees. All contributions made pursuant to
the Plan shall be held by the Trustee in accordance with the terms of the Trust
Agreement for the exclusive benefit of those Employees who are Participants
under the Plan, including former Employees, and their Beneficiaries, and shall
be applied to provide benefits under the Plan and to pay expenses of
administration of the Plan and the Trust, to the extent that such expenses are
not otherwise paid. At no time prior to the satisfaction of all liabilities with
respect to such Employees and their Beneficiaries shall any part of the Trust
Fund (other than such part as may be required to pay administration expenses and
taxes) be used for, or diverted to, purposes other than for the exclusive
benefit of such Employees and their Beneficiaries. However, without regard to
the provisions of this Section 4.2:
(a) If a contribution under the Plan is conditioned on initial
qualification of the Plan under Section 401(a) of the Code, and the Plan
receives an adverse determination with respect to its initial qualification, the
Trustee shall, upon written request of the Company, return to the Company the
amount of such contribution (increased by earnings attributable thereto and
reduced by losses attributable thereto) within one calendar year after the date
that qualification of the Plan is denied, provided that the application for the
determination is made by the time prescribed by law for filing the Company's
return for the taxable year in which the Plan is adopted, or such later date as
the Secretary of the Treasury may prescribe;
(b) If a contribution is conditioned upon the deductibility of
the contribution under Section 404 if the Code, then, to the extent the
deduction is disallowed, the Trustee shall upon written request of the Company
return the contribution (to the extent disallowed) to the Company within one
year after the date the deduction is disallowed;
(c) If a contribution or any portion thereof is made by the
Company by a mistake of fact, the Trustee shall, upon written request of the
Company, return the contribution or such portion to the Company within one year
after the date of payment of the Trustee; and
(d) Earnings attributable to amount to be returned to the
Company pursuant to subsection (b) or (c) above shall not be returned, and
losses attributable to amounts to be returned pursuant to subsection (b) or (c)
shall reduce the amount to be so returned.
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ARTICLE V
INVESTMENT OF TRUST ASSETS
5.1 Investments. The Trust Fund will be invested primarily in Company
Stock. The Committee may direct the Trustee to incur Debt from time to time to
finance the acquisition of Company Stock by the Trust or otherwise. The Trust
Fund may be used to acquire shales of Company Stock from Company shareholders
(including former Participants) or from the Company. The Trustee may also invest
the Trust Fund in savings accounts, certificates of deposit, high-grade
short-term securities, equity stock, bonds, or other investments desirable for
the Trust, or the Trust Fund may be held in cash. All investments will be made
by the Trustee only upon the direction of the Committee. The Committee may
direct that the entire Trust Fund assets be invested and held in Company Stock.
5.2 Valuation of Company Stock. All purchases of Company Stock will be
made at a price, or at prices, that do not exceed the fair market value of such
Company Stock. If Company Stock is traded on a national securities exchange,
fair market value shall be the average of the closing prices thereof on such
exchange for the ten trading days immediately preceding the purchase. If Company
Stock is not traded on such an exchange but is publicly traded, fair market
value shall be the average of the bid and asked price thereof for such ten
trading days. If Company Stock is not publicly traded, the determination of the
fair market value of Company Stock for all purposes of the Plan shall in all
cases be made by an independent appraiser appointed pursuant to this section
shall meet requirements similar to the requirements of Regulations promulgated
under Section 170(a)(1) of the Code.
5.3 Suspense Account. Company Stock purchased with the proceeds of a
Loan shall be held in the Suspense Account pending release and reallocation to
other Accounts as the Loan is paid. Company Stock purchased with amounts
allocated to Participants' Other Investment Accounts or Company Other
Investments Accounts shall immediately upon purchase be credited pro rata to the
corresponding Participants' Company Stock or Company Stock Contribution Accounts
as the case may be. Company Stock contributed to the Plan pursuant to Article IV
shall be allocated to the Company Stock Accounts of Participants pursuant to
Section 7.4.
5.4 Sales and Resales of Company Stock. The Committee may direct the
Trustee to sell or resell shares of Company Stock to any person, including the
Company, provided that any such sales to any disqualified person, including the
Company, will be made at no less than the fair market value as determined under
Section 5.2 and no commission is charged. Any such sale shall be made in
conformance with Section 408(e) of ERISA. All sales of Company Stock (except
Company Stock held in a Suspense Account or Company Stock Contribution Account)
by the Trustee will be charged pro rata to the Company Stock Accounts of the
Participants.
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ARTICLE VI
EXEMPT LOANS
6.1 Loans.
(a) The Committee may direct the Trustee to obtain Loans. Any
such Loan will meet all requirements necessary to constitute an "exempt loan"
within the meaning of Section 4975(d)(3) of the Code and Regulations
ss.54.4975-7(b)(1)(iii) and shall be used primarily for the benefit of the
Participants and Beneficiaries. The proceeds of any such Loan shall be used,
within a reasonable time after the Loan is obtained, only to purchase Company
Stock, repay the Loan, or repay any prior Loan. Any such Loan shall provide for
no more than a reasonable rate of interest (as determined under Regulations
ss.54.4975-7(b)(7)) and must be without recourse against the Plan. The number of
years to maturity under the Loan must be definitely ascertainable at all times.
The only assets of the Plan that may be given as collateral on a Loan are shares
of Company Stock acquired with the proceeds of the Loan and shares of Company
Stock that were used as collateral on a prior Loan repaid with the proceeds of
the current Loan. Such Company Stock so pledged shall be placed in a Suspense
Account. No person entitled to payment under a Loan shall have recourse against
Trust Assets other than such collateral, contributions (other than contributions
of Company Stock) that are available under the Plan to meet obligations under
the Loan and earnings attributable to such collateral and the investment of such
contributions. All Company contributions paid during the Plan Year in which a
Loan is made (whether before or after the date the proceeds of the Loan are
received), all Company contributions paid thereafter until the Loan has been
repaid in full, and all earnings from investment of such Company contributions,
without regard to whether any such Company contributions and earnings have been
allocated to Participants' Other Investment Accounts, shall be available to meet
obligations under the Loans as such obligations accrue, or prior to the time
such obligations accrue, unless otherwise provided by the Company at the time
any such contribution is made.
(b) Any pledge of Company Stock must provide for the release
of shares so pledged upon the payment of any portion of the Loan. The number of
shares to be released will be determined, at the discretion of the Committee,
under clause (1) or (2) of this section 6.1(b).
(1) If the Loan provides annual payments of
principal and interest at a cumulative rate
that is not less rapid at any time than
level annual payments of principal and
interest over ten years, then for each Plan
Year during the duration of the Loan, the
number of shares of Company Stock released
from such pledge shall equal the number of
encumbered securities held immediately
before release for the current Plan Year
multiplied by a fraction. The numerator of
the fraction is the
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principal paid in such Plan Year. The
denominator of the fraction is the sum of
the numerator plus the principal to be paid
for all future years. Such years will be
determined without taking into account any
possible extension or renewal periods. To
the extent that the net proceeds received by
the Plan in respect of any Loan exceed the
stated principal amount of the Loan, that
portion of any interest payment that would
be deemed to be a repayment of principal
under standard loan amortization tables
shall be treated as principal paid or
principal to be paid, as the case may be,
for purposes of the above calculation.
(2) If the Loan does not satisfy the conditions
stated in subparagraph (1), then for each
Plan Year during the duration of the Loan,
the number of shares of Company Stock
released from such pledge shall equal the
number of encumbered securities held
immediately before release for the current
Plan year multiplied by a fraction. The
numerator of the fraction is the sum of the
principal and interest paid in such Plan
Year. The denominator of the fraction is the
sum of the numerator plus the principal and
interest to be paid for all future years.
Such years will be determined without taking
into account any possible extension of
renewal periods.
(c) If the collateral includes more than one class of Company
Stock, the number of shares of each class to be released for a Plan Year must be
determined by applying the same fraction to each class. If interest on any Loan
is variable, the interest to be paid in future years under the Loan shall be
computed by using the interest rate application as of the end of the Plan Year.
Should a Loan initially satisfying the conditions stated in subparagraph (b)(1)
at some subsequent date cease to satisfy the conditions of such subparagraph, by
reason of a renewal, extension, or refinancing of the Loan, then subparagraph
(b)(2) shall be applied in determining the shares released upon payment of any
principal or interest after such date.
6.2 Loan Payments.
(a) Payments of principal and interest on any Loan during a
Plan Year shall be made by the Trustee (as directed by the Committee) only from
(1) Company Contributions to the Trust made to meet the Plan's obligation under
a Loan (other than contributions of Company Stock) and from any earnings
attributable to Company Stock and investments of such contributions (both
received during or prior to the Plan Year); (2) the proceeds of a subsequent
Loan made to repay a prior Loan; and (3) the proceeds of the sale of any Company
Stock held as
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collateral for a Loan. Such contribution and earnings must be accounted for
separately by the Plan until the Loan is repaid.
(b) Company Stock released by reason of the payment of
principal or interest on a Loan from amounts allocated to Participants' Other
Investments Accounts or Company Other Investments Accounts shall immediately
upon payment be allocated as set forth in Sections 7.2 and 7.4 to the
corresponding Company Stock or Company Stock Contribution Accounts.
(c) The Company shall contribute to the Trust sufficient
amounts to enable the Trust to pay principal and interest on any such Loan as
they are due, provided however that no such contributions shall exceed the
limitations in Section 7.5. In the event that such contributions by reason of
the limitations in Section 7.5 are insufficient to enable the Trust to pay
principal and interest on such Loan as it is due, then upon the Trustee's
request the Company shall:
(1) Make a loan to the Trust as described in
Regulations ss.54.4975(b)(4)(iii), in sufficient amounts to meet such principal
and interest payment. Such new Loan shall also meet all requirements of an
"exempt loan" within the meaning of Regulations ss.54.4975-7(b)(1)(iii) and
shall be subordinated to the prior Loan. Company Stock released from the pledge
of the prior Loan shall be pledged as collateral to secure the new Loan. Such
Company Stock will be released from this new pledge and allocated to the
accounts of the Participants in accordance with applicable provisions of the
Plan;
(2) Purchase any Company Stock pledged as collateral
in an amount necessary to provide the Trustee with sufficient funds to meet the
principal and interest repayments. Any such sale by the Plan shall meet the
requirements of Section 408(e) of ERISA; or
(3) Any combination of the foregoing.
(d) The Company shall not, pursuant to the provisions of this
subsection, do, fail to do or cause to be done any act or thing which would
result in a disqualification of the Plan as an employee stock ownership plan
under the Code.
(e) Except as provided in sections 6.3 and 6.4 below, and
notwithstanding any amendment to or termination of the Plan which causes it to
cease to qualify as an employee stock ownership plan within the meaning of
Section 4975(e)(7) of the Code, or any repayment of a loan, no shares of Company
Stock acquired with
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the proceeds of a Loan obtained by the Trust to purchase Company Stock may be
subject to a put, call or other option, or buy-sell or similar arrangement while
such shares are held by and when distributed from the Plan.
6.3 Right of First Refusal. Shares of Company Stock purchased with the
proceeds of a Loan and distributed by the Trustee may be subject to a "right of
first refusal." Such a "right" shall provide that prior to any subsequent
transfer, the shares must first be offered in writing to the Company at a price
equal to the greater of (1) the then fair market value of such shares of Company
Stock as determined in accordance with Section 5.2, or (2) the purchase price
offered by a buyer, other than the Company or Trustee, making a good faith (as
determined by the Committee) offer to purchase such shares of Company Stock. The
Trust or the Company, as the case may be, may accept the offer as to part or all
of the Company Stock at any time during a period not exceeding 14 days after
receipt of such offer by the Trust, on terms and conditions no less favorable to
the shareholder than those offered by the independent third party buyer. Any
installment purchase shall be made pursuant to a note secured by the shares
purchased and shall bear a reasonable rate of interest as determined by the
Committee. If the offer is not accepted by the Trust, or the Company, or both,
then the proposed transfer may be completed within a reasonable prior following
the end of the 14 day period, but only upon terms and conditions of the third
party buyer's prior offer. Shares of Company Stock which are publicly traded
within the meaning of Code Section 409(h)(1)(B) at the time such right may
otherwise be exercised shall not be subject to this "right of first refusal."
6.4 Put Option.
(a) Shares of Company Stock acquired by the Trust shall be
subject to a "put" option at the time of distribution, provided that at such
time the shares are not readily tradable on an established market within the
meaning of Section 409(h)(1)(B) of the Code. The "put" option shall be
exercisable by the Participant or his Beneficiary, by the donees of either, or
by a person (including an estate or its distributee) to whom the Company Stock
passes by reason of the Participant's or Beneficiary's death. The "put" option
shall provide that for a period of at least 60 days following the date of
distribution of the Company Stock, the holder of the option shall have the right
to cause the Company, by notifying the Committee in writing, to purchase such
shares at their fair market value (as determined pursuant to Section 5.2). If
the "put" option is not exercised within such 60-day period, the option shall be
exercisable for an additional period of 60 days in the following Plan Year. The
Committee may give the Trustee the option to assume the rights and obligations
of the Company at the time the "put" option is exercised, insofar as the
repurchase of Company Stock is concerned.
(b) If the entire Adjusted Balance of a Participant's Accounts
is distributed to the Participant within one taxable year, payment of the price
of the Company Stock purchased pursuant to an exercised "put" option shall be
made in five substantially equal annual payments and the first installment shall
be paid not later than 30 days
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after the Participant exercises the "put" option. The Plan will provide adequate
security and pay a reasonable rate of interest on amounts not paid after 30
days. If the entire Adjusted Balance of a Participant's Accounts is not
distributed to him within one taxable year, payment of the price of the Company
Stock purchased pursuant to an exercised "put" option shall be made in a single
lump sum not later than 30 days after the Participant exercises the "put"
option.
6.5 Continuation of Rights or Put Option. The rights set forth in
Section 6.2(d) and the "put" option provided for by Section 6.4 are
nonterminable and shall continue to apply to shares of Company Stock purchased
by the Trustee with the proceeds of a Loan as described herein or to shares of
Company Stock distribute hereunder notwithstanding the repayment of the Loan or
any amendment to, or termination of, this Plan which causes the Plan to cease to
be an employee stock ownership plan within the meaning of Section 4975(e)(7) of
the Code.
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ARTICLE VII
ALLOCATIONS TO PARTICIPANTS' ACCOUNTS
7.1 Separate Accounts. Separate Company Stock Accounts and Other
Investments Accounts will be established to reflect Participants' interests
under the Plan. Records shall be kept by the Committee from which can be
determined the portion of each Other Investments Account which at any time is
available to meet obligations under a Loan in accordance with Section 6.1 and
the portion which is not so available.
7.2 Company Stock. The Company Stock Account maintained for each
Participant will be credited with his allocable share determined under Section
7.4 of Company Stock (including fractional shares) purchased and paid for by the
Trust or contributed in kind to the Trust, with the forfeitures of Company
Stock, and with any stock dividends on Company Stock allocated to his Company
Stock Account to the extent such dividends are not distributed pursuant to
Section 8.8. Company Stock acquired by the Trust with the proceeds of a Loan
obtained pursuant to Article VI shall be allocated to the Company Stock Accounts
of Participants according to the method set forth in Section 7.4, as the Company
Stock is released from Suspense Accounts as provided for in Section 6.1.
7.3 Other Investments. The Other Investments Account maintained for
each Participant will be credited (or debited) with its allocable shares as
determined under Section 7.8 of the net income (or loss) of the Trust, with any
cash dividends on Company Stock allocated to his Company Stock Accounts to the
extent such dividends are not distributed to the Participant or applied to the
repayment of principal or interest of a Loan pursuant to Section 8.8, with
Company Contributions which have not been used to make principal and interest
payments on a Loan or other Debt or to purchase Company Stock and with
forfeitures in other than Company Stock. Each Other Investments Account will be
debited for its share of any payments for the acquisition of Company Stock for
the benefit of the Participants' Company Stock Accounts and for any repayment of
principal or interest on any Loan or other Debt chargeable to Participants'
Company Stock Accounts; provided that only the portion of each Other Investments
Account which is available to meet obligations under Loans shall be used to pay
principal or interest on a Loan.
7.4 Allocations of Company Contributions and Forfeitures. The Company
Stock and other investments held in the Company Contribution Accounts under the
Plan, and forfeitures incurred under the Plan for each Plan Year, shall be
allocated as of the last day of such Plan Year (even though receipt of the
Company Contributions by the Trustee may take place after the close of such
Year) among the Company Stock and Other Investments Accounts of all Participants
who, during the course of such Plan Year; (i) completed at least 1,000 Hours of
Service and were employed by the Company on the last day of such Plan Year; (ii)
retired on or after their Normal Retirement Dates; (iii) died; or (iv) became
disabled as defined in Section 8.3. Such allocation shall be in the ratio that
each
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Participant's Compensation (as defined in Section 2.12 of the Plan) during the
Plan Year bears to the total Compensation during such Plan Year of all
Participants entitled to share in such allocation. Notwithstanding the preceding
provisions of this Section, in no event shall an allocation be made to the
Account of any Participant, for any Limitation Year, which would cause: (a)
Annual Additions to the accounts of such Participant to exceed the Maximum
Permissible Amount for that Year (except as permitted in Section 7.5); or (b)
the sum of the defined benefit plan fraction (as defined in Section 7.5) and the
defined contribution plan fraction (as defined in Section 7.5) to exceed one for
such Participant for that Year.
7.5 Maximum Allocation.
(a) Except as provided in paragraphs (b) and (c) below, the
allocations to the accounts of any Participant in any Limitation Year shall be
limited so that the Participant's Annual Additions for such Year do not exceed
the Maximum Permissible Amount.
(b) If no more than one-third of the Company Contribution for
a Limitation Year that are deductible as principal or interest payments on a
Loan, pursuant to the provisions of Section 404(a)(9) of the Code, are allocated
to Highly Compensated Participants, then the limitations imposed by subsection
(a) or (b), whichever is applicable, shall not apply to:
(i) Forfeitures of Company Stock if the Company
Stock was acquired with the proceeds of a
Loan, or
(ii) Company Contributions that are deductible as
interest payments on a Loan under Section
404(a)(9)(B) of the Code and charged against
a Participant's Account.
(c) If the foregoing limitation on allocations would be
exceeded in any Limitation Year for any Participant as a result of the
allocation of forfeitures under the Plan, reasonable error in estimating a
Participant's Compensation, or under such other limited facts and circumstances
that the Commissioner of the Internal Revenue Service, pursuant to Regulations
ss.1.415-6(b)(6), finds justify the availability of this Section 7.5, the amount
in excess of the limits of this Section 7.5 shall be placed, unallocated to any
Participant, in a Limitation Account. If a Limitation Account is in existence at
any time during a particular Limitation Year, other than the Limitation Year
described in the preceding sentence, all amounts in the Limitation Account must
be allocated to Participants' Accounts (subject to the limits of this Section
7.5) before any Company Contributions which would constitute Annual Additions
may be made to the Plan for that Limitation Year. The excess amount allocated
pursuant to this Section 7.5(d) shall be used to reduce Company Contributions
for the next Limitation Year (and succeeding Limitation Years,
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as necessary) for all of the Participants in the Plan. The Limitation Account
will not share in the valuation of Participants' Accounts and the allocation of
earnings set forth in Section 7.8 of the Plan, and the change in fair market
value and allocation of earnings attributable to the Limitation Account shall be
allocated to the remaining accounts hereunder as set forth in Section 7.5.
(d) Upon termination of the Plan, any amounts in a Limitation
Account at the time of such termination shall revert to the Company.
(e) In the event that any Participant under this Plan is also
a Participant in a defined benefit plan (as defined in Section 415(k) of the
Code) maintained by the Company or a Related Employer, the sum of the defined
benefit plan fraction and the defined contribution plan fraction for any
Limitation Year with respect to such Participant shall not exceed one. The
"defined benefit plan fraction" for any Limitation Year for a Participant means
a fraction, the numerator of which is the projected annual benefit of the
Participant under all defined benefit plans maintained by the Company or a
Related Employer determined as of the close of the Limitation Year and the
denominator of which is the lesser of (a) the product of 1.25 and the dollar
limitation in effect under Section 415(b)(1)(A) of the Code for such Year, or
(b) the product of 1.4 and the amount taken into account under Section
415(b)(1)(B) of the Code for the Participant for such Year. The "defined
contribution plan fraction" for any Limitation Year for any Participant is a
fraction, the numerator of which is the sum of the annual additions to the
Participant's accounts under the Plan and to the accounts under all Related
Plans as of the close of the Year, and the denominator of which is the sum of
the lesser of the following amounts determined for such Year and for each prior
Year of Service with the Company or an Affiliate: (A) the product of 1.25 of the
dollar limitation in effect under Section 415(c)(1)(A) of the Code for such Year
(determined without regard to Section 415(c)(6) of the Code), and (B) the
product of 1.4 and the amount which may be taken into account under Section
415(c)(1)(B) of the Code with respect to such Participant for such Year.
(f) If a Participant shall be entitled to receive an
allocation under this Plan and any Related Plan and, in the absence of the
limitations contained in this and Section 7.6, the Company would have
contributed or allocated to the Account of any Participant an amount for a
Limitation Year that would have caused the Annual Additions to the Account of a
Participant to exceed the Maximum Permissible Amount for such Year, then the
contributions or allocations under such Related Plan shall be reduced prior to
any reduction in contributions or allocations made with respect to the
Participant under this Plan to the extent necessary so that the allocations of
such Annual Additions does not exceed the Maximum Permissible Amount.
(g) Any reduction in the contributions and allocations under
this Plan made with respect to a Participant's Accounts required pursuant to
this Section 7.5 and Section 415 of the Code shall be effected, to the
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minimum extent necessary, by reducing the Company Contributions that would have
been made by the Company for the applicable Plan Year with respect to such
Participant.
(h) The provisions of this Section shall be interpreted by the
Committee, in the administration of the Plan, to reduce contributions and
allocations (as required by this Section) only to the minimum extent necessary
to reflect the requirements of Section 415 of the Code, as amended and in force
from time to time, and Regulations promulgated pursuant to that Section, which
are incorporated by reference herein.
7.6 Vesting.
(a) Each Participant shall have a vested interest in the
Adjusted Balance of his Company Stock and Other Investments Accounts in
accordance with the following formula:
Years of Vested Forfeitable
Service Percentage Percentage
Less than 5 0% 100%
5 or more 100% 0%
(b) On reaching his Normal Retirement Date, a Participant
shall be one hundred percent (100%) vested in the Adjusted Balance of his
Company Stock and Other Investments Accounts.
(c) In the event a Participant dies or becomes disabled within
the meaning of Section 8.3 while an Employee, he shall be one hundred percent
(100%) vested in the Adjusted Balance of his Company Stock and Other Investments
Accounts as of the date of his death or disability.
(d) In the event the Plan is terminated or upon the complete
discontinuance of Company Contributions to the Plan, each Participant shall
become one hundred percent (100%) vested in the Adjusted Balance of his Company
Stock and Other Investments Accounts if such event occurs (1) in the case of a
Participant who does not have a vested interest in his Accounts, while the
Participant is an Employee, and (2) in the case of a Participant who has a
vested interest in his Accounts, prior to the time the Participant incurs a
one-year Break in Service.
7.7 Net Income (or Loss) of the Trust. Any dividends received in
respect of Company Stock allocated to Company Stock Accounts of Participants or
Company Stock Contribution Account shall be credited upon receipt (to the extent
not distributed or applied to the repayment of principal or interest on a Loan
pursuant to Section 8.8) to the applicable Company Stock Account or Company
Stock Contribution Account in the case of stock dividends,
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or to the corresponding Other Investments or Company Other Investments
Contributions Account in the case of cash dividends. The net income (or loss) of
the Trust for each Plan Year will be determined as of each Valuation Date. Each
Participant's share of the net income (or loss) will be allocated to his Other
Investments Account in the ratio which the balance of such Account on the
preceding Anniversary Date (reduced by the amount of any distribution from such
Account) bears to the sum of such balances for all Participants as of that date.
The net income (or loss) of the Trust includes the increase (or decrease) in the
fair market value of the Trust Fund (other than Company Stock, except as
provided below), interest income, dividends and other income (or loss)
attributable to the Trust Fund (other than allocated Company Stock) since the
preceding Valuation Date but net income (or loss) shall not include Company
contributions or forfeitures. Any dividends on unallocated Company Stock and any
proceeds of sales of unallocated Company Stock, to the extent such proceeds are
not used to pay principal or interest on a Loan, shall be considered net income
for the Trust for the Plan Year and allocated to the Company Other Investments
Contribution Account. Net income (or loss) attributable to any Limitation
Account established under Section 7.4 shall be allocated to the Other
Investments Accounts of Participants in the manner set forth in the third
sentence of this Section, and the Limitation Account shall not share in the
allocation of Net Income (or loss) of the Trust under this Section.
7.8 Accounting for Allocations. The Committee shall adopt accounting
procedures for the purposes of making the allocations, valuations and
adjustments to Participants' Accounts provided for in this Article. Except as
provided in Regulations ss. 54.4975-11(d), Company Stock acquired by the Plan
shall be accounted for as provided under Regulations ss. 1.402(a)-1(b)(2)(ii),
allocations of Company Stock shall be made separately for each class of stock,
and the Committee shall maintain adequate records of the cost basis of all
shares of Company Stock allocated to each Participant's Company Stock Account.
From time to time, the Committee may modify the accounting procedures for the
purpose of achieving equitable and nondiscriminatory allocations among the
Accounts of Participants in accordance with the general concepts of the Plan and
the provisions of this Section. Annual valuations of Trust Assets shall be made
at fair market value, as described in Section 5.2 above.
7.9 Special Allocation Provisions. Whenever an account balance is
distributable in installments, the undistributed balance of such account shall
participate in the valuation provided in Section 7.7 until fully distributed. In
lieu of such participation, however, upon the written request of the former
Participant or Beneficiary entitled to receive such installments, received by
the Committee prior to the payment of the first installment, the Adjusted
Balances of his accounts shall be deposited in the name of the Trustee in a
savings account or certificate of deposit in a national or state bank or in a
federal savings and loan association and earn and be credited with such earnings
(at not less than the current rate of earnings paid thereon by the depository).
Any amounts deposited pursuant to this Section 7.9 and any earnings thereon
shall be disregarded in computing the fair market value of trust assets to be
allocated under Section 7.7 of the Plan and the earnings shall be payable to
such former Participant or Beneficiary
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with payment of the aforementioned installments. Any expenses incurred by the
Trustee and the Committee as the result of any deposit made pursuant to this
Section shall be payable from the accounts of the former Participant or
Beneficiary from whom such deposit was made.
7.10 Special Limitations on Allocations.
(a) Notwithstanding the foregoing provisions of this Article,
if more than one-third of Company Contributions for a Plan Year which
are deductible under Section 404(a)(9) of the Code would be allocated,
in the aggregate, to the Accounts of Highly Compensated Participants
then such allocations to the Accounts Highly Compensated Participants
shall be reduced, pro rata, in an amount sufficient to reduce the
amounts allocated to the Accounts of such Participants to an amount
not in excess of one-third of such deductible contributions with
respect to such Plan Year. Any contributions which are prevented from
being allocated due to the restriction contained in this Section 7.10
shall be allocated pursuant to Section 7.4 as though those Highly
Compensated Participants did not participate in the Plan.
(b) Notwithstanding the foregoing provisions of this Article,
in the event that the Trustee acquires shares of Company Stock
transaction to which Section 1042 of the Code applies, then, in
accordance with the Regulations, such Shares shall not be allocated,
directly or indirectly, to any Participant described in Section
409(n)(1) of the Code for the duration of the "nonallocation period"
(as defined in section 409(n)(3)(C) of the Code). Where any shares of
Company Stock are prevented from being allocated due to the
prohibition contained in the allocation of contributions otherwise
provided under Section 7.4 shall be adjusted to reflect such result.
ARTICLE VIII
RETIREMENT PAYMENTS, DISABILITY PAYMENTS AND OTHER BENEFITS
8.1 Payments on Retirement. A Participant who attains his Normal
Retirement Date and continues to be an Employee shall continue to share in the
allocation of Company Contributions and of forfeitures under the Plan. Upon the
retirement of a Participant at or after his Normal Retirement Date the Committee
shall notify the Trustee in writing of the Participant's retirement and shall
direct the Trustee to make payment of the Adjusted Balance of the Participant's
Accounts as of the Valuation Date coinciding with or immediately preceding the
distribution commencement date pursuant to Section 8.6, in a method provided in
the Plan.
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8.2 Payments on Death.
(a) Upon the death of a Participant, the Committee shall
promptly notify the Trustee in writing of the Participant's death and the name
of his Beneficiary and shall direct the Trustee to make payments of the Adjusted
Balance of the Participant's accounts as of the Valuation Date coinciding with
or immediately preceding the date of distribution to his Beneficiary pursuant to
Section 8.6, in a method provided in the Plan.
(b) Each unmarried Participant or each married Participant
whose surviving Spouse has consented to any alternate Beneficiary or an
alternate method of payment as provided in subsection (c), shall have the right
to designate, by giving a written designation to the Committee, (i) a person or
entity as Beneficiary to receive the death benefit provided under this Section
8.2 and (ii) the method of payment of such death benefit to his Beneficiary
pursuant to Section 8.6. Successive designations may be made, and the last
designation received by the Committee prior to the death of the Participant
shall be effective and shall revoke all prior designations. If a designated
Beneficiary shall die before the Participant, his interest shall terminate, and,
unless otherwise provided in the Participant's designation, if the designation
included more than one Beneficiary, such interest shall be paid in equal shares
to those Beneficiaries, if any, who survive the Participant. A Participant to
whom this subsection applies shall have the right to designate different
Beneficiaries to receive the Adjusted Balance in the Participant's various
accounts under the Plan.
(c) The Beneficiary of each Participant who is married shall
be the surviving Spouse of such Participant and the death benefits of any
Participant who is married shall be paid in full to his surviving Spouse in a
single lump sum. Notwithstanding the preceding sentence, the death benefits
provided pursuant to subsection (a) shall be distributed to any other
Beneficiary designated by a married Participant as provided in subsection (b),
if the Participant's surviving Spouse consented to such designation, prior to
the date of the Participant's death, in writing. Such a consent must acknowledge
the effect of the election and designation and the identity of any nonsurviving
Spouse Beneficiary, including any class of Beneficiaries or contingent
Beneficiaries, and must be witnessed by a representative of the Plan or a notary
public. Consent of a Participant's surviving Spouse shall not be required if the
Participant established to the satisfaction of the Committee that consent may
not be obtained because there is no surviving Spouse or the surviving Spouse
cannot be located, or because of such other circumstances as the Secretary of
the Treasury may prescribe by Regulations. The Participant may not subsequently
change the method of distribution elected by the Participant or the designation
of his Beneficiary unless his surviving Spouse consents to the new elections or
designation in accordance with the requirements set forth in the preceding
sentence, or unless the surviving Spouse's consent permits the Participant to
change the election of method of payment or the designation of his Beneficiary
without the Spouse's further consent. A surviving Spouse's consent shall be
irrevocable. Any
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consent by a surviving Spouse, or establishment that the consent of the
surviving Spouse may not be obtained, shall be effective only with respect to
that surviving Spouse.
(d) The Committee may determine the identity of the
distributees and in so doing may act and rely upon any information it may deem
reliable upon reasonable inquiry, and upon any affidavit, certificate, or other
paper believed by it to be genuine, and upon any affidavit, certificate, or
other paper believed by it to be genuine, and upon any evidence believed by it
sufficient.
8.3 Payments on Disability. Upon the termination of a Participant's
employment with the Company by reason of a disability, the Committee shall
notify the Trustee in writing of said disability termination, and shall direct
the Trustee to make payment of the Adjusted Balance of the Participant's
accounts as of the Valuation Date coinciding with or immediately preceding the
distribution commencement date under Section 8.6 in a method provided in the
Plan. For purposes of this section "disability" means a physical or mental
condition which is expected to render the Participant permanently unable to
perform his usual duties or any comparable duties for the Company. The
determination of the existence of such disability shall be made by the Committee
and shall be final and binding upon the Participant and all other parties. The
Committee may require the submission of such medical evidence as it may deem
necessary in order to arrive at its determination. The Committee's determination
of the existence of a disability will be made with reference to the nature of
the injury without regard to the period the Participant is absent from work.
8.4 Payments on Termination for Other Reasons. Upon the termination of
a Participant's employment with the Company for any reason (whether before, on,
or after his Early Retirement Date) other than retirement on or after his Normal
Retirement Date, or permanent disability, the Committee shall notify the Trustee
to make payment of the vested portion of the Adjusted Balance of his Accounts,
if any, as of the Valuation Date coinciding with or next preceding the
distribution commencement date determined under Section 8.6, in a method
provided in the Plan. The vested portion of a Participant's Accounts shall be
determined in accordance with Section 7.7 of the Plan. The nonvested portion of
the Adjusted Balance of his Accounts shall be retained in his Accounts until a
period has elapsed sufficient to determine whether he will be reemployed or will
incur five consecutive one-year Breaks in Service. If he is reemployed before he
incurs five consecutive one-year Breaks in Service, his Accounts will continue
to vest; if he incurs five consecutive one-year Breaks in Service, the amount in
such Accounts shall be deemed a forfeiture as of the last day of the Plan Year
in which the Participant incurs the last of the five consecutive one-year Breaks
in Service. The amount of any such forfeiture shall be first deducted from the
Participant's Other Investments Account. If forfeitures of the Participants'
Other Investments Account are not sufficient to reduce the fair market value of
the vested portion of the Adjusted Balances of his Accounts to the percentage of
the total value of his Accounts determined under this Section, the remainder of
the forfeitures shall be deducted from the
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Participant's Company Stock Account. If a Participant's Company Stock Account
includes more than one class of Company Stock, the forfeiture will consist of
the same proportion of each class of stock. All forfeitures will be applied in
the same manner described in Section 7.4 as of the end of the Plan Year in which
the last of five consecutive one-year Breaks in Service resulting in forfeiture
occurs. If a Participant incurs a Break in Service, is rehired before incurring
five consecutive one-year Breaks in Service and subsequently incurs another
Break in Service under circumstances in which he is not fully vested in his
Accounts, the portion of his Accounts distributable upon the date of his later
one-year Break in Service shall be calculated as follows:
(i) the amount distributed to the Participant from his
Accounts upon his earlier Break in Service shall be
added to the Adjusted Balance of his Accounts;
(ii) the amount determined under paragraph (i) shall be
multiplied by the vested percentage as of the date of
his later termination of employment determined under
Section 7.7; and
(iii) the amount distributed to the Participant upon his
earlier Break in Service shall be deducted from the
product calculated under paragraph (ii) to determine
the amount distributable upon his later Break in
Service.
8.5 Property Distributed. Distribution of the vested portion of the
Adjusted Balance of a Participant's Accounts under the Plan will be made in
whole shares of Company Stock. To the extent a distribution is to be made in
Company Stock, any cash or other property in the Participant's Other Investments
Accounts will be used to acquire Company Stock for distribution. The right of a
Participant to receive a distribution in whole shares of Company Stock pursuant
to this Section 8.5 shall not apply to the extent the Participant is a Qualified
Participant who makes a valid and timely election for a distribution pursuant to
Section 8.9 below. Notwithstanding the foregoing, if applicable corporate
charter or bylaw provisions restrict ownership of substantially all outstanding
shares of Company Stock to Employees or to a plan or trust descried in Section
401(a) of the Code, then any distribution shall be in cash. Notwithstanding
anything herein to the contrary, if any shares of Company Stock in a
Participant's Accounts are issued by a bank described in Section 409(h)(3) of
the Code, distribution shall be made, at the Participant's election, in cash or
Shares.
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8.6 Methods of Payments.
(a) Whenever the Committee shall direct the Trustee to make
payment to a Participant or his Beneficiary upon termination of the
Participant's employment (whether by reason of retirement, death, disability or
for other reasons), the Committee shall direct the Trustee to pay the vested
portion of the Adjusted Balance of his Accounts, if any, to or for the benefit
of the Participant or his Beneficiary, in either of the following ways as the
Participant (or, if a deceased former Participant shall have failed to select a
method of payment, as his Benefit) shall determine;
(i) In a lump sum; provided that distribution of
Company Stock shall be valued at its fair
market value on the date of such
distribution as determined pursuant to
section 5.2; or
(ii) Subject to Section 8.2, in installments
payable in substantially equal amounts,
continuing over a period that complies with
subsection (d) below, but in no event over a
period exceeding ten years in the case of a
Participant whose termination occurs prior
to age 65.
If the selection of a method of payment is not made within 90 days
prior to the distribution date determined under subsection (b), payment shall be
made in a lump sum.
(b) Payment under this Section shall be made or commence as follows:
(i) In the case of a Participant whose
employment terminated due to death,
disability, retirement or termination of
employment, not more than 60 days after the
end of the Plan Year in which the employment
of the Participant terminates, unless the
Participant, or his Beneficiary in the event
of his death, agrees to a later date.
Notwithstanding the preceding sentence,
however, if the Participant's Account
balances at the time for any distribution
exceed $3,500, then neither such
distribution nor any subsequent distribution
shall be made to the Participant at any time
before his 65th birthday without his written
consent.
(ii) If a Participant terminates service and the
value of his Account balances does not
exceed (or at the time of any prior
distribution has not exceeded) $3,500, the
Participant shall receive a distribution of
the entire value of his Account balances
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as soon as administratively feasible. For
purposes of this Section 8.6(b)(ii), if the
value of the Participant's Account balances
is zero, the Participant shall be deemed to
have received a distribution of such Account
balances.
(c) Notwithstanding the provisions of paragraph (b) of this
Section, unless a Participant, or his Beneficiary in the event of his death,
otherwise elects, the payment of benefits under the Plan will begin not later
than 60 days after the last day of the Plan Year in which last of the following
events occur:
(i) the date on which the Participant
attains the age of 65;
(ii) the tenth anniversary of the date
on which the Participant commenced
participation in the Plan; or
(iii) the date on which the
Participant's employment with the
Company terminates.
(d) Notwithstanding the provisions of subsection (b) and (c)
other than those that require the consent of a Participant to a distribution of
the Adjusted Balance of his Accounts in excess of $3,500:
(i) A Participant may always elect to
have the payment of benefits begin
not later than one year after the
close of the Plan Year (x) in which
the Participant separates from
service by reason of the attainment
of his Normal Retirement Date,
disability, or death or (y) which
is the fifth Plan Year following
the Plan Year in which the
Participant otherwise separates
from service.
(ii) Unless the Participant otherwise
elects, the distribution of the
Adjusted Balance of his Accounts
will be in substantially equal
annual or more frequent payments
over a period not longer than the
greater of (1) five years, or (2)
in the case of a Participant the
Adjusted Balance of whose Accounts
exceeds $642,450, five years plus
one additional year (but not more
than five additional years) for
each $128,490 or fraction thereof
by which such Adjusted Balance
exceeds $623,450. The dollar
amounts contained in this
paragraph (ii) shall be adjusted
by the Secretary of the Treasury
pursuant to Section 409(o)(2) of
the Code.
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(e) Notwithstanding anything to the contrary contained
elsewhere in the Plan:
(i) A Participant's benefits under the
Plan will:
(1) be distributed to him not
later than the Required
Distribution Date (as defined in
subsection (iii)), or
(2) be distributed commencing not
later than the Required
Distribution Date in accordance
with regulations prescribed by the
Secretary of the Treasury over a
period not extending beyond the
life expectancy of the Participant
or the life expectancy of the
Participant and his Beneficiary.
(ii) (1) If the Participant dies after
distribution has commenced pursuant
to subsection (i)(2) but before his
entire interest in the Plan has
been distributed to him, then the
remaining portion of that interest
will be distributed at least as
rapidly as under the method of
distribution being used under
subsection (i)(2) at the date of
his death.
(2) If the Participant dies before
distribution has commenced pursuant
to subsection (i)(2), then, except
as provided in subsections (ii)(3)
and (ii)(4), his entire interest in
the Plan will be distributed within
five years after his death.
(3) Notwithstanding the provisions
of subsection (ii)(2), if the
Participant dies before
distribution has commenced pursuant
to subsection (i)(2) and if any
portion of his interest in the Plan
is payable (A) to or for the
benefit of a Beneficiary, (B) in
accordance with Regulations
prescribed by the Secretary of the
Treasury over a period not
extending beyond the life
expectancy of the Beneficiary, and
(C) beginning not later than one
year after the date as the
Secretary of the Treasury may
prescribe by Regulations, then the
portion referred to in this
subsection (ii)(3) shall be treated
as distributed on the date on which
such distribution begins.
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(4) Notwithstanding the provisions
of subsections (ii)(2) and
(ii)(3), if the Beneficiary
referred to in subsection (ii)(3)
is the spouse of the Participant,
then
(A) the date on which
the distributions
are required to
begin under
subsection
(ii)(3)(C) of
this Section
shall not be
earlier than the
date on which the
Participant would
have attained age
70 1/2, and
(B) if the spouse
dies before the
distributions to
that spouse
begin, then this
subsection
(ii)(4) shall be
applied as if the
surviving spouse
were the
Participant.
(iii) For purposes of paragraph
(h), the Required Distribution Date
means October 1 of the calendar
year following the calendar year in
which the Participant attains age
70 1/2.
(iv) For purposes of subsection
(e), the life expectancy of a
Participant and his spouse may be
redetermined, but not more
frequently than annually.
(v) A Participant may not elect a
form of distribution pursuant to
subsection (i) providing payments
to a Beneficiary who is other than
his spouse unless the actuarial
value of the payments expected to
be paid to the Participant is more
than 50% of the actuarial value of
the total payments expected to be
paid under such form of
distribution.
(vi) No Participant shall receive a
distribution under circumstances
that would impose an additional tax
on such distribution pursuant to
Section 72(t) of the Code unless
and until that individual is
notified in writing by the
Committee of the tax and the
individual, by writing delivered to
the Committee, acknowledges receipt
of the notification and requests
the distribution.
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(f) (i) This subsection 8.6(f) applies
to distributions made on or after
January 1, 1993. Notwithstanding
any provision of the Plan to the
contrary that would otherwise limit
a Distributee's election under this
subsection, a Distributee may
elect, at the time and in the
manner prescribed by the Plan
Administrator, to have any portion
of an Eligible Rollover
Distribution paid directly to an
Eligible Retirement Plan specified
by the Distributee in a Direct
Rollover.
(ii) Definitions.
(A) "Eligible Rollover Distribution"
is any distribution of all or any
portion of the balance to the
credit of the Distributee, except
that an Eligible Rollover
Distribution does not include: Any
distribution that is one of a
series of substantially equal
periodic payments (not less
frequently than annually) made for
the life (or life expectancy) of
the Distributee or the joint lives
(or joint life expectancies) of
the Distributee and the
Distributee's designated
Beneficiary, or for a specified
period of ten years or more; any
distribution to the extent such
distribution is required under
Section 401(a)(9) of the Code; and
the portion of any distribution
that is not includible in gross
income (determined without regard
to the exclusion for net
unrealized appreciation with
respect to employer securities).
(B) "Eligible Retirement Plan" is an
individual retirement account
described in Section 408(b) of the
Code, an individual retirement
annuity described in Section
403(a) of the Code, or a qualified
trust described in Section 401(a)
of the Code, that accepts the
Distributee's eligible rollover
distribution. However, in the case
of an Eligible Rollover
Distribution to the Surviving
Spouse, an Eligible Retirement
Plan is an individual retirement
account or individual retirement
annuity.
(C) "Distributee" includes an Employee
or former Employee. In addition,
the Employee's or former
Employee's Surviving Spouse and
the Employee's or former
Employee's spouse or former spouse
who is the
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<PAGE>
alternate payee under a qualified
domestic relations order, as
defined in Section 414(p) of the
Code, are Distributees with regard
to the interest of the spouse or
former spouse.
(D) "Direct Rollover" is a payment by
the Plan to the Eligible Retirement
Plan specified by the Distributee.
8.7 Administrative Powers Relating to Payments. If a Participant or
Beneficiary is under a legal disability or, by reason of illness or mental or
physical disability, is in the opinion of the Committee unable properly to
attend to his personal financial matters, the Trustee may make such payments in
such of the following ways as the Committee shall direct:
(i) directly to such Participant or Beneficiary;
(ii) to the legal representative of such Participant or
Beneficiary; or
(iii) to some relative by blood or marriage, or friend, for
the benefit of such Participant or Beneficiary.
Any payment made pursuant to this section shall be in complete
discharge of the obligation therefor under the Plan.
8.8 Dividends. Any cash dividends received by the Trustee on Company
Stock allocated to the Accounts of Participants (or former Participants or
Beneficiaries) may be applied to the repayment of principal or interest on a
Loan, retained in the Participants' applicable accounts or paid to such
Participants, former Participants or Beneficiaries (in a nondiscriminatory
manner) at the sole discretion of the Committee; provided that any current
payment in cash must be paid to Participants, Former Participant or
Beneficiaries within 90 days after the close of the Plan Year in which the
dividend is received by the Trustee. Any such payment of cash dividends on
shares of Company Stock shall be accounted for as if the Participant or former
Participant receiving such dividends was the direct owner of such shares of
Company Stock and such payment shall not be treated as a distribution under the
Plan. In the event that cash dividends paid with respect to shares allocated to
the Accounts of a Participant are applied to the repayment of principal or
interest on a Loan, shares of Company Stock released thereby from the Suspense
Account shall be allocated to the Accounts of each Participant in proportion to
the value of the dividends otherwise allocable to such Participant's Accounts.
Any cash dividends paid with respect to unallocated Company Stock shall be
applied to the repayment of principal or interest on a Loan.
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8.9 Diversification of Investments.
(a) Notwithstanding any other provisions of the Plan or the
Trust, each Qualified Participant in the Plan may elect within 90 days after the
close of each Plan Year in the Qualified Election Period, by written instrument
delivered to the Committee, to direct the investment of not more than 25% (in
whole multiples of 1%) of the Participant's Adjusted Balance of his Accounts in
the Plan (to the extent that such portion exceeds the amount to which a prior
election under this Section applies). In the case of an election year in which
the Participant can make his last election, the preceding sentence shall be
applied by substituting "50%" for "25%." The Committee shall direct the Trustee
to invest the Accounts of Qualified Participants pursuant to their valid and
timely elections within 90 days after the last day of the period during which
the election can be made. Notwithstanding the foregoing, a Qualified Participant
shall not be entitled to make the election hereunder for a Plan Year within the
Qualified Election Period if the fair market value of his Accounts as of the
last day of such Plan Year is less than $500.
(b) A Qualified Participant's election pursuant to this
Section 8.9 shall direct the investment of the amount subject to the election
among one or more of the three investment options provided by the Trustee from
time to time. The Trustee will provide a written description of each such
investment option to the Qualified Participant within a reasonable time prior to
the Qualified Election Period. Such an investment election shall comply with
such rules and regulations as the Committee may prescribe.
(c) Distributions.
(1) At the election of a Qualified Participant,
the Plan shall distribute the portion of the
Participant's Accounts that is covered by
the election described in this Section 8.9
within 90 days after the last day of the
period during which the election can be
made. Such a distribution shall be subject
to right of first refusal and "put" option
provisions of Sections 6.3 and 6.4 of the
Plan. The provisions of this paragraph (1)
shall apply notwithstanding any other
provisions of the Plan other than those that
require the consent of the Participant to a
distribution of the Adjusted Balance of his
Accounts in excess of $3,500.
(2) In lieu of a distribution pursuant to
paragraph (1), a Qualified Participant who
has the right to receive a cash distribution
pursuant to paragraph (1) may direct the
Plan to transfer the portion of the Adjusted
Balance of his Accounts that is covered by
the election to another qualified plan of
the Company that accepts
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<PAGE>
such transfers, provided that the transferee
plan permits participant-directed
investments and does not invest in Company
Stock to a substantial degree. Such a
transfer shall be made no later than 90 days
after the last day of the period during
which the election can be made.
(d) The portion of the Adjusted Balance of a Participant's
Accounts attributable to Company Stock acquired by the Plan after December 31,
1986, shall be determined by multiplying the number of shares of Stock held in
the Accounts by a fraction, the numerator of which is the number of shares
acquired by the Plan after December 31, 1986 and allocated to Participant's
Accounts (not to exceed the number of shares held by the Plan on the date the
Participant becomes a Qualified Participant) and the denominator of which is the
total number of shares held by the Plan at the date the Participant becomes a
Qualified Participant.
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ARTICLE IX
VOTING OF COMPANY STOCK
9.1 Company Common Stock - Voting and Consents.
(a) Each Participant is entitled to direct the Trustee as to
the manner in which any Company Common Stock allocated to his Company
Contribution Account is to be voted. The Company shall furnish the Trustee with
notices and information statements when voting rights are to be exercised. The
Trustee will notify Participants of each occasion for the exercise of voting
rights and will forward copies of any proxy material within a reasonable time
after it is secured from the Company. A Participant shall elect to exercise such
right by filing written voting instructions with the Trustee at such time and in
such form as the Trustee may reasonably specify. Instructions received from
Participants by the Trustee shall be held in the strictest confidence and shall
not be divulged or released to any person including officers, director or
employees of the Company. To the extent not inconsistent with its fiduciary
obligations under ERISA, the Trustee shall vote shares of Company Stock for
which it does not receive timely instructions from Participants, or that have
not been allocated to Participants' Accounts, pro rata in accordance with the
timely instructions it has received from Participants.
(b) Participants will be allowed to direct the voting of
fractional shares or fractional rights to shares. This requirement will be
satisfied if the Trustee, or such other person or persons as the Trustee may
designate, votes the combined fractional shares or rights to shares to the
extent possible to reflect the instructions of the Participants holding
fractional shares or rights to shares.
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ARTICLE X
PLAN ADMINISTRATION
10.1 Company Responsibility. The Company shall be responsible for and
shall control and manage the operation and administration of the Plan. It shall
be the "Plan Administrator" and "Named Fiduciary" for purposes of ERISA and
shall be subject to service of process on behalf of the Plan. The Board may, in
its discretion, appoint a Committee of one or more persons, to be known as the
"Plan Administrative Committee" to act as the agent of the Company in performing
these duties. In the event that the Board chooses not to appoint such a
Committee, all references in the Plan to the "Committee" (except for such
references in this Section 10.1) shall mean the Board. The members of the
Committee shall serve at the pleasure of the Board; they may be officers,
directors, or Employees of the Company or any other individuals. Any member may
resign by delivering his written resignation to the Board and to the Committee.
Vacancies in the Committee arising by resignation, death, removal or otherwise,
shall be filled by the Board. The Company shall advise the Trustee in writing of
the names of the member of the Committee and of changes in membership from time
to time.
10.2 Powers and Duties of Committee. The Committee shall administer
the Plan in accordance with its terms and shall have all powers necessary to
carry out the provisions of the Plan. The Committee shall direct the Trustee
concerning all payments which shall be made out of the Trust pursuant to the
Plan. The Committee shall interpret the Plan and shall determine all questions
arising in the administration, interpretation, and application of the Plan,
including but not limited to questions of eligibility and the status and rights
of Participants, Beneficiaries and other persons. Any such determination by the
Committee shall presumptively be conclusive and binding on all persons. The
regularly kept records of the Company shall be conclusive and binding upon all
persons with respect to an Employee's Hours of Service, date and length of
employment, time and amount of Compensation and the manner of payment thereof,
type and length of any absence from work and all other matters contained therein
relating to Employees. All rules and determinations of the Committee shall be
uniformly and consistently applied to all persons in similar circumstances.
10.3 Organization and Operations of Committee.
(a) The Committee shall act by a majority vote of its members
at the time in office, and such action may be taken either by a vote at a
meeting or in writing without a meeting. The signatures of a majority of the
members will be sufficient to authorize Committee action. A Committee member
shall not participant in discussions of or vote upon matters pertaining to his
own participation in the Plan.
(b) The Committee may authorize any of its members or any
other person to execute any document or documents on behalf of the Committee, in
which event the Committee shall notify the Trustee in writing
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of such action and the name or names of such member or person. The Trustee
thereafter shall accept and rely upon any document executed by such members or
persons as representing action by the Committee, until the Committee shall file
with the Trustee a written revocation of such designation.
(c) The Committee may adopt such bylaws and regulations as it
deems desirable for the conduct of its affairs and with the consent of the
President of the Company, may appoint such accountants, counsel, specialists,
and other persons as it deems necessary or desirable in connection with the
administration of this Plan. The Committee shall be entitled to rely
conclusively upon, and shall be fully protected in any action taken by it in
good faith in relying upon, any opinions or reports which shall be furnished to
it by any such accountant, counsel, specialist or other person.
10.4 Records and Reports of Committee. The Committee shall keep a
record of all its proceedings and acts and shall keep all such books of account,
records, and other data as may be necessary for proper administration of the
Plan. The Committee shall notify the Trustee and the Company of any action taken
by the Committee and, when required, shall notify any other interested person or
persons.
10.5 Claims Procedure. Claims for benefits under the Plan shall be
made in writing to the Committee. In the event a claim for benefits is wholly or
partially denied by the Committee, the Committee shall, within a reasonable
period of time, but no later than 90 days after the receipt of the claim, notify
the claimant in writing of the denial of the claim. If the claimant shall not be
notified in writing of the denial of the claim within 90 days after it is
received by the Committee, the claim shall be deemed denied. A notice of denial
shall be written in a manner calculated to be understood by the claimant, and
shall contain (i) the specific reason or reasons for denial of the claim, (ii) a
specific reference to the pertinent Plan provisions upon which the denial is
based, (iii) a description of any additional material or information necessary
for the claimant to perfect the claim, together with an explanation of why such
material or information is necessary, and (iv) an explanation of the Plan's
review procedure. Within 60 days of the receipt by the claimant of the written
notice of denial of the claim, or within 60 days after the claim is deemed
denied as set forth above, if applicable, the claimant may file a written
request with the Committee that it conduct a full and fair review of the denial
of the claimant's claim for benefits, including the conducting of a hearing, if
deemed necessary by the Committee. In connection with the claimant's appeal of
the denial of his benefit, the claimant may review pertinent documents and may
submit issues and comments in writing. The Committee shall render a decision on
the claim appeal promptly, but not later than 60 days after the receipt of the
claimant's request for review, unless special circumstances (such as the need to
hold a hearing, if necessary) require an extension of time for processing, in
which case the 60 day period may be extended to 120 days. The Committee shall
notify the claimant in writing of any such extension. The decision upon review
shall (i) include specific reasons for the
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decision, (ii) be written in a manner calculated to be understood by the
claimant and (iii) contain specific references to the pertinent Plan provisions
upon which the decision is based.
10.6 Compensation and Expenses of Committee. The members of the
Committee shall serve without compensation for services as such, but all
reasonable expenses incurred by the Committee incident to the administration of
the Plan (including reasonable expenses of litigation involving the Plan and
reasonable fees and expenses of its attorneys and agents) shall be borne by, and
paid out of the plan assets, except to the extent the Board elects to have such
expenses paid directly by the Company.
10.7 Indemnity of Committee Members. The Company shall indemnify and
defend each member of the Committee and each of its other employees against any
and all claims, loss, damages, expenses (including reasonable attorneys fees),
and liability arising in connection with the administration of the Plan, except
when the same is judicially determined to be due to the gross negligence or
willful misconduct of such member or other employee.
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ARTICLE XI
TRUST AND TRUSTEE
11.1 Trust Agreement. A Trust has been created and will be maintained
for the purposes of the Plan. All contributions under the Plan will be paid into
the Trust. The Trust Fund will be held, invested and disposed of by the Trustee
from time to time acting in accordance with the Trust Agreement. All benefits
payable under the Plan will be paid from the Trust Fund.
11.2 Exclusive Benefit of Employees. All contributions made pursuant
to the Plan shall be held by the Trustee in accordance with the terms of the
Trust Agreement and Section 4.2 of the Plan for the exclusive benefit of those
Employees who are Participants under the Plan, including former Employees and
their Beneficiaries, and shall be applied to provide benefits under the Plan and
to pay expenses of administration of the Plan and the Trust, to the extent that
such expenses are not otherwise paid by the Company.
11.3 Trustee. The Company shall appoint a bank or trust company or an
individual or individuals to act as Trustee or Trustees under the Trust
Agreement. The Trustee shall serve at the pleasure of the Company and its powers
and responsibilities shall be set forth in a Trust Agreement entered into
between the Company and the Trustee. No person who receives full-time pay from
the Company shall receive compensation paid by the Trust Fund except for
reimbursement of expenses properly incurred.
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ARTICLE XII
AMENDMENT AND TERMINATION
12.1 Amendment of Plan. The Company shall have the right to amend the
Plan at any time and from time to time by resolution of its Board of Directors,
and all Employees and persons claiming any interest hereunder shall be bound
thereby; provided, however, that no amendment shall have the effect of: (i)
directly or indirectly divesting the interest of any Participant in any amount
that he would have received had he terminated his employment with the Company
immediately prior to the effective date of such amendment, of the interest of
any Beneficiary as such interest existed immediately prior to the effective date
of such amendment; (ii) directly or indirectly affective the vesting schedule
set forth in Section 7.7 used to determine the vested interest of a Participant
on the effective date of the amendment unless the conditions of Section 203(c)
of ERISA are satisfied; (iii) vesting in the Company any right, title or
interest in or to any Plan assets, (iv) causing or effecting discrimination in
favor of officers, shareholders, or highly compensated Employees; or (v) causing
any part of the Plan assets to be used for any purpose other than for the
exclusive benefit of the Participants and their Beneficiaries.
12.2 Voluntary Termination of or Permanent Discontinuance of
Contributions to the Plan. The Company expects the Plan to be permanent, but
since future conditions affecting the Company cannot be anticipated, the Company
shall have the right to terminate the Plan in whole or in part, or to
permanently discontinue contributions to the Plan, at any time by resolution of
its Board and by giving written notice of such termination or permanent
discontinuance, which shall not be earlier than the first day of the Plan Year
which includes the date of the resolution.
12.3 Limitation on Amendment or Termination. Notwithstanding the
provisions of Sections 12.1 and 12.2, the Company shall not terminate the Plan
or discontinue contributions thereto while any Debt or Loan shall remain
outstanding and unpaid in whole or in part, without the prior written consent to
any such termination or amendment by all holders and guarantors, if any, of the
Plan's obligations under such Debt or Loan.
12.4 Involuntary Termination of Plan. The Plan shall automatically
terminate if the Company is legally adjudicated a bankrupt, makes a general
assignment for the benefit of creditors, or is dissolved. In the event of the
merger or consolidation of the Company with or into any other corporation, or in
the event substantially all of the assets of the Company shall be transferred to
another corporation, the successor corporation resulting from the consolidation
or merger, or transfer of such assets, as the case may be, shall have the right
to adopt and continue the Plan and succeed to the position of the Company
hereunder. If, however, the Plan is not so adopted within 90 days after the
effective date of such consolidation, merger or sale, the Plan shall
automatically be deemed terminated
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as of the effective date of such transaction. Nothing in this Plan shall prevent
the dissolution, liquidation, consolidation or merger of the Company, or the
sale or transfer of all or substantially all of its assets.
12.5 Payments on Termination of or Permanent Discontinuance of
Contribution to the Plan. If the Plan is terminated as herein provided, or if it
should be partially terminated, or upon the complete discontinuance of Company
contributions to the Plan, the following procedure shall be followed, except
that in the event of a partial termination, it shall be followed only in cases
of those Participants and Beneficiaries directly affected:
(i) The Committee may continue to function, but if it fails to
do so, its records, books of account and other necessary data shall be turned
over to the Trustee and the Trustee shall act on its own motion as hereinafter
provided.
(ii) Notwithstanding any other provisions of the Plan, all
interests of Participants shall become fully vested and nonforfeitable, provided
that, the Accounts of a former Participant who terminated employment prior to
the date of Plan termination, who had no vested interest at the date of his
termination of employment, and who has incurred a Break in Service of more than
one year but less than five years at the date of Plan termination, shall not be
vested.
(iii) The value of the Trust and the shares of all
Participants and Beneficiaries shall be determined as of the date of termination
or discontinuance.
(iv) Distribution to Participants and Beneficiaries shall be
made at such time after termination of or discontinuance of contributions to the
Plan and by such of the methods provided in Sections 8.5 and 8.6, as the
Committee (or the Trustee if no Committee is then acting) in its discretion
shall determine (except that distribution shall be made not later than the time
specified in Section 8.6(c)).
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ARTICLE XIII
MISCELLANEOUS
13.1 Duty To Furnish Information and Documents. Participants and their
Beneficiaries must furnish to the Committee and the Trustee such evidence, data
or information as the Committee considers necessary or desirable for the purpose
of administering the Plan, and the provisions of the Plan for each person are
upon the condition that he will furnish promptly full, true, and complete
evidence, data, and information requested by the Committee. All parties to, or
claiming any interest under, the Plan hereby agrees to perform any and all acts,
and to execute any and all document and papers, necessary or desirable for
carrying out the Plan and the Trust.
13.2 Committee's Annual Statements and Available Information. The
Company shall advise Employees of the eligibility requirements and benefits
under the Plan. As soon as practicable after making the annual valuations and
allocations provided for in the Plan, and at such other times as the Committee
may determine, the Committee shall provide each Participant, and each former
Participant and Beneficiary with respect to whom an account is maintained, with
a statement reflecting the current status of his accounts, including the
Adjusted Balance thereof. No Participant, except a member of the Committee,
shall have the right to inspect the records reflecting the account of any other
Participant. The Committee shall make available for inspection at reasonable
times by Participants and Beneficiaries copies of the Plan, any amendments
thereto, Plan summary, and all reports of Plan and Trust operations required by
law.
13.3 No Enlargement of Employment Rights. Nothing contained in the
Plan shall be construed as a contract of employment between the Company and any
person, nor shall the Plan be deemed to give any person the right to be retained
in the employ of the Company or limit the right of the Company to employ or
discharge any person with or without cause, or to discipline any Employee.
13.4 Applicable Law. All questions pertaining to the validity,
construction and administration of the Plan shall be determined in conformity
with the laws of Montana to the extent that such laws are not preempted by ERISA
and valid regulations published thereunder.
13.5 No Guarantee. Neither the Trustee, the Committee, nor the Company
in any way guarantees the Trust Fund from loss or depreciation nor the payment
of any money or other assets which may be or become due to any person from the
Trust Fund. No Participant or other person shall have any recourse against the
Trustee, the Company or the Committee if the Trust Fund is insufficient to
provide Plan benefits in full. Nothing herein contained shall be deemed to give
any Participant, former Participant, or Beneficiary an interest in any specific
part
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of the Trust Fund or any other interest except the right to receive benefits out
of the Trust Fund in accordance with the provisions of the Plan and Trust.
13.6 Unclaimed Funds. Each Participant shall keep the Committee
informed of his current address and the current address of his Beneficiary or
Beneficiaries. Neither the Company, the Committee nor the Trustee shall be
obligated to search for the whereabouts of any person. If the location of a
Participant is not made known to the Committee within three years after the date
on which distribution of the Participant's Accounts may first be made,
distribution may be made as though the Participant had died at the end of the
three-year period. If, within one additional year after such three-year period
has elapsed, or, within three years after the actual death of a Participant, the
Committee is unable to locate any individual who would receive a distribution
under the Plan upon the death of the Participant pursuant to Section 8.2 of the
Plan, the Adjusted Balance in the Participant's Accounts shall be deemed a
forfeiture and shall be used to reduce Company contributions to the Plan for the
Plan Year next following the year in which the forfeiture occurs; provided,
however, that in the event that the Participant or a Beneficiary makes a claim
for any amount which has been so forfeited, the benefits which have been
forfeited shall be reinstated.
13.7 Merger or Consolidation of Plan. Any merger or consolidation of
the Plan with another plan, or transfer of Plan assets or liabilities to any
other plan, shall be effected in accordance with such regulation, if any, as may
be issued pursuant to Section 208 of ERISA, in such a manner that each
Participant in the Plan would receive, if the merged, consolidated or transferee
plan were terminated immediately following such event, a benefit which is equal
to or greater than the benefit he would have been entitled to receive if the
Plan had terminated immediately before such event.
13.8 Interest Nontransferable. Except as provided in this Section, no
interest of any person or entity in, or right to receive distributions from, the
Trust Fund shall be subject in any manner to sale, transfer, assignment, pledge,
attachment, garnishment, or other alienation or encumbrance of any kind; nor may
such interest or right to receive distributions be taken, either voluntarily or
involuntarily, for the satisfaction of the debts of, or other obligations or
claims against, such person or entity, including claims in bankruptcy
proceedings. The Account of any Participant, however, shall be subject to and
payable in accordance with the applicable requirements of any qualified domestic
relations order, as that term is defined in Section 414(p) of the Code, and the
Committee shall direct the Trustees to provide for payment from a Participant's
Accounts in accordance with such order and with the provisions of Section 414(p)
of the Code and any regulations promulgated thereunder.
13.9 Prudent Man Rule. Notwithstanding any other provisions of this
Plan, and the Trust Agreement, the Trustee, the Committee and the Company shall
exercise their powers and discharge their duties under this Plan and the Trust
Agreement for the exclusive purpose of providing benefits to Employees and their
Beneficiaries, and
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<PAGE>
shall act with the care, skill, prudence and diligence under the circumstances
that a prudent man acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with like
aims.
13.10 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Plan, none of the Trustee, the Company, the Committee and each
individual acting as an employee or agent of any of them shall be liable to any
Participant, former Participant or Beneficiary for any claim, loss, liability or
expense incurred in connection with the Plan, except when the same shall have
been judicially determined to be due to the gross negligence or willful
misconduct of such person.
13.11 Federal and State Security Law Compliance.
(a) Each Participant or Beneficiary shall, prior to the
transfer of Company Stock to such Participant and Beneficiary, execute and
deliver an agreement, in form and substance acceptable to the Committee,
certifying such person's intent to hold such Stock and containing such other
representations and agreements relating to the Stock as the Committee may
reasonably request.
(b) The Committee will take all necessary steps to comply with
any applicable registration or other requirements of federal or state securities
laws from which no exemption is available.
(c) Stock certificates distributed to Participants may bear
such legends concerning restrictions imposed by federal or state securities law,
and concerning other restrictions and rights under the Plan, as the Committee in
its discretion may determine.
13.12 Headings. The headings in this Plan are inserted for convenience
of reference only and are not to be considered in construction of the provisions
hereof.
13.13 Gender and Number. Except when otherwise required by the
context, any masculine terminology in this document shall include the feminine,
and any singular terminology shall include the plural.
13.14 ERISA and Approval Under Internal Revenue Code. This Plan is
intended to constitute an employee stock ownership plan and meet the
requirements of Sections 401(a), 409, 501(a) and 4975(d)(3) and (e)(7) of the
Code, and Sections 407(d)(6) and 408(b)(3) of ERISA, to the extent applicable,
as now in effect or hereafter amended. Any modification or amendment of the Plan
may be made retroactively, as necessary or appropriate, to establish and
maintain such qualification and to meet any requirements of the Code or ERISA.
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<PAGE>
13.15 Extension of Plan to Related Employers.
(a) With the approval of the Company, any Related Employer may
adopt the Plan and qualify its Employees to become Participants thereunder by
taking proper corporate action to adopt the Plan and making such contributions
to the Trust Fund as the board of directors of the Related Employer may require.
(b) The Plan will terminate with respect to any Related
Employer that has adopted the Plan pursuant to this Section if the Related
Employer ceases to be a Related Employer, revokes its adoption of the Plan by
appropriate corporate action, permanently discontinues its contributions for its
Employees, is judicially declared bankrupt, makes a general assignment for the
benefit of creditors, or is dissolved. If the Plan is terminated or
contributions are discontinued with respect to any Related Employer, the
provisions of Section 12.5 shall apply to the interest in the Plan of the
Employees of such Related Employer, and their Beneficiaries.
(c) The terms "Company" and "Employee" in the Plan shall
include any Related Employer that has adopted the Plan pursuant to this Section
13.15 and such Related Employer's Employees; provided, however, that the term
"Company" shall not include any such Related Employer where used in Articles X
or XI of the Plan. The Company shall act as the agent for each Related Employer
that adopts the Plan for all purposes of administration thereof.
13.16 Administrative Changes Without Plan Amendment.
The Committee reserves authority to make administrative changes to
this Plan document that do not alter the minimum qualification requirements
without formal amendment to the Plan. The Committee will effect such changes by
substituting pages in the Plan document with corrected pages. Administrative
changes include, but are not limited to, corrections of typographical errors and
similar errors, conforming provisions for administrative procedures to actual
practice and changes in practice, and deleting or correcting language that fails
to accurately reflect the intended provision of the Plan.
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<PAGE>
ARTICLE XIV
TOP-HEAVY PROVISIONS
14.1 Top-Heavy Status. Except as provided in Sections 14.4(b) and (c),
the provisions of this Article shall not apply to the Plan with respect to any
Plan Year for which the Plan is not Top-Heavy. If the Plan is or becomes
Top-Heavy in any Plan Year, the provisions of this Article XIV will supersede
any conflicting provisions elsewhere in the Plan.
14.2 Definitions. For purposes of this Article XIV, the following
words and phrases shall have the meanings states below unless a different
meaning is plainly required by the context:
(a) "Determination Date" means, with respect to any Plan Year:
(i) the last day of the preceding Plan Year, or (ii) in the case of the first
Plan Year of the Plan, the last day of such Plan Year.
(b) "Key Employee" means in Employee meeting the definition of
"key employee" contained in Section 416(i)(1) of the Code and the Regulations
interpreting that section. For purposes of determining whether an Employee is a
Key Employee, the definition of Compensation set forth in Section 14.6 shall
apply.
(c) "Non-Key Employee" means any Employee who is not a Key
Employee.
(d) "Valuation Date" means with respect to a particular
Determination Date, the most recent Valuation Date (as defined in Section 2.34
occurring within a 12-month period ending on the applicable Determination Date.
14.3 Determination of Top-Heavy Status.
(a) The Plan will be "Top-Heavy" with respect to any Plan Year
if, as of the Determination Date applicable to such Year, the ratio of the
Adjusted Balances in the accounts of Key Employees (determined as of the
Valuation Date applicable to such Determination Date) to the Adjusted Balances
in the accounts of all Employees (determined as of such Valuation Date) exceeds
60%. For purposes of computing such ratio and for all other purposes of applying
and interpreting this paragraph (a): (i) the amount of the accounts of any
Employee shall be increased by the aggregate distributions made with respect to
such Employee under the Plan during the five-year period ending on any
Determination Date; (ii) benefits provided under all plans which are aggregated
pursuant to (b) of this Section must be considered; and (iii) the provisions of
Section 416 of the Code and all Regulations interpreting that section shall be
applied. If any Employee has not performed services for the company or any
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<PAGE>
Related Employer at any time during the five-year period ending on any
Determination Date, the balances of the accounts of such Employee shall not be
taken into consideration for purposes of determining whether the Plan is
Top-Heavy with respect to the Plan Year to which such Determination Date
applies.
(b) For purposes of determining whether the Plan is Top-Heavy,
all qualified retirement plans maintained by the Company and each Related
Employer shall be aggregated to the extent that such aggregation is required
under the applicable provisions of Section 416 of the Code and the Regulations
interpreting that Section. All other qualified Related employer shall be
aggregated only to the extent permitted by Section 416 of the Code and such
Regulations and elected by the Company.
(c) For purposes of determining whether the Plan is Top-Heavy,
the Adjusted Balance of a Participant's accounts shall not include (i) the
amount of a rollover contribution (or similar transfer) accepted after December
31, 1983, initiated by the Participant and derived from a plan not maintained by
the Company or any Related Employer, or (ii) a distribution made with respect to
any Employee which is a tax-free rollover contribution (or similar transfer)
that is either not initiated by the Employee or that is made to a plan
maintained by the Company or any Related Employer.
(d) Solely for purposes of determining whether the Plan is
Top-Heavy, the accrued benefit of any Non-key Employee shall be determined (i)
under the method, if any, that uniformly applies for accrual purposes under all
plans of the Company or any Related Employer, or (ii) if there is no such
method, as if such benefit accrued not more rapidly than the slowest accrual
rate permitted under the fractional accrual rule of Section 411(b)(1)(C) of the
Code.
14.4 Vesting.
(a) If the Plan becomes Top-Heavy, the vested interest of a
Participant in the portion of his Company Stock and Other Investments Accounts
referred to in subsection (b) shall be determined in accordance with the
following formula in lieu of the formula set forth in Section 7.6:
Vested Forfeitable
Years of Service Percentage Percentage
Less than 3 0% 100%
3 or more 100% 0%
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<PAGE>
For purposes of the above schedule, years of Service shall include all
years of Service required to be counted under Section 411(a) of the
Code, disregarding all years of Service permitted to be disregarded
under Section 411(a)(4) of the Code.
(b) The vesting schedule set forth in subsection (a) shall apply to all
amounts allocated to a Participant's Company Stock and Other Investments
Accounts while the Plan is Top-Heavy and during the period of time before the
Plan becomes Top Heavy. This vesting schedule shall not apply to the Company
Stock and Other Investments Accounts of any Employee who does not have an Hour
of Service after the Plan becomes Top-Heavy.
(c) If the Plan becomes Top-Heavy and subsequently ceases to be
Top-Heavy, the vesting schedule set forth in subsection (a) shall automatically
cease to apply, and the vesting schedule set forth in Section 7.6 above shall
automatically apply, with respect to all amounts allocated to a Participant's
Company Stock and Other Investments Accounts for all Plan Years after the Plan
Year with respect to which the Plan was las Top-Heavy. For purposes of this
subsection (c), this change in vesting schedules shall only be valid to the
extent that the conditions of Section 12.1 of the Plan and Section 411(a)(10) of
the Code are satisfied.
14.5 Minimum Contribution. For each Plan Year that the Plan is
Top-Heavy, the Company will contribute and allocate to the Company Stock and
Other Investments Accounts of each Participant who is a Non-key Employee and is
employed by the Company on the last day of such Plan Year an amount consisting
of contributions and forfeitures equal to the lesser of (i) 3% of such
Participant's Compensation (as defined in Section 14.6) for such Plan Year and
(ii) the largest percentage of Company contributions and forfeitures, as a
percentage of the Key Employee's compensation (as described in Section 14.6),
allocated to the Company Stock and Other Investments Accounts of any Key
Employee for such Year. The minimum contribution allocable pursuant to this
Section 14.5 will be determined without regard to any contributions by the
Company for any Employee under the Federal Social Security Act. A Non-key
Employee will not be excluded from an allocation pursuant to this Section merely
because his compensation is less than a stated amount. A Non-Key Employee who
has become a Participant but who fails to complete at least 1,000 Hours of
Service in a Plan Year in which the Plan is top Heavy shall not be excluded from
an allocation pursuant to this Section.
14.6 Compensation. For any Plan Year in which the Plan is Top-Heavy,
annual Compensation for the purposes of this Article shall have the meaning set
forth in Section 414(q)(7) of the Code.
14.7 Collective Bargaining Agreements. The requirements of Sections
14.4 and 14.5 shall not apply with respect to any employees included in a unit
of employees covered by a collective bargaining agreement between
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employer representatives and the Company or a Related Employer if retirements
benefits were the subject of good faith bargaining between such employer
representatives and the Company or Related Employer.
IN WITNESS WHEREOF, Empire Federal Savings Bank has caused this Plan to
be executed by its duly authorized officer this _______ day of ____________,
1996.
Attest: EMPIRE FEDERAL SAVINGS BANK
By:
Secretary President
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EXHIBIT 21
Subsidiaries
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Registrant
Empire Federal Bancorp, Inc.
Percentage State of
Subsidiaries Owned Incorporation
Empire Federal Savings and Loan
Association of Livingston(1) 100% United States
Dime Service Corporation (2) 100% Montana
(1) Upon consummation of the Conversion, Empire Federal Savings and Loan
Association of Livingston will become a wholly-owned subsidiary of the
Registrant.
(2) This subsidiary is a wholly-owned subsidiary of Empire Federal Savings
and Loan Association of Livingston.
<PAGE>
EXHIBIT 23.1
Consent of KPMG Peat Marwick & Company, LLP
<PAGE>
(logo of KPMG Peat Marwick LLP)
KPMG PEAT MARWICK LLP
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
The Board of Directors
Empire Federal Savings and Loan Association:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in Form SB-2.
(Signature of KPMG Peat Marwick LLP)
/s/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Billings, Montana
September 24, 1996
<PAGE>
EXHIBIT 23.3
Consent of Keller & Company, Inc.
<PAGE>
KELLER & COMPANY, INC.
55 METRO PLACE NORTH
SUITE 524
DUBLIN, OHIO 43017
(614) 766-1426
(614) 766-1459 FAX
September 19, 1996
Re: Valuation Appraisal of Empire Federal Bancorp, Inc.
Empire Federal Savings and Loan Association
Livingston, Montana
We hereby consent to the use of our firm's name, Keller & Company,
Inc., and the reference to our firm as experts in the Application for Conversion
on Form AC to be filed by Empire Federal Savings and Loan Association with the
Office of Thrift Supervision and the Registration Statement on Form S-1 to be
filed by Empire Federal Bancorp, Inc. with the Securities and Exchange
Commission and any amendments thereto, and to the statements with respect to us
and the references to our Valuation Appraisal Report in the Prospectus, in the
said Form AC and in the said Form S-1 and any amendments thereto.
Very truly yours,
KELLER & COMPANY, INC.
(signature of Michael R. Keller)
/s/Michael R. Keller
Michael R. Keller
President
<PAGE>
EXHIBIT 99.2
Solicitation and Marketing Materials
<PAGE>
(KBW logo appears here) (white box within black circle logo appears here)
Charles Webb & Company
A Division of
KEEFE, BRUYETTE & WOODS, INC.
To Members and Friends of
Empire Federal Savings and Loan Association
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Charles Webb & Company, a member of the National Association of Securities
Dealers, Inc. ("NASD"), is assisting Empire Federal Savings and Loan Association
("Association") in its conversion from a federally chartered mutual savings and
loan association to a federally chartered capital stock savings bank and the
concurrent offering of shares of common stock by Empire Federal Bancorp, Inc.,
(the "Holding Company"), the newly formed corporation that will serve as holding
company for the Association following the conversion.
At the request of the Holding Company, we are enclosing materials explaining
this process and your options, including an opportunity to invest in shares of
the Holding Company's common stock being offered to customers and the community
through XXXXX X, 1996. Please read the enclosed offering materials carefully.
The Holding Company has asked us to forward these documents to you in view of
certain requirements of the securities laws in your state.
If you have any questions, please visit our Stock Information Center at 123
South Main Street, Livingston, Montana or feel free to call the Stock
Information Center at (406) XXX-XXXX.
Very truly yours,
Charles Webb & Company
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
Investment Bankers and Financial Advisors
<PAGE>
XXXXX XX, 1996
Dear Friend:
We are pleased to announce that Empire Federal Savings and Loan
Association, ("Association") is converting from a federally chartered mutual
savings and loan association to a federally chartered capital stock savings bank
(the "Conversion"). In conjunction with the Conversion, the newly-formed
corporation that will serve as holding company for Empire Federal Bancorp, Inc.,
is offering shares of common stock in a subscription offering and community
offering. The sale of stock in connection with the Conversion will enable the
Association to raise additional capital to support and enhance its current
operations.
Because we believe you may be interested in learning more about the
Conversion, we are sending you the following materials which describe the stock
offering.
PROSPECTUS: This document provides detailed information about the
operations of the Association and the proposed stock offering.
QUESTIONS AND ANSWERS: Key questions and answers about the stock
offering are found in this pamphlet.
STOCK ORDER FORM: This form is used to purchase stock by returning it
with your payment in the enclosed business reply envelope. The deadline
for ordering stock is Noon, Mountain Time., XXXX X, 1996.
CERTIFICATION FORM: This form must be completed and returned with the
stock order form in the enclosed business reply envelope if you wish to
purchase stock.
As a friend of the Association, you will have the opportunity to buy
stock directly from Empire Federal Bancorp, Inc., in the Conversion without
commission or fee. If you have additional questions regarding the Conversion and
stock offering, please call us at (406) XXX-XXXX, Monday through Friday from
X:00 a.m. to X:00 p.m. or stop by the Stock Information Center at 123 South Main
Street, Livingston, Montana.
We are pleased to offer you this opportunity to become a charter
shareholder of Empire Federal Bancorp, Inc.
Sincerely,
Beverly D. Harris
President and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
<PAGE>
XXXX XX, 1996
Dear Member:
We are pleased to announce that Empire Federal Savings and Loan
Association ("Association") is converting from a federally chartered mutual
savings and loan association to a federally chartered capital stock savings bank
(the "Conversion"). In conjunction with the Conversion, Empire Federal Bancorp,
Inc., the newly-formed corporation that will serve as holding company for the
Association, is offering shares of common stock in a subscription offering and
community offering.
Unfortunately, Empire Federal Bancorp, Inc., is unable to either offer
or sell its common stock to you because the small number of eligible subscribers
in your jurisdiction makes registration or qualification of the common stock
under the securities laws of your jurisdiction impractical, for reasons of cost
or otherwise. Accordingly, this letter should not be considered an offer to sell
or a solicitation of an offer to buy the common stock of Empire Federal Bancorp,
Inc.
However, as a member of the Association, you have the right to vote on
the Plan of Conversion at the Special Meeting of Members to be held on XXXXX XX,
1996. Therefore, enclosed is a proxy card, a Proxy Statement (which includes the
Notice of the Special Meeting), Prospectus (which contains information
incorporated into the Proxy Statement) and a return envelope for your proxy
card.
I invite you to attend the Special Meeting on XXXXX XX, 1996. However,
whether or not you are able to attend, please complete the enclosed proxy card
and return it in the enclosed envelope.
Sincerely,
Beverly D. Harris
President and Chief Executive Officer
<PAGE>
XXXXX XX, 1996
Dear Member:
We are pleased to announce that Empire Federal Savings and Loan
Association ("Association") is converting from a federally chartered mutual
savings and loan association to a federally chartered capital stock savings bank
(the "Conversion"). In conjunction with the Conversion, Empire Federal Bancorp,
Inc., ("Holding Company") the newly-formed corporation that will serve as
holding company for the Association, is offering shares of common stock in a
subscription offering and community offering to certain of our depositors, to
our Employee Stock Ownership Plan and some members of the general public
pursuant to a Plan of Conversion.
To accomplish this Conversion, we need your participation in an
important vote. Enclosed is a proxy statement describing the Plan of Conversion
and your voting and subscription rights. The Plan of Conversion has been
approved by the Office of Thrift Supervision and now must be approved by you.
YOUR VOTE IS VERY IMPORTANT.
Enclosed, as part of the proxy material, is your proxy card located
behind the window of your mailing envelope. This proxy should be signed and
returned to us prior to the Special Meeting scheduled for XXXXXX XX, 1996.
Please take a moment to sign the enclosed proxy card and return it to us in the
postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING
AGAINST THE CONVERSION.
The Board of Directors of the Association believes that the Conversion
will offer a number of advantages, such as an opportunity for depositors and
customers of the Association to become shareholders of the Holding Company.
Please remember:
(arrow) Your accounts at the Association will continue to be insured up to the
maximum legal limit by the Federal Deposit Insurance Corporation
("FDIC").
(arrow) There will be no change in the balance, interest rate, or maturity of
any deposit accounts because of the Conversion.
(arrow) Members have a right, but no obligation, to buy stock before it is
offered to the public.
(arrow) Like all stock, stock issued in this offering will not be insured by
the FDIC.
Enclosed are materials describing the stock offering. We urge you to
read these materials carefully. If you are interested in purchasing the common
stock of the Holding Company. you must submit your Stock Order Form,
Certification Form, and payment prior to Noon, Mountain Time, XXXXX XX, 1996.
If you have additional questions regarding the stock offering, please
call us at (406) XXX-XXXX, Monday through Friday from x:00 a.m. to x:00 p.m., or
stop by the Stock Information Center located at 123 South Main Street in
Livingston, Montana.
Sincerely,
Beverly D. Harris
President and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED IN THIS OFFERING ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND
OR ANY OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
XXXXX XX 1996
Dear Prospective Investor:
We are pleased to announce that Empire Federal Savings and Loan
Association ("Association"), is converting from a federally chartered mutual
savings and loan association to a federally chartered capital stock savings bank
(the "Conversion"). In conjunction with the Conversion, Empire Federal Bancorp,
Inc., the newly-formed corporation that will serve as holding company for the
Association, is offering shares of common stock in a subscription offering and
community offering. The sale of stock in connection with the Conversion will
enable the Association to raise additional capital to support and enhance its
current operations.
We have enclosed the following materials which will help you learn more
about the Conversion. Please read and review the materials carefully.
PROSPECTUS: This document provides detailed information about the
operations of the Association and the proposed stock offering.
QUESTIONS AND ANSWERS: Key questions and answers about the stock
offering are found in this pamphlet.
STOCK ORDER FORM: This form is used to purchase stock by returning it
with your payment in the enclosed business reply envelope. The deadline
for ordering stock is Noon., Mountain Time, XXXX XX, 1996.
CERTIFICATION FORM: This form must be completed and returned with the
stock order form in the enclosed business reply envelope if you wish to
purchase stock.
We invite our loyal customers and local community members to become
charter shareholders of Empire Federal Bancorp, Inc. Through this offering you
have the opportunity to buy stock directly from Empire Federal Bancorp, Inc.,
without commission or fee. The board of directors and senior management of the
Association fully support the stock offering.
If you have additional questions regarding the Conversion and stock
offering, please call us at (406) XXX-XXXX, Monday through Friday from X:00 a.m.
to X:00 p.m. or stop by the Stock Information Center located at 123 South Main
Street in Livingston, Montana.
Sincerely,
Beverly D. Harris
President and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
<PAGE>
- --------------------------------------------------------------------------------
STOCK OFFERING QUESTIONS
AND ANSWERS
- -------------------------------------------------------------------------------
EMPIRE FEDERAL
BANCORP, INC.
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
FACTS ABOUT CONVERSION
The Board of Directors of Empire Federal Savings and Loan Association
("Association") unanimously adopted a Plan of Conversion (the "Conversion") to
convert from a federally chartered mutual savings and loan association to a
federally chartered capital stock savings bank.
This brochure answers some of the most frequently asked questions about the
Conversion and about your opportunity to invest in Empire Federal Bancorp, Inc.,
(the "Holding Company"), the newly formed corporation that will serve as holding
company for Empire Federal Bancorp, Inc., following the conversion.
Investment in the stock of Empire Federal Bancorp, Inc., involves certain risks.
For a discussion of these risks and other factors, investors are urged to read
the accompanying Prospectus, especially the discussion under the heading "Risk
Factors".
WHY IS THE ASSOCIATION CONVERTING TO STOCK FORM?
- --------------------------------------------------------------------------------
The stock form of ownership is used by most business corporations and an
increasing number of savings institutions. Through the sale of stock, the
Association will raise additional capital enabling it to:
o support and expand its current financial and other services.
o allow customers and friends to purchase stock and share in the Holding
Company's and the Association's future.
WILL THE CONVERSION AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS?
- --------------------------------------------------------------------------------
No. The Conversion will have no effect on the balance or terms of any savings
account or loan, and your deposits will continue to be federally insured by the
Federal Deposit Insurance Corporation ("FDIC") to the maximum legal limit. YOUR
SAVINGS ACCOUNT IS NOT BEING CONVERTED TO STOCK.
WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS?
- --------------------------------------------------------------------------------
Certain past and present depositors of the Association, the Holding Company's
Employee Stock Ownership Plan and members of the general public.
HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE?
- --------------------------------------------------------------------------------
Empire Federal Bancorp, Inc., is offering up to X,XXX,000 shares of common
stock, subject to adjustment as described in the Prospectus, at a price of
$10.00 per share through the Prospectus.
HOW MUCH STOCK MAY I BUY?
- --------------------------------------------------------------------------------
The minimum order is 25 shares. No person alone may purchase more than $125,000
of the common stock issued in the Conversion. No person together with associates
of and persons acting in concert with such person, may purchase more than
$250,000 of the common stock issued in the Conversion.
DO MEMBERS HAVE TO BUY STOCK?
- --------------------------------------------------------------------------------
No. However, the Conversion will allow the Association's depositors an
opportunity to buy stock and become charter shareholders of the holding company
for the local financial institution with which they do business.
HOW DO I ORDER STOCK?
- --------------------------------------------------------------------------------
You must complete the enclosed Stock Order Form and the Certification Form.
Instructions for completing your Stock Order Form and Certification Form are
contained in this packet. Your order must be received by Noon, Mountain Time, on
XXXX X, 1996.
HOW MAY I PAY FOR MY SHARES OF STOCK?
- --------------------------------------------------------------------------------
First, you may pay for stock by check, cash or money order. Interest will be
paid by the Association on these funds at the passbook rate, which is currently
___% per annum, from the day the funds are received until the completion or
termination of the Conversion. Second, you may authorize us to withdrawal funds
from your Association savings account or certificate of deposit for the amount
of funds you specify for payment. You will not have access to these funds from
the day we receive your order until completion or termination of the Conversion.
CAN I PURCHASE SHARES USING FUNDS IN MY ASSOCIATION IRA ACCOUNT?
- --------------------------------------------------------------------------------
Federal regulations do not permit the purchase of conversion stock from your
existing Association IRA account. To accommodate our depositors however, we have
made arrangements with an outside trustee to allow such purchases. Please call
our Stock Information Center for additional information.
WILL THE STOCK BE INSURED?
- --------------------------------------------------------------------------------
No. Like any other common stock, the Holding Company's stock will not be
insured.
WILL DIVIDENDS BE PAID ON THE STOCK?
- --------------------------------------------------------------------------------
The Board of Directors of the Holding Company will consider whether to pay a
cash dividend in the future, subject to regulatory limits and requirements. No
decision has been made as to the amount or timing of such dividends, if any.
HOW WILL THE STOCK BE TRADED?
- --------------------------------------------------------------------------------
The Holding Company's stock will trade on the Nasdaq National Market under the
symbol "XXXX". However, no assurance can be given that an active and liquid
market will develop.
ARE OFFICERS AND DIRECTORS OF THE ASSOCIATION PLANNING TO PURCHASE STOCK?
- --------------------------------------------------------------------------------
Yes! The Association's officers and directors plan to purchase, in the
aggregate, $X00,000 worth of stock or approximately X.X% of the stock offered at
the midpoint of the offering range.
MUST I PAY A COMMISSION?
- --------------------------------------------------------------------------------
No. You will not be charged a commission or fee on the purchase of shares in the
Conversion.
SHOULD I VOTE?
- --------------------------------------------------------------------------------
Yes. Your "YES" vote is very important!
PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS!
WHY DID I GET SEVERAL PROXY CARDS?
- --------------------------------------------------------------------------------
If you have more than one account, you could receive more than one proxy card,
depending on the ownership structure of your accounts.
HOW MANY VOTES DO I HAVE?
- --------------------------------------------------------------------------------
Your proxy card(s) show(s) the number of votes you have. Every depositor
entitled to vote may cast one vote for each $100, or fraction thereof, on
deposit as of the voting record date.
MAY I VOTE IN PERSON AT THE SPECIAL MEETING?
- --------------------------------------------------------------------------------
Yes, but we would still like you to sign and mail your proxy today. If you
decide to revoke your proxy you may do so by giving notice at the special
meeting.
FOR ADDITIONAL INFORMATION YOU MAY CALL OUR STOCK INFORMATION CENTER BETWEEN
X:00 A.M. AND X:00 P.M. MONDAY THROUGH FRIDAY.
- --------------------------------------------------------------------------------
STOCK INFORMATION CENTER (406) XXX-XXXX
- --------------------------------------------------------------------------------
Empire Federal Bancorp, Inc.
123 South Main Street
Livingston, Montana 59047-1099
Phone (406) 222-1981
Fax (406) 222-1987
<PAGE>
PROXY GRAM
We recently forwarded to you a proxy statement and related materials regarding
a proposal to convert Empire Federal Savings and Loan Association from a
federally chartered mutual savings and loan association to a federally
chartered capital stock savings bank.
YOUR VOTE ON OUR PLAN OF CONVERSION HAS NOT YET BEEN RECEIVED. FAILURE TO VOTE
HAS THE SAME EFFECT AS VOTING AGAINST THE CONVERSION.
Your vote is important to us, and we, therefore, are requesting that you
sign the enclosed proxy card and return it promptly in the enclosed postage-
paid envelope.
Voting for the Conversion does not obligate you to purchase stock or affect
the terms or insurance on your accounts.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND YOU VOTE "FOR" THE CONVERSION.
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
Livingston, Montana
Beverly D. Harris
President and Chief Executive Officer
If you mailed the proxy, please accept our thanks and disregard this request.
For further information call (406) XXX-XXXX.
- ----------------------------------------------------------------------------
The shares of common stock being offered are not savings accounts or deposits
and are not insured by the Federal Deposit Insurance Corporation, the Bank
Insurance Fund or any other governmental agency. This is not an offer to sell
or a solicitation of an offer to buy stock. The offer is made only by the
Prospectus.
<PAGE>
STOCK GRAM
We are pleased to announce that Empire Federal Savings and Loan Association
("Association") is offering shares of common stock in a subscription and
community Offering. The sale of stock in connection with the offering will
enable the Association to raise additional capital to support and enhance
its current franchise.
We previously mailed to you a PROSPECTUS providing detailed information about
the association's operations and the proposed stock offering. We urge you
to read this carefully.
We invite our loyal customers and community members to become shareholders of
EMPIRE FEDERAL BANCORP, INC., (THE PROPOSED HOLDING COMPANY FOR EMPIRE FEDERAL
SAVINGS AND LOAN ASSOCIATION). If you are interested in purchasing the
common stock of Empire Federal Bancorp, Inc., you must submit your Stock
Order Form, Certification Form and payment prior to NOON, MOUNTAIN TIME,
LIVINGSTON, MONTANA, ON XXXXX XX, 1996.
Should you have additional questions regarding the stock offering or need
additional materials, please call the Stock Information Center at (406)
XXX-XXXX or stop by the Stock Information Center at 123 South Main Street
in Livingston.
The shares of common stock being offered are not savings accounts or deposits
and are not insured by the Federal Deposit Insurance Corporation, the Bank
Insurance Fund or any other governmental agency. This is not an offer to sell
or a solicitation of an offer to buy stock. The offer is made only by the
Prospectus.
<PAGE>
STOCK ORDER FORM & Empire Federal Savings
CERTIFICATION FORM and Loan Association
Note: Please read the Stock Order Form Guide and Instructions on the back
of this form before completion.
- ------------------------------------------------------------------------------
DEADLINE
The Subscription and Community Offering ends at Noon, Mountain Time, XXXX xx,
1996. Your Stock Order Form and Certification Form, properly executed and with
the correct payment, must be received at the address on the bottom of this
form by this deadline, or it will be considered void.
NUMBER OF SHARES
(1) Number of Shares Price Per Share (2) Total Amount Due
x $10.00 =
THE MINIMUM NUMBER OF SHARES THAT MAY BE SUBSCRIBED FOR IS 25, and the
maximum purchase is x,xxx shares in the Subscription Offering and Community
Offering, respectively. No person alone may purchase more than $125,000 of
the shares issued in the Conversion. No person, together with associates of
and persons acting in concert with such person, may purchase more than $250,000
of the shares of the Common Stock in the Conversion. The price per share is
based upon a valuation that is subject to review prior to filling individual
stock orders.
- ------------------------------------------------------------------------------
METHOD OF PAYMENT
(3) [ ] I authorize Empire Federal Savings and Loan Association to make
withdrawals from my Empire Savings account(s) shown below, and
understand that the amounts will not otherwise be available for
withdrawal:
(4) [ ] Enclosed is a check, bank draft or money order payable to Empire
Federal Savings and Loan Association for $ (or cash if presented
in person).
ACCOUNT NUMBER(S) AMOUNT(S)
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
TOTAL WITHDRAWAL
---------------------
PURCHASE INFORMATION
(5) [ ] Check here if you are a director, officer or employee of Empire
Federal Savings and Loan Association or a member of such person's
immediate family.
[ ] Check here if you are a depositor or a borrower and enter below
information for all accounts you had at the Eligibility Record Date
(March 31, 1995), Supplemental Eligibility Record Date (XXXX XX,
1996) or the Voting Record Date (XXXX XX, 1996). If additional
space is needed, please utilize the back of this form. Please
confirm account(s) by initializing here. ___________
ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
- ------------------------------------------------------------------------------
(6) STOCK REGISTRATION
<TABLE>
<CAPTION>
<S> <C> <C>
[ ] Individual [ ] Uniform Transfer to Minors [ ] Partnership
[ ] Joint Tenants [ ] Uniform Gift to Minors [ ] Individual Retirement Account
[ ] Tenants in Common [ ] Corporation [ ] Fiduciary/Trust (Under Agreement Dated _______)
</TABLE>
---------------------------------------------------------------------------
Name Social Security or Tax I.D.
---------------------------------------------------------------------------
Name Daytime Telephone
---------------------------------------------------------------------------
Street Address Evening Telephone
---------------------------------------------------------------------------
City State Zip Code County of Residence
---------------------------------------------------------------------------
NASD AFFILIATION (This section only applies to those individuals who meet
the delineated criteria)
[ ] Check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply
with conditions under which an exemption from the NASD's Interpretation With
Respect to Free-Riding and Withholding is available, you agree, if you
have checked the NASD affiliation box: (1)not to sell, transfer or hypothecate
the stock for a period of three months following the issuance, and (2)to
report this subscription in writing to the applicable NASD member within one
day of the payment therefor.
- -------------------------------------------------------------------------------
ACKNOWLEDGMENT By signing below, I acknowledge receipt of the Prospectus
dated XXXX xx, 1996 and that I have reviewed all provisions therein and
understand I may not change or revoke my order once it is received by
Empire Federal Savings and Loan Association. I also certify that this stock
order is for my account and there is no agreement or understanding regarding
any further sale or transfer of these shares. Federal regulations prohibit
any persons from transferring, or entering into any agreement directly
or indirectly to transfer, the legal or beneficial ownership of conversion
subscription rights or the underlying securities to the account of another
person. Empire Federal Savings and Loan Association will pursue any and all
legal and equitable remedies in the event it becomes aware of the transfer of
subscription rights and will not honor orders known by it to involve such
transfer. Under penalties of perjury, I further certify that: (1)the social
security number or taxpayer identification number given above is correct;
and (2)I am not subject to backup withholding. You must cross out this item,
(2)above, if you have been notified by the Internal Revenue Service that you
are subject to backup withholding because of underreporting interest or
dividends on your tax return.
- -------------------------------------------------------------------------------
SIGNATURE Sign and date this form. When purchasing as a custodian,
corporate officer, etc., include your full title. An additional signature is
required only if payment is by withdrawal from an account that requires
more than one signature to withdraw funds. YOUR ORDER WILL BE FILLED IN
ACCORDANCE WITH THE PROVISIONS OF THE PROSPECTUS. THIS ORDER IS NOT VALID
IF THE STOCK ORDER FORM AND CERTIFICATION FORM ARE NOT BOTH SIGNED. If you
need help completing this Form, you may call the Stock Information Center
at (406) xxx-xxxx.
------------------------------------------------------------------
Signature Title (if applicable) Date
------------------------------------------------------------------
Signature Title (if applicable) Date
------------------------------------------------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
Date Rec'd ______/_______/________ Order #_______ Batch#____
OFFICE USE Check # __________________________ Category _____
Amount $ _________________________ Initials _____
STOCK INFORMATION CENTER
123 South Main Street
Livingston, Montana
(406) XXX-XXXX
<PAGE>
Empire Federal
Bancorp, Inc.
Stock Ownership Guide
______________________________________________________________________________
Individual- The Stock is to be registered in an individual's name only. You
may not list beneficiaries for this ownership.
Joint Tenants- Joint tenants with right of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the
death of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common- Tenants in common may also identify two or more owners.
When stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or
sale of shares held by tenants in common. You may not list beneficiaries for
this ownership.
Individual Retirement Account- Individual Retirement Account ("IRA") holders
may make stock purchases from their deposits through a pre-arranged "trustee-
to-trustee" transfer. Stock may only be held in a self-directed IRA. The
Empire Federal Savings and Loan Association does not offer a self-directed
IRA. Please contact the Stock Information Center if you have any questions
about your IRA account or to obtain a list of local brokers who will open a
self-directed IRA, or check with your broker. There will be no early
withdrawal or IRS penalties incurred by these transactions.
Uniform Gift to Minors- For residents of many states, stock may be held in
the name of a custodian for the benefit of a minor under the Uniform Transfer
to Minors Act. For residents in other states, stock may be held in a similar
type of ownership under the Uniform Gift to Minors Act of the individual
states. For either ownership, the minor is the actual owner of the stock with
the adult custodian being responsible for the investment until the child
reaches legal age.
Instructions: See your legal advisor if you are unsure about the correct
registration of your stock.
On the first line, print the first name, middle initial and last name of the
custodian, with the abbreviation "CUST" after the name. Print the first name,
middle initial and last name of the minor on the second "NAME" line. Only
one custodian and one minor may be designated.
Corporation/Partnership- Corporations/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. To have
depositor rights, the Corporation/Partnership must have an account in the
legal name. Please contact the Stock Information Center to verify depositor
rights and purchase limitations.
Fiduciary/Trust- Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or are
pursuant to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first "NAME" line, print the first name, middle initial
and last name of the fiduciary if the fiduciary is an individual. If the
fiduciary is a corporation, list the corporate title on the first "NAME" line.
Following the name, print the fiduciary "title" such as trustee, executor,
personal representative, etc.
On the second "NAME" line, print either the name of the maker, donor or
testator OR the name of the beneficiary. Following the name, indicate the
type of legal document establishing the fiduciary relationship (agreement,
court order, etc.). In the blank after "Under Agreement Dated", fill in the
date of the document governing the relationship. The date of the document
need not be provided for a trust created by a will.
An example of fiduciary ownership of stock in the case of a trust is:
John D. Smith, Trustee for Thomas A. Smith Under Agreement Dated 06/09/87
Definition of Associate
______________________________________________________________________________
The term "associate" of a person is defined to mean (i)any corporation or
other organization (other than the Association or a majority owned subsidiary
of the Association) of which such person is a director, 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 a
trustee or in a similar fiduciary capacity, provided, however, that such
term shall not include any tax-qualified employee stock benefit plan of the
Association in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity; and (iii)any relative
or spouse of such person, or any relative of such person, who either has
the same home as such person or who is a director or officer of the
Association or any of its parents or subsidiaries.
<PAGE>
CERTIFICATION FORM
(This Form Must Accompany A Signed Stock Order Form)
I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE
("COMMON STOCK"), OF EMPIRE FEDERAL BANCORP, INC., ("HOLDING COMPANY") ARE
NOT FEDERALLY INSURED AND ARE NOT GUARANTEED BY, THE ASSOCIATION OR THE
FEDERAL GOVERNMENT.
If anyone asserts that the shares of Common Stock are federally insured or
guaranteed, or are as safe as an insured deposit, I should call the Office
of Thrift Supervision Western Regional Director, John F. Robinson, at (415)
616-1500.
I further certify that, before purchasing the shares of Common Stock of the
Holding Company, I received a copy of the Prospectus dated, XXXXX xx, 1996
which discloses the nature of the shares of Common Stock being offered thereby
and describes the following risks involved in an investment in the Common
Stock under the heading "Risk Factors" beginning on page X of the Prospectus.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Signature Signature
(Note: If stock is to be held jointly, both parties must sign)
Date:
____________________
<PAGE>
Empire Federal Savings
and Loan Association
Item Instruction
Items 1 and 2- Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares by the subscription price of $10.00 per share. The minumum purchase is
25 shares. The maximum purchase amount in the Conversion by any person is
$125,000 of the shares in the Conversion. No person, together with associates of
and persons acting in concert with such person, may purchase more than $250,000
of the shares of the Common Stock in the Conversion.
Empire Federal Savings and Loan Association has reserved the right to reject
the subscription of any order received in the Community Offering, in whole or
in part.
Item 3- Payment for shares may be made in cash (only if delivered by you in
person) or by check, bank draft or money order made payable to Empire Federal
Savings and Loan Association. DO NOT MAIL CASH. If you choose to make a cash
payment, take your Stock Order Form, signed Certification Form and payment
in person to Empire Federal Savings and Loan Association. Your funds will earn
interest at Empire Federal Savings and Loan Association's passbook rate,
currently xxx% per annum.
Item 4- To pay by withdrawal from a savings account or certificate at Empire
Federal Savings and Loan Association, insert the account number(s) and the
Amount(s) you wish to withdraw from each account. If more than one
signature is required to withdraw, each must sign in the Signature box on the
front of this form. To withdraw from an account with checking privileges,
please write a check. No early withdrawal penalty will be charged on funds used
to purchase our stock. A hold will be placed on the account(s) for the
amount(s) you show. Payments will remain in certificate account(s) until the
stock offering closes. However, if a partial withdrawal reduces the balance
of a certificate account to less than the applicable minimum, the remaining
balance will thereafter earn interest at the passbook rate.
Item 5- Please check this box if you were a depositor on the Eligibility
Record Date (March 31, 1995), and/or a depositor on the Supplemental
Eligibility Record Date (XXXX XX, 1996) or a depositor on the Voting
Record Date (XXX XX, 1996) and list all names on the account(s) and all
account number(s) of those accounts you had at these dates to ensure proper
identification of your purchase rights.
Item 6 and 7- The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Empire Federal
Savings and Loan Association common stock. Print the name(s) in which you want
the stock registered and the mailing address of the registration. Include the
first name, middle initial and last name of the shareholder. Avoid the use
of two initials. Please omit words that do not affect ownership rights,
such as "Mrs.", "Mr.", "Dr.", "special account", etc.
Subscription rights are not transferable. If you are a qualified member, to
protect your priority over other purchasers as described in the Prospectus,
you must take ownership in at least one of the account holder's names.
Enter the Social Security or Tax I.D. number of one registered owner. This
registered owner must be listed on the first "NAME" line. Be sure to include
your telephone number because we will need to contact you if we cannot
execute your order as given. Review the Stock Ownership Guide on this page
and refer to the instructions for Uniform Gift to Minors/Uniform Transfer to
Minors and Fiduciaries.
Account Title (Names on Accounts) Account Number
---------------------------------------------------------------------
--------------------------------------------
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--------------------------------------------
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--------------------------------------------
---------------------------------------------------------------------
--------------------------------------------
---------------------------------------------------------------------
EXHIBIT 99.3
Appraisal Agreement with Keller & Company, Inc.
<PAGE>
KELLER & COMPANY, INC.
555 Metro Place North
Suite 524
Dublin, Ohio 43017
(614) 766-1426
(614) 766-1459 FAX
July 24, 1996
The Board of Directors
Empire Federal Savings and Loan
Association
123 S. Main Street
PO Box 1099
Livingston, MT 59047-1099
Re: Conversion Valuation Agreement
Attn: Beverly D. Harris, President
Keller & Company, Inc. (hereinafter referred to as KELLER) hereby
proposes to prepare an independent conversion appraisal of Empire Federal
Savings and Loan Association, Livingston, Montana (hereinafter referred to as
EMPIRE FEDERAL), relating to the conversion of EMPIRE FEDERAL from a mutual to a
stock institution. KELLER will provide a pro forma valuation of the market value
of the shares to be sold in the proposed conversion of EMPIRE FEDERAL.
KELLER is a financial consulting firm that primarily serves the
financial institution industry. KELLER is experienced in evaluating and
appraising thrift institutions and thrift institution holding companies. KELLER
is an experienced conversion appraiser for filings with the Federal Deposit
Insurance Corporation ("FDIC") and the Office of Thrift Supervision ("OTS"), and
is also approved by the Internal Revenue Service as an expert in thrift stock
valuations.
KELLER agrees to prepare the conversion appraisal in the format
required by the OTS in a timely manner for prompt filing with the OTS and the
Securities and Exchange Commission. KELLER will provide any additional
information as requested and will complete appraisal updates in accordance with
regulatory requirements.
1
<PAGE>
The appraisal report will provide a detailed description of EMPIRE
FEDERAL, including its financial condition, operating performance, asset
quality, rate sensitivity position, liquidity level and management
qualifications. The appraisal will include a description of EMPIRE FEDERAL's
market area, including both economic and demographic characteristics and trends.
An analysis of other publicly-traded thrift institutions will be performed to
determine a comparable group, and adjustments to the appraised value will be
made based on a comparison of EMPIRE FEDERAL with the comparable group.
In making its appraisal, KELLER will reply upon the information in the
Subscription and Community Offering Circular (Prospectus), including the
financial statements. Among other factors, KELLER will also consider the
following: the present and projected operating results and financial condition
of EMPIRE FEDERAL; the economic and demographic conditions in EMPIRE FEDERAL's
existing marketing area; pertinent historical financial and other information
relating to EMPIRE FEDERAL; a comparative evaluation of the operating and
financial statistics of EMPIRE FEDERAL with those of other thrift institutions;
the proposed price per share; the aggregate size of the offering of common
stock; the impact of the conversion on EMPIRE FEDERAL's capital position and
earnings potential; EMPIRE FEDERAL's proposed dividend policy; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities. In preparing the appraisal, KELLER will rely solely
upon, and assume the accuracy and completeness of, financial and statistical
information provided by EMPIRE FEDERAL, and will not independently value the
assets or liabilities of EMPIRE FEDERAL in order to prepare the appraisal.
Upon completion of the conversion appraisal, KELLER will make a
presentation to the board of directors of EMPIRE FEDERAL to review the content
of the appraisal, the format and the assumptions. A written presentation will be
provided to each board member.
For its services in making this appraisal, KELLER's fee will be
$17,000, plus out-of-pocket expenses not to exceed $1,000. The appraisal fee
will include the preparation of two valuation updates. All additional valuation
updates will be subject to an additional fee of $1,000 each. Upon the acceptance
of this proposal, KELLER shall be paid a retainer of $3,000 to be applied to the
total appraisal fee of $17,000, the balance of which will be payable at the time
of the completion of the appraisal.
2
<PAGE>
EMPIRE FEDERAL agrees, by the acceptance of this proposal, to indemnify
KELLER and its employees and affiliates for certain costs and expenses,
including reasonable legal fees, in connection with claims or litigation
relating to the appraisal and arising out of any misstatement or untrue
statement of a material fact in information supplied to KELLER by EMPIRE FEDERAL
or by an intentional omission by EMPIRE FEDERAL to state a material fact in the
information so provided, except where KELLER has been negligent or at fault.
This proposal will be considered accepted upon the execution of the two
enclosed copies of this agreement and the return of one executed copy to KELLER,
accompanied by the specified retainer.
KELLER & COMPANY, INC.
(signature of Michael R. Keller)
By: /s/Michael R. Keller
Michael R. Keller
President
EMPIRE FEDERAL SAVINGS AND LOAN
ASSOCIATION
(signature of Beverly D. Harris)
By: /s/Beverly D. Harris
Beverly D. Harris
President
Date: August 7, 1996
3
<PAGE>
KELLER & COMPANY, INC.
555 Metro Place North
Suite 524
Dublin, Ohio 43017
(614) 766-1426
(614) 766-1459 FAX
July 24, 1996
The Board of Directors
Empire Federal Savings and Loan
Association
123 S. Main Street
PO Box 1099
Livingston, MT 59047-1099
Re: Business Plan Proposal
Attn: Beverly D. Harris, President
This letter represents our proposal to prepare a complete Business Plan
for Empire Federal Savings and Loan Association ("Empire Federal" or the
"Association") to fulfill the requirements of the Office of Thrift Supervision
relating to the Association's stock conversion. The Plan will focus on Empire
Federal's new three-year pro formas, the conversion impact on the Association
and the planned use of proceeds.
Keller & Company is experienced in preparing business plans for filing
with and approval by all regulatory agencies. We prepared thirty business plans
in 1994, thirty-two in 1995 and twenty to date in 1996, and all have been
approved. Your Plan will be based on the established format and guidelines
incorporated in the attached Exhibit A. We will prepare the three-year pro
formas and each discussion section in accordance with those requirements and
based on your input. Our objective is to ensure that your Business Plan is in
compliance with all applicable requirements, and that management and directorate
are knowledgeable of and comfortable with the assumptions, commitments and
projections contained in the Plan, making the Plan useful for the future.
Exhibit B provides a sample set of typical pro formas. Your pro formas
will incorporate the most current interest rate projections available. Our
procedure is to request key financial information, including recent lending
activity, savings activity, costs and yields and other data from Empire Federal.
Based on a review of this information, I will then meet with management to
discuss your plans and expectations for 1996, 1997 and 1988, focusing on items
including use of proceeds, deposit growth expectations, loan origination
projections, new products and services, increases in general valuation
allowance, new branches or capital improvements, increases in fixed assets,
investment strategy, increases in board fees and total compensation. We will
then prepare financial projections tying the beginning figures to your most
recent quarterly balances, incorporating your current yields on asset items and
your current costs of
<PAGE>
Board of Directors
July 24, 1996
Page 2
interest-bearing liabilities. Assets and liabilities will
be repriced based on their maturity period, with such items tied to rate indices
and their yields and costs adjusting based on interest rate trends. The
projections will be based on your actual performance in 1995 and 1996, in
conjunction with the input from our discussions. We can introduce numerous
scenarios for internal use as part of the preparation of the business plan to
show the impact of alternative strategies, the impact of the one-time SAIF
assessment and subsequent reduced insurance premiums.
With each set of pro formas, we will send you a discussion summary of
the assumptions for easy review and comments (Exhibit C). After your review of
the pro formas, we will make any adjustments that are required. When the pro
formas are complete, we will provide you with the final pro forma financial
statements, as well as formas for the holding company (Exhibit D).
With regard to the Business Plan text, we will complete each section in
draft form for your review,a nd revise each section based on your comments and
requests. We will also send copies to your accounting firm and counsel for their
input and comments. The Plan will be in full compliance with all regulatory
requirements. We also prepare a quarterly comparison chart each quarter for
presentation to the board showing the quarterly variance in actual performance
relative to projections and provide comments on the variance.
Our fee for the preparation of the Business Plan text and pro formas is
$5,000, including out-of-pocket expense for travel, copying and binding.
I look forward to possibly working with you and would be pleased to
meet with you to discuss our proposal and provide samples of our work.
Sincerely,
KELLER & COMPANY, INC.
(signature of Michael R. Keller)
By: /s/Michael R. Keller
Michael R. Keller
President
MRK/gf
Enclosure
Accepted this 7th day of August, 1996.
(signature of Beverly D. Harris)
By: /s/Beverly D. Harris
Beverly D. Harris
President
<PAGE>
EXHIBIT 99.5
Proxy Statement for Special Meeting of Members of
Empire Federal Savings and Loan Association
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
123 South Main Street
Livingston, Montana 59047
(406) 222-1981
NOTICE OF SPECIAL MEETING OF MEMBERS
To be held on _________ __, 1996
Notice is hereby given that a special meeting ("Special Meeting") of
members of Empire Federal Savings and Loan Association ("Association") will be
held at the Association's office at 123 South Main Street, Livingston, Montana,
on _________, _________ __, 1996, at __:00 _.m., Mountain Time. Business to be
taken up at the Special Meeting shall be:
(1) To approve a Plan of Conversion adopted by the Board of Directors
on August 29, 1996 to convert the Association from a federally chartered mutual
savings and loan association to a federally chartered capital stock savings bank
to be known as "Empire Federal Savings Bank," to be held as a wholly-owned
subsidiary of a new holding company, Empire Federal Bancorp, Inc.
("Conversion"), including the adoption of a Federal Stock Charter and Bylaws for
the Association, pursuant to the laws of the United States and the rules and
regulations of the Office of Thrift Supervision ("OTS"); and
(2) To consider and vote upon any other matters that may lawfully come
before the Special Meeting.
Note: As of the date of mailing of this Notice, the Board of
Directors is not aware of any other matters that may come
before the Special Meeting.
The members entitled to vote at the Special Meeting shall be those
members of the Association, at the close of business on _________ __, 1996, and
who continue as members until the Special Meeting, and should the Special
Meeting be, from time to time, adjourned to a later time, until the final
adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
ERNEST A. SANDBERG
SECRETARY
Livingston, Montana
__________ __, 1996
PLEASE SIGN AND RETURN PROMPTLY EACH PROXY CARD YOU RECEIVE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. THIS WILL ASSURE NECESSARY REPRESENTATION AT THE SPECIAL
MEETING, BUT WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU SO DESIRE. THE
PROXY IS SOLICITED ONLY FOR THIS SPECIAL MEETING (AND ANY ADJOURNMENTS THEREOF)
AND WILL NOT BE USED FOR ANY OTHER MEETING. YOU MAY REVOKE YOUR WRITTEN PROXY BY
WRITTEN INSTRUMENT DELIVERED TO ERNEST A. SANDBERG, SECRETARY, EMPIRE FEDERAL
SAVINGS AND LOAN ASSOCIATION, AT THE ABOVE ADDRESS AT ANY TIME PRIOR TO OR AT
THE SPECIAL MEETING.
<PAGE>
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
123 South Main Street
Livingston, Montana 59047
(406) 222-1981
PROXY STATEMENT
__________ __, 1996
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION FOR USE AT A SPECIAL MEETING OF
MEMBERS TO BE HELD ON _________, _________ __, 1996, AND ANY ADJOURNMENT OF THAT
MEETING, FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING.
YOUR BOARD OF DIRECTORS AND MANAGEMENT URGE YOU TO VOTE FOR THE PLAN OF
CONVERSION.
PURPOSE OF MEETING -- SUMMARY
A special meeting of members ("Special Meeting") of Empire Federal
Savings and Loan Association ("Association") will be held at the Association's
office at 123 South Main Street, Livingston, Montana, on _________, _________
__, 1996, at __:00 _.m., Mountain Time, for the purpose of considering and
voting upon a Plan of Conversion from Federal Mutual Savings and Loan
Association to Federal Stock Savings Bank and Formation of a Holding Company
("Plan of Conversion"), which, if approved by a majority of the total votes of
the members eligible to be cast, will permit the Association to convert from a
federally chartered mutual savings and loan association to a federally chartered
capital stock savings bank, to be known as "Empire Federal Savings Bank," to be
held as a subsidiary of Empire Federal Bancorp, Inc. ("Holding Company"), a
newly organized Delaware corporation formed by the Association. The conversion
of the Association and the acquisition of control of the Association by the
Holding Company are collectively referred to herein as the "Conversion."
Members entitled to vote on the Plan of Conversion are members of the
Association as of _________ __, 1996, and who continue as members until the
Special Meeting, and should the Special Meeting be, from time to time, adjourned
to a later time, until the final adjournment thereof. The Conversion requires
the approval of not less than a majority of the total votes eligible to be cast
at the Special Meeting.
The Plan of Conversion provides in part that, after receiving final
authorization from the Office of Thrift Supervision ("OTS"), the Association
will offer for sale shares of common stock of the Holding Company ("Common
Stock"), through the issuance of nontransferable subscription rights
("Subscription Rights"), in order of priority, to (i) depositors with $50.00 or
more on deposit at the Association as of March 31, 1995 ("Eligible Account
Holders"), (ii) the Association's employee stock ownership plan ("ESOP"), a
tax-qualified employee benefit plan, (iii) depositors with $50.00 or more on
deposit at the Association as of ________ __, 1996 ("Supplemental Eligible
Account Holders"), and (iv) depositors of the Association as of _________ __,
1996 ("Voting Record Date") and borrowers of the Association with loans
outstanding as of _________ __, 1996 which continue to be outstanding as of the
Voting Record Date ("Other Members"), subject to the priorities and purchase
limitations set forth in the Plan of Conversion ("Subscription Offering").
Concurrently, but subject to the prior rights of holders of Subscription Rights,
the Holding Company is offering the Common Stock for sale to members of the
general public through a direct community offering ("Direct Community Offering")
with preference given to natural persons who are permanent residents of Park,
Gallatin and Sweet Grass Counties of Montana ("Local Community"). The
Subscription Offering and the Direct Community Offering are at times 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
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<PAGE>
selling group of broker-dealers managed by Charles Webb & Company, a division of
Keefe, Bruyette & Woods, Inc. in a syndicated offering ("Syndicated Community
Offering"). The Subscription and Direct Community Offering and the Syndicated
Community Offering are referred to collectively as the "Offerings." The Holding
Company and the Association reserve the right, in their absolute discretion, to
accept or reject, in whole or in part, any or all orders in the Direct Community
Offering or Syndicated Community Offering either at the time of receipt of an
order or as soon as practicable following the termination of the Offerings. If
an order is rejected in part, the purchaser does not have the right to cancel
the remainder of the order.
Adoption of a Federal Stock Charter ("Federal Stock Charter") and
Bylaws ("Bylaws") of the Association is an integral part of the Plan of
Conversion. Copies of the Plan of Conversion and the proposed Federal Stock
Charter and Bylaws for the Association are attached to this Proxy Statement as
exhibits. They provide, among other things, for the termination of voting rights
of members and their rights to receive any surplus remaining after liquidation
of the Association. These rights, except for the rights of Eligible Account
Holders and Supplemental Eligible Account Holders in the liquidation account,
will vest exclusively in the holders of the stock in the Holding Company and the
Association. For further information, see "THE CONVERSION -- Effects of
Conversion to Stock Form on Depositors and Borrowers of the Association" in the
Prospectus.
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
The Association is a federally chartered mutual savings and loan
association located in Livingston, Montana, which is approximately 26 miles east
of Bozeman, Montana. Chartered in 1923 as a Montana-chartered mutual savings and
loan association under the name "Empire Building and Loan Association," the
Association converted to a federal charter and adopted its current name in 1970.
In connection with the Conversion, the Association will convert to a federal
stock savings bank and change its name to "Empire Federal Savings Bank." The
Association is regulated by the OTS, its primary federal regulator, and the
Federal Deposit Insurance Corporation, the insurer of its deposits. The
Association's deposits are federally insured by the FDIC under the Savings
Association Insurance Fund. The Association is a member of the Federal Home Loan
Bank ("FHLB") System. At June 30, 1996, the Association had total assets of
$86.8 million, total deposits of $68.6 million and total equity of $15.9
million, or 18.3% of total assets, on a consolidated basis.
The Association is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings, including an emphasis on
loans for construction of residential dwellings. To a lesser extent, lending
activities also have included the origination of multi-family, commercial real
estate and home equity loans. The Association's primary business has been that
of a traditional thrift institution, originating loans in its primary market
area for its portfolio. At June 30, 1996, the Association's gross loan portfolio
totaled $43.1 million, of which 81.7% were one- to four-family residential
mortgage loans, 3.2% were construction loans (most of which related to one- to
four-family residences), 5.4% were multi-family loans, and 2.7% were commercial
real estate loans. In addition the Association has maintained a significant
portion of its assets in investment and mortgage-backed securities. Similar to
its lending activities, the Association's investment portfolio has been weighted
toward mortgage-backed securities secured by one- to four-family residential
properties. The portfolio also includes U.S. Government agency securities.
Investment securities, including mortgage-backed securities, totaled $39.1
million, or 45.0% of total assets, at June 30, 1996. In addition to interest and
dividend income on loans and investments, the Association receives other income
from the sale of insurance products through its wholly-owned subsidiary, Dime
Service Corporation.
The Association's market area is comprised of Park, Gallatin and Sweet
Grass Counties of South Central Montana. The Association faces strong
competition in its market area. See "RISK FACTORS -- Dependence on Local Economy
and Competition Within Market Area" in the Prospectus. The Association's
principal executive office is located at 123 South Main Street, Livingston,
Montana 59047, and its telephone number is (406) 222-1981.
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<PAGE>
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
The Board of Directors of the Association has fixed the close of
business on _________ __, 1996 as the record date ("Voting Record Date") for the
determination of members entitled to notice of and to vote at the Special
Meeting. All holders of the Association's savings or other authorized accounts
are members of the Association under its current charter. Any member as of the
close of business on the Voting Record Date who ceases to be a member prior to
the Special Meeting or any adjournment thereof shall not be entitled to vote at
the Special Meeting or any adjournment thereof.
Each eligible depositor member will be entitled at the Special Meeting
to cast one vote for each $100, or fraction thereof, of the aggregate withdrawal
value of all of his savings accounts in the Association as of the Voting Record
Date. Borrowers with loans outstanding as of _________ __, 1996, which continue
to be outstanding as of the Voting Record Date, will be entitled to cast one
vote for the period of time such borrowings remain in existence, in addition to
any votes such borrower may also be entitled to in his or her capacity as a
depositor. No member is entitled to cast more than 1,000 votes. Any number of
members present and voting, represented in person or by proxy, at the Special
Meeting will constitute a quorum.
Approval of the Plan of Conversion will require the affirmative vote of
a majority of the total outstanding votes of the Association's members eligible
to be cast at the Special Meeting. As of the Voting Record Date for the Special
Meeting, there were approximately ______ votes eligible to be cast, of which
_______ votes constitutes a majority.
PROXIES
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. Enclosed is a proxy which may be used by any eligible member
to vote on the Plan of Conversion. All properly executed proxies received by
management will be voted in accordance with the instructions indicated thereon
by the members giving such proxies. If no instructions are given, such proxies
will be voted in favor of the Plan of Conversion. If any other matters are
properly presented at the Special Meeting and may properly be voted on, all
proxies will be voted on such matters in accordance with the best judgment of
the proxy holders named therein. If the enclosed proxy is returned, it may be
revoked at any time before it is voted by written notice to the Secretary of the
Association, by submitting a later dated proxy, or by attending and voting in
person at the Special Meeting. The proxies being solicited are only for use at
the Special Meeting and at any and all adjournments thereof and will not be used
for any other meeting. Management is not aware of any other business to be
presented at the Special Meeting.
The Association, as trustee for individual retirement accounts at the
Association, will vote in favor of the Plan of Conversion, unless the beneficial
owner executes and returns the enclosed proxy for the Special Meeting or attends
the Special Meeting and votes in person.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by officers, directors or regular employees of the
Association, in person, by telephone or through other forms of communication
and, if necessary, the Special Meeting may be adjourned to an alternative date.
Such persons will be reimbursed by the Association for their reasonable
out-of-pocket expenses incurred in connection with such solicitation.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Association unanimously recommends that
you vote "FOR" the Plan of Conversion. Voting in favor of the Plan of Conversion
will not obligate any voter to purchase any stock of the Holding Company.
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<PAGE>
THE CONVERSION
The OTS and the Board of Directors of the Association have approved the
Plan of Conversion subject to approval by the members of the Association
entitled to vote on the matter and subject to the satisfaction of certain other
conditions imposed by the OTS in its approval. OTS approval, however, does not
constitute a recommendation or endorsement of the Plan of Conversion.
General
On August 29, 1996, the Association's Board of Directors adopted the
Plan of Conversion, pursuant to which the Association will convert from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank under the name "Empire Federal Savings Bank," to be held as a
wholly-owned subsidiary of the Holding Company, a newly formed Delaware
corporation. The Holding Company and the Association intend to pursue the
business strategy described in this Prospectus with the goal of enhancing
long-term shareholder value. Neither the Holding Company nor the Association has
any existing plan to pursue any possible business combination, and neither has
any agreement or understanding, written or oral, with respect to any possible
business combination.
The following discussion of the Plan of Conversion is qualified in its
entirety by reference to the Plan of Conversion, which is attached as Exhibit A
hereto. The OTS has approved the Plan of Conversion subject to the Plan's
approval by the members of the Association entitled to vote on the matter at the
Special Meeting and subject to the satisfaction of certain other conditions
imposed by the OTS in its approval.
If the Board of Directors of the Association decides for any reason,
such as possible delays resulting from overlapping regulatory processing or
policies or conditions that could adversely affect the Association's or the
Holding Company's ability to consummate the Conversion and transact its business
as contemplated herein and in accordance with the Association's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Association
will promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's registration statement from the SEC and
will take all steps necessary to consummate the Conversion and proceed with a
new offering without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Association
determines not to consummate the Conversion, the Association will issue and sell
the common stock of the Association. There can be no assurance that the OTS
would approve the Conversion if the Association decided to proceed without the
Holding Company. The following description of the Plan assumes that a holding
company form of organization will be utilized in the Conversion. In the event
that a holding company form of organization is not utilized, all other pertinent
terms of the Plan as described below will apply to the Conversion of the
Association from mutual to stock form of organization and the sale of the
Association's common stock.
The Conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the
Association. Under the Plan, 1,666,000 to 2,254,000 shares of Common Stock are
being offered for sale by the Holding Company at the Purchase Price of $10.00
per share. As part of the Conversion, the Association will issue all of its
newly issued common stock (1,000 shares) to the Holding Company in exchange for
50% of the net proceeds from the sale of Common Stock by the Holding Company.
The Plan of Conversion provides generally that (i) the Association will
convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings bank; (ii) the Common Stock will be offered
by the Holding Company in the Subscription Offering to persons having
Subscription Rights and in a Direct Community Offering to certain members
of the general public with preference given to natural persons residing in the
Local Community; (iii) if necessary, shares of Common Stock not subscribed for
in the
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<PAGE>
Subscription and Direct Community Offering will be offered to certain members of
the general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers pursuant to selected dealers agreements; and (iv) the
Holding Company will purchase all of the capital stock of the Association to be
issued in connection with the Conversion. The Conversion will be effected only
upon completion of the sale of at least 1,666,000 shares of Common Stock to be
issued pursuant to the Plan of Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of March 31, 1995); (ii) the Association's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of _________ __, 1996); and (iv) Other Members (depositors of the Association
as of __________ __, 1996, and borrowers of the Association with loans
outstanding as of ________ __, 199_, which continue to be outstanding as of
__________ __, 1996). Concurrent with the Subscription Offering and subject to
the prior rights of holders of Subscription Rights, the Holding Company is
offering the Common Stock for sale to certain members of the general public
through a Direct Community Offering.
Shares of Common Stock not sold in the Subscription and Direct
Community Offering may be offered in the Syndicated Community Offering.
Regulations require that the Syndicated Community Offering be completed within
45 days after completion of the Subscription Offering unless extended by the
Association or the Holding Company with the approval of the regulatory
authorities. If the Syndicated Community Offering is determined not to be
feasible, the Board of Directors of the Association will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion provides
that the Conversion must be completed within 24 months after the date of the
approval of the Plan of Conversion by the members of the Association.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Association.
The completion of the Offerings, however, is subject to market
conditions and other factors beyond the Association's control. No assurance can
be given as to the length of time after approval of the Plan of Conversion at
the Special Meeting that will be required to complete the Syndicated Community
Offering or other sale of the Common Stock. If delays are experienced,
significant changes may occur in the estimated pro forma market value of the
Holding Company and the Association as converted, together with corresponding
changes in the net proceeds realized by the Holding Company from the sale of the
Common Stock. In the event the Conversion is terminated, the Association would
be required to charge all Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
1,666,000 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion closes. If the Conversion is not
consummated by ___________ __, 1997 (45 days after the last day of the fully
extended Subscription Offering) and the OTS consents to an extension of time to
consummate the Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
Association's passbook rate (____% per annum as of the date hereof) from the
date payment is received until the funds are returned to the subscriber. If such
period is not extended, or, in any event, if the Conversion is not consummated
by ____________ __, 1997, all withdrawal authorizations will be terminated and
all funds held will be promptly returned together with accrued interest at the
Association's passbook rate from the date payment is received until the
Conversion is terminated.
Effects of Conversion to Stock Form on Depositors and Borrowers
of the Association
Voting Rights. Savings members and borrowers will have no voting rights
in the converted Association or the Holding Company and therefore will not be
able to elect directors of the Association or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings and borrower
members of the Association. Subsequent
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<PAGE>
to the Conversion, voting rights will be vested exclusively in the Holding
Company with respect to the Association and the holders of the Common Stock as
to matters pertaining to the Holding Company. Each holder of Common Stock shall
be entitled to vote on any matter to be considered by the stockholders of the
Holding Company. A stockholder will be entitled to one vote for each share of
Common Stock owned.
Savings Accounts and Loans. The Association's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the loan
accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Association.
Tax Effects. The Association has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Association
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Association immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Association in its
mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Association immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or loss will
be recognized to account holders upon the receipt or exercise of Subscription
Rights in the Conversion, except to the extent Subscription Rights are deemed to
have value as discussed below. Unlike a private letter ruling issued by the
Internal Revenue Service ("IRS"), an opinion of counsel is not binding on the
IRS and the IRS could disagree with the conclusions reached therein. In the
event of such disagreement, no assurance can be given that the conclusions
reached in an opinion of counsel would be sustained by a court if contested by
the IRS.
Based upon past rulings issued by the IRS, the opinion provides that
the receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan will be taxable to the
extent, if any, that the Subscription Rights are deemed to have a fair market
value. Keller & Company, Inc. ("Keller"), a financial consulting firm retained
by the Association, whose findings are not binding on the IRS, has indicated
that the Subscription Rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration and afford the recipients the right only to purchase shares of
the Common Stock at a price equal to its estimated fair market value, which will
be the same price paid by purchasers in the Direct Community Offering for
unsubscribed shares of Common Stock. If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders (if any)
and Other Members who exercise their Subscription Rights. The Association could
also recognize a gain on the distribution of such Subscription Rights. Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members are
encouraged to consult with their own tax advisors as to the tax consequences in
the event the Subscription Rights are deemed to have a fair market value.
The Association has also received an opinion from
Huppert and Swindlehurst, P.C., Livingston, Montana, that, assuming the
Conversion does not result in any federal income tax liability to the
Association, its account holders, or the Holding Company, implementation of
the Plan of Conversion will not result in any Montana income tax liability to
such entities or persons.
The opinions of Breyer & Aguggia and Huppert and Swindlehurst, P.C.
and the opinion from Keller are filed as exhibits to the Registration Statement.
See "ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
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Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in the Association at
the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the
Association, including certificates of deposit ("Savings Account(s)"), shall not
be entitled to share in any residual assets in the event of liquidation of the
Association. However, pursuant to OTS regulations, the Association shall, at the
time of the Conversion, establish a liquidation account in an amount equal to
its total equity as of the date of the latest statement of financial condition
contained herein.
The liquidation account shall be maintained by the Association
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Association. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related inchoate
interest in a portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder or a Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of such holder's "qualifying
deposit" in the Savings Account and the denominator is the total amount of the
"qualifying deposits" of all such holders. Such initial subaccount balance shall
not be increased, and it shall be subject to downward adjustment as provided
below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing day of the Association subsequent to March 31, 1995 is less than
the lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to March 31, 1995 or
_________ __, 1996 or (ii) the amount of the "qualifying deposit" in such
Savings Account on March 31, 1995 or _________ __, 1996, then the subaccount
balance for such Savings Account shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of a downward adjustment, such subaccount balance shall not be
subsequently increased, notwithstanding any increase in the deposit balance of
the related Savings Account. If any such Savings Account is closed, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Association (and only in
such event) each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Association is not the surviving institution shall be considered to
be a complete liquidation. In any such transaction the liquidation account shall
be assumed by the surviving institution.
REVIEW OF OTS ACTION
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves a plan of conversion pursuant to this part
may obtain review of such action by filing in the court of appeals of the United
States for the circuit in which the principal office or residence of such person
is located, or in the United States Court of Appeals for the District of
Columbia, a written petition praying that the final action of the OTS be
modified, terminated or set aside. Such petition must be filed within 30 days
after the publication of notice of such final action in the Federal Register, or
30 days after the mailing by the applicant of the notice to members as provided
for in 12 C.F.R. ss.563b.6(c), whichever is later. The further procedure for
review is as follows: A copy of the petition is forthwith transmitted to the OTS
by the clerk of the court and thereupon the OTS files in
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the court the record in the proceeding, as provided in Section 2112 of Title 28
of the United States Code. Upon the filing of the petition, the court has
jurisdiction, which upon the filing of the record is exclusive, to affirm,
modify, terminate, or set aside in whole or in part, the final action of the
OTS. Review of such proceedings is as provided in Chapter 7 of Title 5 of the
United States Code. The judgment and decree of the court is final, except that
they are subject to review by the United States Supreme Court upon certiorari as
provided in Section 1254 of Title 28 of the United States Code.
ADDITIONAL INFORMATION
The Holding Company has filed with the Securities and Exchange
Commission a Registration Statement on Form SB-2 (File No. 333-____) under the
Securities Act of 1933, as amended, with respect to the Common Stock offered in
the Conversion. The accompanying Prospectus does not contain all the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. Such information may be
inspected at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549; 500 West Madison Street, Suite
1400, Room 1100, Chicago, Illinois 60661; and 75 Park Place, New York, New York
10007. Copies may be obtained at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Association has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Association's Special Meeting
and certain other information. The accompanying Prospectus omits certain
information contained in such Application. The Application, including 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 94104.
Copies of the Holding Company's Certificate of Incorporation and Bylaws
may be obtained by written request to the Association.
All persons eligible to vote at the Special Meeting should review both
this Proxy Statement and the accompanying Prospectus carefully. However, no
person is obligated to purchase any Common Stock. For additional information,
you may call the Conversion Center at (406) ___-____.
BY ORDER OF THE BOARD OF DIRECTORS
ERNEST A. SANDBERG
SECRETARY
Livingston, Montana
__________ __, 1996
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN
PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED
PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED.
THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL
MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN INSTRUMENT DELIVERED TO THE
SECRETARY OF THE ASSOCIATION AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR
BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS IN THOSE JURISDICTIONS IN
WHICH IT IS LAWFUL TO MAKE SUCH OFFER.
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EXHIBIT A
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
LIVINGSTON, MONTANA
PLAN OF CONVERSION
FROM FEDERAL MUTUAL SAVINGS AND LOAN ASSOCIATION
TO FEDERAL STOCK SAVINGS AND LOAN ASSOCIATION
AND FORMATION OF A HOLDING COMPANY
INTRODUCTION
I. General
It is the desire of the Board of Directors to attract new capital to
the Association to increase its net worth, to support future savings growth, to
increase the amount of funds available for other lending and investment, to
provide greater resources for the expansion of customer services and to
facilitate future expansion by the Association. In addition, the Board of
Directors intends to implement stock option plans and other stock benefit plans
as part of the Conversion in order to attract and retain qualified directors and
officers. It is the further desire of the Board of Directors to reorganize the
Association as the wholly owned subsidiary of a holding company to enhance
flexibility of operations, diversification of business opportunities and
financial capability for business and regulatory purposes and to enable the
Association to compete more effectively with other financial service
organizations. Accordingly, on August 29, 1996, the Board of Directors of Empire
Federal Savings and Loan Association ("Association"), after careful study and
consideration, adopted by unanimous vote this Plan of Conversion ("Plan"), which
provides for the conversion of the Association from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank and the
concurrent formation of a holding company for the Association ("Holding
Company").
All capitalized terms contained in the Plan shall have the meanings
ascribed to them in Section II hereof.
Pursuant to the Plan, shares of Conversion Stock in the Holding Company
will be offered as part of the Conversion in a Subscription Offering pursuant to
nontransferable Subscription Rights at a predetermined and uniform price first
to the Association's Eligible Account Holders, second to the Tax-Qualified
Employee Stock Benefit Plans, third to Supplemental Eligible Account Holders of
record as of the last day of the calendar quarter preceding OTS approval of the
Association's application to convert to stock form, and fourth to Other Members
of the Association. Concurrently with the Subscription Offering, shares not
subscribed for in the Subscription Offering will be offered as part of the
Conversion to the general public in a Direct Community Offering. Shares
remaining may then be offered to the general public in an underwritten public
offering or otherwise. The aggregate Purchase Price of the Conversion Stock will
be based upon an independent appraisal of the Association and will reflect the
estimated pro forma market value of the Association, as a subsidiary of the
Holding Company.
The Conversion is subject to regulations of the Director of the OTS of
the United States Department of the Treasury pursuant to Section 5(i) of the
Home Owners' Loan Act; Part 563b of the Rules and Regulations Applicable to All
Savings Associations.
Consummation of the Conversion is subject to the approval of this Plan
and the Conversion by the OTS and by the affirmative vote of Members of the
Association holding not less than a majority of the total votes eligible to be
cast at a special meeting of the Members to be called to consider the
Conversion.
No change will be made in the Board of Directors or management of the
Association as a result of the Conversion.
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II. Definitions
As used in this Plan, the terms set forth below have the following
meanings:
A. Acting in Concert: (1) Knowing participation in a joint activity or
interdependent conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or (2) 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. A Person (as defined by 12 C.F.R.
ss.563b.2(a)(26)) who acts in concert with another Person ("other party") shall
also be deemed to be acting in concert with any Person who is also acting in
concert with that other party, except that any Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert with its trustee or a
Person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the Tax- Qualified Employee
Benefit Plan will be aggregated.
B. Associate: When used to indicate a relationship with any Person,
means (l) any corporation or organization (other than the Association or a
majority-owned subsidiary of the Association, or the Holding Company) of which
such Person is an officer or partner or is, directly or indirectly, the
beneficial owner of ten percent or more of any class of equity securities, (2)
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, except that it does not include a Tax- Qualified Employee Stock
Benefit Plan and (3) any relative or spouse of such Person or any relative of
such spouse, who has the same home as such Person or who is a director or
officer of the Association, any of its subsidiaries, or the Holding Company.
C. Association: Empire Federal Savings and Loan Association, in its
present form as a federally chartered mutual savings and loan association.
D. Capital Stock: Any and all authorized stock in the Converted
Association.
E. Common Stock: Any and all authorized common stock in the Holding
Company subsequent to the Conversion.
F. Conversion: (1) Amendment of the Association's Charter and Bylaws to
authorize issuance of shares of Capital Stock by the Converted Association and
to conform to the requirements of a Federal stock savings bank under the laws of
the United States and regulations of the OTS; (2) issuance and sale of
Conversion Stock by the Holding Company in the Subscription Offering and Direct
Community Offering; and (3) purchase by the Holding Company of the Capital Stock
of the Converted Association to be issued in the Conversion immediately
following or concurrently with the close of the sale of all Conversion Stock.
G. Conversion Stock: Holding Company stock to be issued and sold by the
Holding Company pursuant to the Plan.
H. Converted Association: The Association in its converted form of
organization as a Federally- chartered capital stock savings bank operating
under the title "Empire Federal Savings Bank," or such other appropriate title.
I. Direct Community Offering: The offering for sale of Conversion Stock
to the public.
J. Eligibility Record Date: March 31, 1995.
K. Eligible Account Holder: Holder of a Qualifying Deposit in the
Association on the Eligibility Record Date.
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L. FDIC: Federal Deposit Insurance Corporation.
M. Form AC Application: The application submitted to the OTS for
approval of the Conversion.
N. H-(e)1 Application: The application submitted to the OTS on OTS Form
H-(e)1 or Form H-(e)1-S, if applicable, for approval of the Holding Company's
acquisition of all of the Capital Stock.
O. Holding Company: A corporation to be formed by the Association under
state law for the purpose of becoming a holding company through the issuance and
sale of its stock under the Plan, and concurrent acquisition of 100% of the
Capital Stock of the Association to be issued pursuant to the Plan.
P. Holding Company Stock: Any and all authorized stock of the Holding
Company.
Q. Local Community: Park, Gallatin and Sweet Grass Counties, Montana.
R. Market Maker: A dealer (i.e., any Person who engages directly or
indirectly as agent, broker, or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (l) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system or furnishes bona fide competitive bid and offer quotations on request
and (2) is ready, willing and able to effect transactions in reasonable
quantities at his quoted prices with other brokers or dealers.
S. Members: All Persons or entities who qualify as members of the
Association pursuant to its Charter and Bylaws prior to the Conversion.
T. Officer: An executive officer of the Association, which includes the
Chairman of the Board, President, Executive Vice President, Senior Vice
Presidents, Vice Presidents in charge of principal business functions, the
Secretary and the Treasurer as well as any other person performing similar
functions.
U. Order Forms: Forms to be used for the purchase of Conversion Stock
sent to Eligible Account Holders and other parties eligible to purchase
Conversion Stock in the Subscription Offering pursuant to the Plan.
V. Other Member: Holder of a Savings Account (other than Eligible
Account Holders and Supplemental Eligible Account Holders) as of the Record Date
and borrowers from the Association as provided in the Association's Federal
Mutual Charter who continue to be borrowers from the Association as of the
Record Date.
W. OTS: Office of Thrift Supervision of the United States Department of
the Treasury.
X. Person: An individual, corporation, partnership, association, joint
stock company, trusts of natural Persons, unincorporated organization or a
government or any political subdivision thereof.
Y. Plan: This Plan of Conversion, which provides for the conversion of
the Association from a federally chartered mutual savings and loan association
to a federally chartered capital stock savings bank as a wholly owned subsidiary
of the Holding Company, as originally adopted by the Board of Directors or as
amended in accordance with the terms thereof.
Z. Qualifying Deposit: The deposit balance in any Savings Account as of
the Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable; provided, however, that no Savings Account with a deposit balance of
less than $50 shall constitute a Qualifying Deposit.
AA. Record Date: Date which determines which Members are entitled to
vote at the Special Meeting.
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BB. Registration Statement: The registration statement on Form SB-2 or
other applicable forms filed by the Holding Company with the SEC for the purpose
of registering the Conversion Stock under the Securities Act of 1933, as
amended.
CC. Savings Account(s): Withdrawable deposit(s) in the Association,
including certificates of deposit.
DD. SEC: Securities and Exchange Commission.
EE. Special Meeting: The special meeting of Members called for the
purpose of considering the Plan for approval.
FF. Subscription Offering: The offering of Conversion Stock to Eligible
Account Holders, Tax- Qualified Employee Stock Benefit Plans, Supplemental
Eligible Account Holders and Other Members under the Plan.
GG. Subscription Rights: Nontransferable, nonnegotiable, personal
rights of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans,
Supplemental Eligible Account Holders and Other Members to purchase Conversion
Stock.
HH. Supplemental Eligibility Record Date: The last day of the calendar
quarter preceding the approval of the Plan by the OTS.
II. Supplemental Eligible Account Holder: Holder of a Qualifying
Deposit in the Association (other than an Officer or director or their
Associates) on the Supplemental Eligibility Record Date.
JJ. Tax Qualified Employee Stock Benefit Plan: Any defined benefit plan
or defined contribution plan of the Association or Holding Company, such as an
employee stock ownership plan, bonus plan, profit-sharing plan or other plan,
which, with its related trust meets the requirements to be "qualified" under
section 401 of the Internal Revenue Code. A "non-tax-qualified employee stock
benefit plan" is any defined benefit plan or defined contribution plan that is
not so qualified.
III. Steps Prior to Submission of the Plan to the Members for Approval
Prior to submission of the Plan to the Members for approval, the
Association must receive approval from the OTS of the Form AC Application. Prior
to such regulatory approval:
A. The Board of Directors shall adopt the Plan by a vote of not less
than two-thirds of its entire membership.
B. The Association shall notify the Members of the adoption of the Plan
by publishing a statement in a newspaper having a general circulation in each
community in which the Association maintains an office.
C. A press release relating to the proposed Conversion may be submitted
to the local media.
D. Copies of the Plan as adopted by the Board of Directors shall be
made available for inspection at each office of the Association.
E. The Association shall cause the Holding Company to be incorporated
under state law and the Board of Directors of the Holding Company shall concur
in the Plan by at least a two-thirds vote.
F. As soon as practicable following the adoption of this Plan, the
Association shall file the Form AC Application, and the Holding Company shall
file the Registration Statement and the H-(e)1 Application. Upon receipt of
notification from the OTS that the Form AC Application is properly executed and
not materially
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incomplete, the Association shall publish notice of the filing of the Form AC
Application in a newspaper having a general circulation in each community in
which the Association maintains an office and/or by mailing a letter to each of
its Members, and shall publish such other notices of the Conversion as may be
required in connection with the H-(e)1 Application and by the regulations and
policies of the OTS.
G. The Association shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which shall
state that the Conversion will not result in any gain or loss for Federal income
tax purposes to the Association or its Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members. Receipt of a favorable opinion or
ruling is a condition precedent to completion of the Conversion.
IV. Meeting of Members
Subsequent to the approval of the Plan by the OTS, the Special Meeting
shall be scheduled in accordance with the Association's Bylaws. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to the
Special Meeting, the Association shall distribute proxy solicitation materials
to all Members and beneficial owners of accounts held in fiduciary capacities
where the beneficial owners possess voting rights, as of the Record Date. The
proxy solicitation materials shall include a copy of the proxy statement to be
used in connection with such solicitation ("Proxy Statement") and other
documents authorized for use by the regulatory authorities and may also include
a copy of the Plan and/or a prospectus ("Prospectus") as provided in Paragraph V
below. The Association shall also advise each Eligible Account Holder and
Supplemental Eligible Account Holder not entitled to vote at the Special Meeting
of the proposed Conversion and the scheduled Special Meeting, and provide a
postage prepaid card on which to indicate whether he wishes to receive the
Prospectus, if the Subscription Offering is not held concurrently with the proxy
solicitation.
Pursuant to OTS regulations, an affirmative vote of not less than a
majority of the total outstanding votes of the Members is required for approval
of the Plan. Voting may be in person or by proxy. The OTS shall be notified
promptly of the actions of the Members.
V. Summary Proxy Statement
The Proxy Statement furnished to Members may be in summary form,
provided that a statement is made in bold-face type that a more detailed
description of the proposed transaction may be obtained by returning an enclosed
postage prepaid card or other written communication requesting supplemental
information. Without prior approval of the OTS, the Special Meeting shall not be
held less than 20 days after the last day on which the supplemental information
statement is mailed to requesting Members. The supplemental information
statement may be combined with the Prospectus if the Subscription Offering is
commenced concurrently with or during the proxy solicitation of Members for the
Special Meeting.
VI. Offering Documents
The Holding Company may commence the Subscription Offering and,
provided that the Subscription Offering has commenced, may commence the Direct
Community Offering concurrently with or during the proxy solicitation of
Members. The Holding Company may close the Subscription Offering before the
Special Meeting, provided that the offer and sale of the Conversion Stock shall
be conditioned upon approval of the Plan by the Members at the Special Meeting.
The Association's proxy solicitation materials may require Eligible Account
Holders, Supplemental Eligible Account Holders (if applicable) and Other Members
to return to the Association by a reasonable certain date a postage prepaid card
or other written communication requesting receipt of a Prospectus with respect
to the Subscription Offering, provided that if the Prospectus is not mailed
concurrently with the proxy solicitation materials, the Subscription Offering
shall not be closed until the expiration of 30 days after the mailing of the
proxy solicitation materials. If the Subscription Offering is not commenced
within 45 days after the Special Meeting, the Association may transmit, not more
than 30 days prior to the commencement of the Subscription Offering, to each
Eligible Account Holder, Supplemental Eligible Account Holder and other eligible
subscribers who
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had been furnished with proxy solicitation materials a notice which shall state
that the Association is not required to furnish a Prospectus to them unless they
return by a reasonable date certain a postage prepaid card or other written
communication requesting the receipt of the Prospectus.
Prior to commencement of the Subscription Offering and the Direct
Community Offering, the Holding Company shall file the Registration Statement.
The Holding Company shall not distribute the final Prospectus until the
Registration Statement containing same has been declared effective by the SEC
and the Prospectus has been declared effective by the OTS.
VII. Combined Subscription and Community Offering
Instead of a separate Subscription Offering, all Subscription Rights
may be exercised by delivery of properly completed and executed Order Forms to
the Association or selling group utilized in connection with the Direct
Community Offering. If a separate Subscription Offering is not held, orders for
Conversion Stock in the Direct Community Offering shall first be filled pursuant
to the priorities and limitations stated in Paragraph IX.C., below.
VIII. Consummation of the Conversion
After receipt of all orders for Conversion Stock, and concurrently with
the execution thereof, the amendment of the Association's Federal mutual Charter
and Bylaws to authorize the issuance of shares of Capital Stock and to conform
to the requirements of a Federal capital stock savings and loan association will
be declared effective by the OTS, the amended Charter and Bylaws approved by the
Members will become effective. At such time, the Conversion Stock will be issued
and sold by the Holding Company, the Capital Stock to be issued in the
Conversion will be issued and sold to the Holding Company, and the Converted
Association will become a wholly owned subsidiary of the Holding Company. The
Converted Association will issue to the Holding Company 1,000 shares of its
common stock, representing all of the shares of Capital Stock to be issued by
the Converted Association, and the Holding Company will make payment to the
Converted Association of that portion of the aggregate net proceeds realized by
the Holding Company from the sale of the Conversion Stock under the Plan as may
be authorized or required by the OTS.
IX. Stock Offering
A. Number of Shares
The number of shares of Conversion Stock to be offered pursuant to the
Plan shall be determined initially by the Board of Directors of the Association
and the Board of Directors of the Holding Company in conjunction with the
determination of the Purchase Price (as that term is defined in Paragraph IX.B.
below). The number of shares to be offered may be subsequently adjusted by the
Board of Directors prior to completion of the offering.
B. Independent Evaluation and Purchase Price of Shares
All shares of Conversion Stock sold in the Conversion, including shares
sold in any Direct Community Offering, shall be sold at a uniform price per
share, referred to herein as the "Purchase Price." The Purchase Price shall be
determined by the Board of Directors of the Association and the Board of
Directors of the Holding Company immediately prior to the simultaneous
completion of all such sales contemplated by this Plan on the basis of the
estimated pro forma market value of the Association, as converted, at such time.
The estimated pro forma market value of the Association shall be determined for
such purpose by an independent appraiser on the basis of such appropriate
factors not inconsistent with the regulations of the OTS. Immediately prior to
the Subscription Offering, a subscription price range shall be established which
shall vary from 15% above to 15% below the average of the minimum and maximum of
the estimated price range. The maximum subscription price (i.e., the per share
amount to be remitted when subscribing for shares of Conversion Stock) shall
then be determined within the subscription price range by the Board of Directors
of the Association. The subscription price range and the number of shares
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to be offered may be revised after the completion of the Subscription Offering
with OTS approval without a resolicitation of proxies or Order Forms or both.
C. Method of Offering Shares
Subscription Rights shall be issued at no cost to Eligible Account
Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible
Account Holders and Other Members pursuant to priorities established by this
Plan and the regulations of the OTS. In order to effect the Conversion, all
shares of Conversion Stock proposed to be issued in connection with the
Conversion must be sold and, to the extent that shares are available, no
subscriber shall be allowed to purchase less than 25 shares; provided, however,
that if the purchase price is greater than $20 per share, the minimum number of
shares which must be subscribed for shall be adjusted so that the aggregate
actual purchase price required to be paid for such minimum number of shares does
not exceed $500. The priorities established for the purchase of shares are as
follows:
1. Category 1: Eligible Account Holders
a. Each Eligible Account Holder shall receive, without
payment, Subscription Rights entitling such Eligible Account Holder to
purchase that number of shares of Conversion Stock which is equal to
the greater of the maximum purchase limitation established for the
Direct Community Offering, one-tenth of one percent of the total
offering or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of
Conversion 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 allocation made in this paragraph
results in an oversubscription, shares of Conversion Stock shall be
allocated among subscribing Eligible Account Holders so as to permit
each such account holder, to the extent possible, to purchase a number
of shares of Conversion Stock sufficient to make his total allocation
equal to 100 shares of Conversion Stock or the total amount of his
subscription, whichever is less. Any shares of Conversion Stock not so
allocated shall be allocated among the subscribing Eligible Account
Holders on an equitable basis, related to the amounts of their
respective Qualifying Deposits as compared to the total Qualifying
Deposits of all Eligible Account Holders.
b. Subscription Rights received by Officers and directors of
the Association and their Associates, as Eligible Account Holders,
based on their increased deposits in the Association in the one-year
period preceding the Eligibility Record Date shall be subordinated to
all other subscriptions involving the exercise of Subscription Rights
pursuant to this Category.
2. Category 2: Tax-Qualified Employee Stock Benefit Plans
a. Tax-Qualified Employee Stock Benefit Plans of the
Association shall receive, without payment, non-transferable
Subscription Rights to purchase in the aggregate up to 8% of the
Conversion Stock, including shares of Conversion Stock to be issued in
the Conversion as result of an increase in the estimated price range
after commencement of the Subscription Offering and prior to the
completion of the Conversion. The Subscription Rights granted to
Tax-Qualified Stock Benefit Plans of the Association shall be subject
to the availability of shares of Conversion Stock after taking into
account the shares of Conversion Stock purchased by Eligible Account
Holders; provided, however, that in the event the number of shares
offered in the Conversion is increased to an amount greater than the
maximum of the estimated price range as set forth in the Prospectus
("Maximum Shares"), the Tax-Qualified Employee Stock Benefit Plans
shall have a priority right to purchase any such shares exceeding the
Maximum Shares up to an aggregate of 8% of the Conversion Stock.
Tax-Qualified Employee Stock Benefit Plans may use funds contributed or
borrowed by the Holding Company or the Association and/or borrowed from
an independent financial institution to exercise such Subscription
Rights, and the Holding Company and the Association
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may make scheduled discretionary contributions thereto, provided that
such contributions do not cause the Holding Company or the Association
to fail to meet any applicable capital requirements.
3. Category 3: Supplemental Eligible Account Holders
a. In the event that the Eligibility Record Date is more than
15 months prior to the date of the latest amendment to the Form AC
Application filed prior to OTS approval, then, and only in that event,
each Supplemental Eligible Account Holder shall receive, without
payment, Subscription Rights entitling such Supplemental Eligible
Account Holder to purchase that number of shares of Conversion Stock
which is equal to the greater of the maximum purchase limitation
established for the Direct Community Offering, one-tenth of one percent
of the total offering or 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of
Conversion Stock to be issued by a fraction of which the numerator is
the amount of the Qualifying Deposit of the Supplemental Eligible
Account Holder and the denominator is the total amount of the
Qualifying Deposits of all Supplemental Eligible Account Holders.
b. Subscription Rights received pursuant to this category
shall be subordinated to Subscription Rights granted to Eligible
Account Holders and Tax-Qualified Employee Stock Benefit Plans.
c. Any Subscription Rights to purchase shares of Conversion
Stock received by an Eligible Account Holder in accordance with
Category Number 1 shall reduce to the extent thereof the Subscription
Rights to be distributed pursuant to this Category.
d. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, shares of Conversion Stock
shall be allocated among the subscribing Supplemental Eligible Account
Holders as follows:
(l) Shares of Conversion Stock shall be allocated so
as to permit each such Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares of
Conversion Stock sufficient to make his total allocation
(including the number of shares of Conversion Stock, if any,
allocated in accordance with Category Number 1) equal to 100
shares of Conversion Stock or the total amount of his
subscription, whichever is less.
(2) Any shares of Conversion Stock not allocated in
accordance with subparagraph (l) above shall be allocated
among the subscribing Supplemental Eligible Account Holders on
an equitable basis, related to the amounts of their respective
Qualifying Deposits as compared to the total Qualifying
Deposits of all Supplemental Eligible Account Holders.
4. Category 4: Other Members
a. Other Members shall receive Subscription Rights to purchase
shares of Conversion Stock, after satisfying the subscriptions of
Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans
and Supplemental Eligible Account Holders pursuant to Category Nos. l,
2 and 3 above, subject to the following conditions:
1. Each such Other Member shall be entitled to subscribe for
the greater of the maximum purchase limitation established for the
Direct Community Offering or one-tenth of one percent of the total
offering.
2. In the event of an oversubscription for shares of
Conversion Stock pursuant to Category No. 4, the shares of Conversion
Stock available shall be allocated among the subscribing Other Members
pro rata on the basis of the amounts of their respective subscriptions.
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D. Direct Community Offering
1. Any shares of Conversion Stock not purchased through the exercise of
Subscription Rights set forth in Category Nos. 1 through 4 above may be sold by
the Holding Company to Persons under such terms and conditions as may be
established by the Association's Board of Directors with the concurrence of the
OTS. The Direct Community Offering may commence concurrently with or as soon as
possible after the completion of the Subscription Offering and must be completed
within 45 days after completion of the Subscription Offering, unless extended
with the approval of the OTS. No Person may purchase shares of Conversion Stock
with an aggregate purchase price that exceeds $125,000. The right to purchase
shares of Conversion Stock under this Category is subject to the right of the
Association or the Holding Company to accept or reject such subscriptions in
whole or in part. In the event of an oversubscription for shares in this
Category, the shares available shall be allocated among prospective purchasers
in an amount equal to the lesser of 100 shares or the number of shares
subscribed for by each such prospective purchaser, if possible. Thereafter,
unallocated shares shall be allocated among the prospective purchasers whose
orders remain unsatisfied after the procedure described in the immediately
preceding sentence until such orders have been filled or the remaining shares
have been allocated. The offering price for which such shares are sold to the
general public in the Direct Community Offering shall be the Purchase Price.
2. Orders received in the Direct Community Offering first shall be
filled up to a maximum of 2% of the Conversion Stock and thereafter remaining
shares shall be allocated on an equal number of shares basis per order until all
orders have been filled.
3. The Conversion Stock offered in the Direct Community Offering shall
be offered and sold in a manner that will achieve the widest distribution
thereof. Preference shall be given in the Direct Community Offering to natural
Persons residing in the Local Community.
4. In the event a Direct Community Offering appears not feasible, the
Association will immediately consult with the OTS to determine the most viable
alternative available to effect the completion of the Conversion. Should no
viable alternative exist, the Association may terminate the Conversion with the
concurrence of the OTS.
E. Limitations Upon Purchases
The following additional limitations and exceptions shall be imposed
upon purchases of shares of Conversion Stock:
1. Purchases of shares of Conversion Stock in the Conversion, including
purchases in the Direct Community Offering by any Person, and Associates
thereof, or a group of Persons Acting in Concert, shall not exceed an aggregate
purchase price of $125,000 except that Tax-Qualified Employee Stock Benefit
Plans may purchase up to 8% of the total Conversion Stock issued in the
Conversion and shares to be held by the Tax-Qualified Employee Stock Benefit
Plans and attributable to a Person shall not be aggregated with other shares
purchased directly by or otherwise attributable to such Person.
2. Officers and directors and Associates thereof may not purchase in
the aggregate more than 34% of the shares issued in the Conversion.
3. The Association's and Holding Company's Boards of Directors will not
be deemed to be Associates or a group of Persons Acting in Concert with other
directors or trustees solely as a result of membership on the Board of
Directors.
4. Persons, Associates thereof, or group of Persons Acting in Concert,
may not purchase shares of Conversion Stock with an aggregate purchase price of
more than $350,000 except that Tax-Qualified Employee Stock Benefit Plans may
purchase up to 8% of the total Conversion Stock issued and shares held or to be
held by the Tax-
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Qualified Employee Stock Benefit Plans and attributable to a Person shall not be
aggregated with other shares purchased directly by or otherwise attributable to
such Person.
5. The Association's Board of Directors, with the approval of the OTS
and without further approval of Members, may, as a result of market conditions
and other factors, increase or decrease the purchase limitation in paragraphs 1
and 4 above or the number of shares of Conversion Stock to be sold in the
Conversion. If the Association or the Holding Company, as the case may be,
increases the maximum purchase limitations or the number of shares of Conversion
Stock to be sold in the Conversion, the Association or the Holding Company, as
the case may be, is only required to resolicit Persons who subscribed for the
maximum purchase amount and may, in the sole discretion of the Association or
the Holding Company, as the case may be, resolicit certain other large
subscribers. If the Association or the Holding Company, as the case may be,
decreases the maximum purchase limitations or the number of shares of Conversion
Stock to be sold in the Conversion, the orders of any Person who subscribed for
the maximum purchase amount shall be decreased by the minimum amount necessary
so that such Person shall be in compliance with the then maximum number of
shares permitted to be subscribed for by such Person.
Each Person purchasing Conversion Stock in the Conversion shall be
deemed to confirm that such purchase does not conflict with the purchase
limitations under the Plan or otherwise imposed by law, rule or regulation. In
the event that such purchase limitations are violated by any Person (including
any Associate or group of Persons affiliated or otherwise Acting in Concert with
such Person), the Holding Company shall have the right to purchase from such
Person at the actual Purchase Price per share all shares acquired by such Person
in excess of such purchase limitations or, if such excess shares have been sold
by such Person, to receive from such Person the difference between the actual
Purchase Price per share paid for such excess shares and the price at which such
excess shares were sold by such Persons. This right of the Holding Company to
purchase such excess shares shall be assignable by the Holding Company.
F. Restrictions On and Other Characteristics of the Conversion Stock
1. Transferability. Conversion Stock purchased by Officers and
directors of the Association and officers and directors of the Holding Company
shall not be sold or otherwise disposed of for value for a period of one year
from the date of Conversion, except for any disposition (i) following the death
of the original purchaser or (ii) resulting from an exchange of securities in a
merger or acquisition approved by the regulatory authorities having
jurisdiction.
The Conversion Stock issued by the Holding Company to such Officers and
directors shall bear a legend giving appropriate notice of the one-year holding
period restriction. Said legend shall state as follows:
"The shares evidenced by this certificate are restricted as to
transfer for a period of one year from the date of this
certificate pursuant to Part 563b of the Rules and Regulations
of the Office of Thrift Supervision. These shares may not be
transferred prior thereto without a legal opinion of counsel
that said transfer is permissible under the provisions of
applicable laws and regulations."
In addition, the Holding Company shall give appropriate instructions to
the transfer agent of the Holding Company's Stock with respect to the foregoing
restrictions. Any shares of Holding Company Stock subsequently issued as a stock
dividend, stock split or otherwise, with respect to any such restricted stock,
shall be subject to the same holding period restrictions for such Persons as may
be then applicable to such restricted stock.
2. Subsequent Purchases by Officers and Directors. Without prior
approval of the OTS, if applicable, Officers and directors of the Association
and officers and directors of the Holding Company, and their Associates, shall
be prohibited for a period of three years following completion of the Conversion
from purchasing outstanding shares of Holding Company Stock, except from a
broker or dealer registered with the SEC. Notwithstanding this restriction,
purchases involving more than 1% of the total outstanding shares of Holding
Company Stock and
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purchases made and shares held by a Tax-Qualified or non-Tax-Qualified Employee
Stock Benefit Plan which may be attributable to such directors and officers may
be made in negotiated transactions without OTS permission or the use of a broker
or dealer.
3. Repurchase and Dividend Rights. Pursuant to present regulations, for
a period of three years from the date of Conversion, repurchases of Holding
Company Stock by the Holding Company from any Person are subject to certain
restrictions, with the exception of (i) a repurchase on a pro rata basis
pursuant to an offer approved by the OTS and made to all stockholders, (ii) the
repurchase of qualifying shares of a director or (iii) a purchase in the open
market by a Tax-Qualified Employee Stock Benefit Plan or a non-Tax-Qualified
Employee Stock Benefit Plan of the Association or the Holding Company in an
amount reasonable and appropriate to fund the plan. Repurchases during the first
year following the consummation of the Conversion are generally prohibited
unless "exceptional circumstances" are deemed to exist by the OTS. However, upon
10 days' written notification to the District Director and to the Chief Counsel,
Corporate and Securities Division of the OTS, if the District Director does not
object, the Holding Company may make open market repurchases of outstanding
Holding Company Stock during the second and third years following the
consummation of the Conversion, provided that (i) no more than 5% of the
outstanding Holding Company Stock is to be purchased during any twelve-month
period, (ii) the Association's ratio of regulatory capital to total liabilities
would not be reduced below 6%, and (iii) the repurchases would not adversely
affect the financial condition of the Association.
Present regulations also provide that the Association may not declare
or pay a cash dividend on or repurchase any of its Capital Stock if the result
thereof would be to reduce the regulatory capital of the Association below the
amount required for the liquidation account described in Paragraph XIII.
Further, any dividend declared or paid on, or repurchase of, the Capital Stock
shall be in compliance with the rules and regulations of the OTS, or other
applicable regulations. The above limitations shall not preclude payment of
dividends on, or repurchases of, Capital Stock in the event applicable Federal
regulatory limitations are liberalized subsequent to the Conversion.
4. Voting Rights. After the Conversion, holders of Savings Accounts in
and obligors on loans of the Association will not have voting rights in the
Association. Exclusive voting rights with respect to the Holding Company shall
be vested in the holders of Holding Company Stock; holders of Savings Accounts
in and obligors on loans of the Association will not have any voting rights in
the Holding Company except and to the extent that such Persons become
stockholders of the Holding Company, and the Holding Company will have exclusive
voting rights with respect to the Association's Capital Stock.
G. Mailing of Offering Materials and Collation of Subscriptions
The sale of all shares of Conversion Stock offered pursuant to the Plan
must be completed within 24 months after approval of the Plan at the Special
Meeting. After approval of the Plan by the OTS and the declaration of the
effectiveness of the Prospectus, the Holding Company shall distribute
Prospectuses and Order Forms for the purchase of shares of Conversion Stock in
accordance with the terms of the Plan.
The recipient of an Order Form shall be provided not less than 20 days
nor more than 45 days from the date of mailing, unless extended, properly to
complete, execute and return the Order Form to the Holding Company or the
Association. Self-addressed, postage prepaid, return envelopes shall accompany
all Order Forms when they are mailed. Failure of any eligible subscriber to
return a properly completed and executed Order Form within the prescribed time
limits shall be deemed a waiver and a release by such eligible subscriber of any
rights to purchase shares of Conversion Stock under the Plan.
The sale of all shares of Conversion Stock proposed to be issued in
connection with the Conversion must be completed within 45 days after the last
day of the Subscription Offering, unless extended by the Holding Company with
the approval of the OTS.
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H. Method of Payment
Payment for all shares of Conversion Stock may be made in cash, by
check or by money order, or if a subscriber has a Savings Account in the
Association such subscriber may authorize the Association to charge the
subscriber's Savings Account. The Holding Company shall pay interest at not less
than the passbook rate on all amounts paid in cash or by check or money order to
purchase shares of Conversion Stock in the Subscription Offering from the date
payment is received until the Conversion is completed or terminated. The
Association is not permitted knowingly to loan funds or otherwise extend any
credit to any Person for the purpose of purchasing Conversion Stock.
If a subscriber authorizes the Association to charge the subscriber's
Savings Account, the funds shall remain in the subscriber's Savings Account and
shall continue to earn interest, but may not be used by such subscriber until
the Conversion is completed or terminated, whichever is earlier. The withdrawal
shall be given effect only concurrently with the sale of all shares of
Conversion Stock proposed to be sold in the Conversion and only to the extent
necessary to satisfy the subscription at a price equal to the Purchase Price.
The Association shall allow subscribers to purchase shares of Conversion Stock
by withdrawing funds from certificate accounts held with the Association without
the assessment of early withdrawal penalties, subject to the approval, if
necessary, of the applicable regulatory authorities. In the case of early
withdrawal of only a portion of such account, the certificate evidencing such
account shall be canceled if the remaining balance of the account is less than
the applicable minimum balance requirement. In that event, the remaining balance
shall earn interest at the passbook rate. This waiver of the early withdrawal
penalty is applicable only to withdrawals made in connection with the purchase
of Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by
submitting an Order Form, along with evidence of a loan commitment from a
financial institution for the purchase of shares, if applicable, during the
Subscription Offering and by making payment for the shares on the date of the
closing of the Conversion.
I. Undelivered, Defective or Late Order Forms; Insufficient Payment
If an Order Form (i) is not delivered and is returned to the Holding
Company or the Association by the United States Postal Service (or the Holding
Company or Association is unable to locate the addressee); (ii) is not returned
to the Holding Company or Association, or is returned to the Holding Company or
Association after expiration of the date specified thereon; (iii) is defectively
completed or executed; or (iv) is not accompanied by the total required payment
for the shares of Conversion Stock subscribed for (including cases in which the
subscribers' Savings Accounts are insufficient to cover the authorized
withdrawal for the required payment), the Subscription Rights of the Person to
whom such rights have been granted shall not be honored and shall be treated as
though such Person failed to return the completed Order Form within the time
period specified therein. Alternatively, the Holding Company or Association may,
but shall not be required to, waive any irregularity relating to any Order Form
or require the submission of a corrected Order Form or the remittance of full
payment for the shares of Conversion Stock subscribed for by such date as the
Holding Company or Association may specify. Subscription orders, once tendered,
shall not be revocable. The Holding Company's and Association's interpretation
of the terms and conditions of the Plan and of the Order Forms shall be final.
J. Members in Non-Qualified States or in Foreign Countries
The Holding Company shall make reasonable efforts to comply with the
securities laws of all states of the United States in which Persons entitled to
subscribe for shares of Conversion Stock pursuant to the Plan reside. However,
no such Person shall be offered or receive any such shares under the Plan who
resides in a foreign country or who resides in a state of the United States with
respect to which any of the following apply: (a) a small number of Persons
otherwise eligible to subscribe for shares of Conversion Stock reside in such
state; (b) the granting of Subscription Rights or offer or sale of shares of
Conversion Stock to such Persons would require the Holding Company to register,
under the securities laws of such state, as a broker or dealer or to register or
otherwise qualify
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its securities for sale in such state; or (c) such registration or qualification
would be impractical for reasons of cost or otherwise.
X. Federal Stock Charter and Bylaws
As part of the Conversion, an amended Federal Stock Charter and Bylaws
will be adopted to authorize the Association to operate as a Federal capital
stock savings and loan association. By approving the Plan, the Members of the
Association will thereby approve the amended Federal Stock Charter and Bylaws.
Prior to completion of the Conversion, the proposed Federal Stock Charter and
Bylaws may be amended in accordance with the provisions and limitations for
amending the Plan under Paragraph XVII below. The effective date of the adoption
of the Federal Stock Charter and Bylaws shall be the date of the issuance of the
Conversion Stock, which shall be the date of consummation of the Conversion.
XI. Post Conversion Filing and Market Making
In connection with the Conversion, the Holding Company shall register
the Conversion Stock with the SEC pursuant to the Securities Exchange Act of
1934, as amended, and shall undertake not to deregister such Conversion Stock
for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the shares of its
stock. The Holding Company shall also use its best efforts to list its stock
through Nasdaq or on a national or regional securities exchange.
XII. Status of Savings Accounts and Loans Subsequent to Conversion
All Savings Accounts shall retain the same status after Conversion as
these accounts had prior to Conversion. Each Savings Account holder shall
retain, without payment, a withdrawable Savings Account or accounts after the
Conversion, equal in amount to the withdrawable value of such holder's Savings
Account or accounts prior to Conversion. All Savings Accounts will continue to
be insured by the Savings Association Insurance Fund of the FDIC up to the
applicable limits of insurance coverage. All loans shall retain the same status
after the Conversion as they had prior to the Conversion. See Paragraph IX.F.4.
with respect to the termination of voting rights of Members.
XIII. Liquidation Account
After the Conversion, holders of Savings Accounts shall not be entitled
to share in any residual assets in the event of liquidation of the Association.
However, the Association shall, at the time of the Conversion, establish a
liquidation account in an amount equal to its total net worth as of the date of
the latest statement of financial condition contained in the final Prospectus.
The function of the liquidation account shall be to establish a priority on
liquidation and, except as provided in Paragraph IX.F.3 above, the existence of
the liquidation account shall not operate to restrict the use or application of
any of the net worth accounts of the Association.
The liquidation account shall be maintained by the Association
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Association. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related inchoate
interest in a portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder and/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 Eligible Account Holders and
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Supplemental Eligible Account 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 date subsequent to the Eligibility Record Date 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 the Eligibility Record
Date or the Supplemental Eligibility Record Date or (ii) the amount of the
Qualifying Deposit in such Savings Account on the Eligibility Record Date or the
Supplemental Eligibility Record Date, 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 Association, each
Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another Federally-insured institution in which the Association is not the
surviving institution shall be considered to be a complete liquidation. In any
such transaction, the liquidation account shall be assumed by the surviving
institution.
XIV. Regulatory Restrictions on Acquisition of Holding Company
A. Present OTS regulations provide that for a period of three years
following completion of the Conversion, no Person (i.e, individual, a group
Acting in Concert, a corporation, a partnership, an association, a joint stock
company, a trust, or any 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 or its holding company) shall
directly, or indirectly, offer to purchase or actually acquire the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company without the prior approval of the OTS. However, approval is not required
for purchases directly from the Holding Company or the underwriters or selling
group acting on its behalf with a view towards public resale, or for purchases
not exceeding 1% per annum of the shares outstanding. Civil penalties may be
imposed by the OTS for willful violation or assistance of any violation. Where
any Person, directly or indirectly, acquires beneficial ownership of more than
10% of any class of equity security of the Holding Company within such
three-year period, without the prior approval of the OTS, stock of the Holding
Company beneficially owned by such Person in excess of 10% shall not be counted
as shares entitled to vote and shall not be voted by any Person or counted as
voting shares in connection with any matter submitted to the stockholders for a
vote. The provisions of this regulation shall not apply to the acquisition of
securities by Tax-Qualified Employee Stock Benefit Plans provided that such
plans do not have beneficial ownership of more than 25% of any class of equity
security of the Holding Company.
B. The Holding Company may provide in its articles of incorporation a
provision that, for a specified period of up to five years following the date of
the completion of the Conversion, no Person shall directly or indirectly offer
to acquire or actually acquire the beneficial ownership of more than 10% of any
class of equity security of the Holding Company. Such provisions would not apply
to acquisition of securities by Tax-Qualified Employee Stock Benefit Plans
provided that such plans do not have beneficial ownership of more than 25% of
any class of equity security of the Holding Company. The Holding Company may
provide in its articles of incorporation for such other provisions affecting the
acquisition of its stock as shall be determined by its Board of Directors.
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XV. Directors and Officers of the Converted Association
The Conversion is not intended to result in any change in the directors
or Officers. Each Person serving as a director of the Association at the time of
Conversion shall continue to serve as a member of the Association's Board of
Directors, subject to the Converted Association's charter and bylaws. The
Persons serving as Officers immediately prior to the Conversion will continue to
serve at the discretion of the Board of Directors in their respective capacities
as Officers of the Association. In connection with the Conversion, the
Association and the Holding Company may enter into employment agreements on such
terms and with such officers as shall be determined by the Boards of Directors
of the Association and the Holding Company.
XVI. Executive Compensation
The Association and the Holding Company may adopt, subject to any
required approvals, executive compensation or other benefit programs, including
but not limited to compensation plans involving stock options, stock
appreciation rights, restricted stock grants, employee recognition programs and
the like.
XVII. Amendment or Termination of Plan
If necessary or desirable, the Plan may be amended by a two-thirds vote
of the Association's Board of Directors, at any time prior to submission of the
Plan and proxy materials to the Members. At any time after submission of the
Plan and proxy materials to the Members, the Plan may be amended by a two-thirds
vote of the Board of Directors only with the concurrence of the OTS. The Plan
may be terminated by a two-thirds vote of the Board of Directors at any time
prior to the Special Meeting, and at any time following such Special Meeting
with the concurrence of the OTS. In its discretion, the Board of Directors may
modify or terminate the Plan upon the order of the regulatory authorities
without a resolicitation of proxies or another meeting of the Members.
In the event that mandatory new regulations pertaining to conversions
are adopted by the OTS prior to the completion of the Conversion, the Plan shall
be amended to conform to the new mandatory regulations without a resolicitation
of proxies or another meeting of Members. In the event that new conversion
regulations adopted by the OTS prior to completion of the Conversion contain
optional provisions, the Plan may be amended to utilize such optional provisions
at the discretion of the Board of Directors without a resolicitation of proxies
or another meeting of Members.
By adoption of the Plan, the Members authorize the Board of Directors
to amend and/or terminate the Plan under the circumstances set forth above.
XVIII. Expenses of the Conversion
The Holding Company and the Association shall use their best efforts to
assure that expenses incurred in connection with the Conversion shall be
reasonable.
XIX. Contributions to Tax-Qualified Plans
The Holding Company and/or the Association may make discretionary
contributions to the Tax-Qualified Employee Stock Benefit Plans, provided such
contributions do not cause the Association to fail to meet its regulatory
capital requirements.
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EXHIBIT B
FEDERAL STOCK CHARTER
EMPIRE FEDERAL SAVINGS BANK
Section 1. Corporate title. The full corporate title of the bank is
Empire Federal Savings Bank ("Savings Bank").
Section 2. Office. The home office shall be located in the City of
Livingston, the County of Park, in the State of Montana.
Section 3. Duration. The duration of the Savings Bank is perpetual.
Section 4. Purpose and powers. The purpose of the Savings Bank is to
pursue any or all of the lawful objectives of a Federal savings and loan
association chartered under section 5 of the Home Owners' Loan Act and to
exercise all of the express, implied, and incidental powers conferred thereby
and by all acts amendatory thereof and supplemental thereto, subject to the
Constitution and laws of the United States as they are now in effect, or as they
may hereafter be amended, and subject to all lawful and applicable rules,
regulations, and orders of the Office of Thrift Supervision ("Office").
Section 5. Capital stock. The total number of shares of all classes of
the capital stock which the Savings Bank has authority to issue is 10,000 of
which 1,000 shares shall be common stock, of par value of $1.00 per share and of
which 9,000 shares shall be serial preferred stock having no par value. The
shares may be issued from time to time as authorized by the board of directors
without the approval of its shareholders except as otherwise provided in this
Section 5 or to the extent that such approval is required by governing law,
rule, or regulation. The consideration for the issuance of the shares shall be
paid in full before their issuance and shall not be less than the par value.
Neither promissory notes nor future services shall constitute payment or part
payment for the issuance of shares of the Savings Bank. The consideration for
the shares shall be cash, tangible or intangible property (to the extent direct
investment in such property would be permitted to the Savings Bank), labor or
services actually performed for the Savings Bank, or any combination of the
foregoing. In the absence of actual fraud in the transaction, the value of such
property, labor, or services, as determined by the board of directors of the
Savings Bank, shall be conclusive. Upon payment of such consideration, such
shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, that part of the surplus of the Savings Bank which is
transferred to stated capital upon the issuance of shares as a share dividend
shall be deemed to be the consideration for their issuance.
Except for shares issuable in connection with the conversion of the
Savings Bank from the mutual to stock form of capitalization, no shares of
common stock (including shares issuable upon conversion, exchange or exercise of
other securities) shall be issued, directly or indirectly, to officers,
directors, or controlling persons of the Savings Bank other than as part of a
general public offering or as qualifying shares to a director, unless their
issuance or the plan under which they would be issued has been approved by a
majority of the total votes eligible to be cast at a legal meeting.
Nothing contained in this section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors: Provided, that this
restriction on voting separately by class or series shall not apply:
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(i) To any provision which would authorize the holders of
preferred stock, voting as a class or series, to elect some members of
the board of directors, less than a majority thereof, in the event of
default in the payment of dividends on any class or series of preferred
stock;
(ii) To any provision which would require the holders of
preferred stock, voting as a class or series, to approve the merger or
consolidation of the Savings Bank with another corporation or the sale,
lease, or conveyance (other than by mortgage or pledge) of properties
or business in exchange for securities of a corporation other than the
Savings Bank if the preferred stock is exchanged for securities of such
other corporation: Provided, that no provision may require such
approval for transactions undertaken with the assistance or pursuant to
the direction of the Office, Federal Deposit Insurance Corporation or
the Resolution Trust Corporation;
(iii) To any amendment which would adversely change the
specific terms of any class or series of capital stock as set forth in
this Section 5 (or in any supplementary sections hereto), including any
amendment which would create or enlarge any class or series ranking
prior thereto in rights and preferences. An amendment which increases
the number of authorized shares of any class or series of capital
stock, or substitutes the surviving Savings Bank in a merger or
consolidation for the Savings Bank, shall not be considered to be such
an adverse change.
A description of the different classes and series, if any, of the
Savings Bank's capital stock and a statement of the designations, and the
relative rights, preferences, and limitations of the shares of each class of and
series, if any, of capital stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder, except as to the
cumulation of votes for the election of directors.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund, retirement fund, or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends out of any
assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
Savings Bank, the holders of the common stock (and the holders of any class or
series of stock entitled to participate with the common stock in the
distribution of assets) shall be entitled to receive, in cash or in kind, the
assets of the Savings Bank available for distribution remaining after: (i)
payment or provision for payment of the Savings Bank's debts and liabilities;
(ii) distributions or provision for distributions in settlement of its
liquidation account; and (iii) distributions or provision for distributions to
holders of any class or series of stock having preference over the common stock
in the liquidation, dissolution, or winding up of the Savings Bank. Each share
of common stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. Preferred Stock. The Savings Bank may provide in supplementary
sections to its charter for one or more classes of preferred stock, which shall
be separately identified. The shares of any class may be divided into and issued
in series, with each series separately designated so as to distinguish the
shares thereof from the shares of all other series and classes. The terms of
each series shall be set forth in a supplementary section to the charter. All
shares of the same class shall be identical except as to the following relative
rights and preferences, as to which there may be variations between different
series:
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(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date(s) the payment date(s) for dividends, and the participating or other
special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price(s) at which, and the terms and conditions on which such shares may be
redeemed;
(e) The amount(s) payable upon the shares of such series in the event
of voluntary or involuntary liquidation, dissolution, or winding up of the
Savings Bank;
(f) Whether the shares of such series shall be entitled to the benefit
of a sinking or retirement fund to be applied to the purchase or redemption of
such shares, and if so entitled, the amount of such fund and the manner of its
application, including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the Savings
Bank and, if so, the conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be made,
and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption
of supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established
by a supplementary charter section adopted by the board of directors, the
Savings Bank shall file with the secretary to the board a dated copy of that
supplementary section of this charter establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
Section 6. Preemptive rights. Holders of the capital stock of the
Savings Bank shall not be entitled to preemptive rights with respect to any
shares of the Savings Bank which may be issued.
Section 7. Liquidation account. Pursuant to the requirements of the
Office's Regulations (12 CFR Subchapter D), the Savings Bank shall establish and
maintain a liquidation account for the benefit of its savings account holders as
of March 31, 1995 and September 30, 1996. In the event of a complete liquidation
of the Savings Bank, it shall comply with such regulations with respect to the
amount and the priorities on liquidation of each of the Savings Bank's eligible
savers' inchoate interest in the liquidation account, to the extent it is still
in existence: Provided, that an eligible savers' inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the Savings Bank's stockholders.
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Section 8. Directors. The Savings Bank shall be under the direction of
a Board of Directors. The authorized number of directors, as stated in the
Savings Bank's bylaws, shall not be fewer than five nor more than fifteen except
when a greater number is approved by the Director of the Office.
Section 9. Amendment of charter. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is first proposed by the Board of Directors of the Savings
Bank, then preliminarily approved by the Office, which preliminary approval may
be granted by the Office pursuant to regulations specifying preapproved charter
amendments, and thereafter approved by the shareholders by a majority of the
total votes eligible to be cast at a legal meeting. Any amendment, addition,
alteration, change, or repeal so acted upon shall be effective upon filing with
the Office in accordance with regulatory procedures or on such other date as the
Office may specify in its preliminary approval.
<TABLE>
<CAPTION>
<S> <C> <C>
Attest: By:
Secretary President and Chief Executive Officer
Empire Federal Savings Bank Empire Federal Savings Bank
Declared effective this ___ day of _________________, 199_.
Office of Thrift Supervision
By: By:
---------------------------------------------
Secretary Director
Office of Thrift Supervision Office of Thrift Supervision
</TABLE>
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EXHIBIT C
BYLAWS
EMPIRE FEDERAL SAVINGS BANK
ARTICLE I - Home Office
The home office of Empire Federal Savings Bank ("Savings Bank"),
shall be located at 123 South Main Street, in the City of Livingston, the County
of Park, in the State of Montana.
ARTICLE II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Savings Bank or at such
other place in the State of Montana as the Board of Directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the
Savings Bank for the election of directors and for the transaction of any other
business of the Savings Bank shall be held annually within 120 days after the
end of the Savings Bank's fiscal year on the second Monday after the first
Tuesday of April, if not a legal holiday, and if a legal holiday, then on the
next day following which is not a legal holiday, at 10:00 a.m., Mountain Time,
or at such other date and time within such 120-day period as the Board of
Directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders
for any purpose or purposes, unless otherwise prescribed by the regulations of
the Office of Thrift Supervision ("Office"), may be called at any time by the
Chairman of the Board, the President, or a majority of the Board of Directors,
and shall be called by the Chairman of the Board, the President, or the
Secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the Savings Bank entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered to the home office of the Savings Bank addressed to the
Chairman of the Board, the President, or the Secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall
be conducted in accordance with rules and procedures adopted by the Board of
Directors. The Board of Directors shall designate, when present, either the
Chairman of the Board or President to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place,
day, and hour of the meeting and the purpose(s) for which the meeting is called
shall be delivered not fewer than 10 nor more than 50 days before the date of
the meeting, either personally or by mail, by or at the direction of the
Chairman of the Board, the President, or the Secretary, or the directors calling
the meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the Savings Bank as of the record date prescribed in Section
6 of this Article II with postage prepaid. When any shareholders' meeting,
either annual or special, is adjourned for 30 days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. It shall
not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjournment is
taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in case of a meeting of shareholders, not fewer than 10 days prior
to the date on
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which the particular action requiring such determination of shareholders is to
be taken. When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of
the shareholders, the officer or agent having charge of the stock transfer books
for shares of the Savings Bank shall make a complete list of the shareholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
shareholders shall be kept on file at the home office of the Savings Bank and
shall be subject to inspection by any shareholder at any time during usual
business hours for a period of 20 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to inspection by any shareholder during the entire time of the meeting.
The original stock transfer book shall constitute prima facie evidence of the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the Board of Directors may
perform such acts as required by paragraphs (a) and (b) of Rule 14a-7 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as may
be duly requested in writing, with respect to any matter which may be properly
considered at a meeting of shareholders, by any shareholder who is entitled to
vote on such matter and who shall defray the reasonable expenses to be incurred
by the Savings Bank in performance of the act or acts required.
Section 8. Quorum. A majority of the outstanding shares of the
Savings Bank entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of the
outstanding shares is represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to constitute less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies solicited on behalf of the management shall
be voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be valid more
than eleven months from the date of its execution except for a proxy coupled
with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons.
When ownership stands in the name of two or more persons, in the absence of
written directions to the Savings Bank to the contrary, at any meeting of the
shareholders of the Savings Bank any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such shares and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing
in the name of another corporation may be voted by any officer, agent, or proxy
as the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the Board of Directors of such corporation may determine. Shares
held by an administrator, executor, guardian, or conservator may be voted by
him, either in person or by proxy, without a transfer of such shares into his
or her name. Shares standing in the name of a trustee may be voted by him or
her, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him or her without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer into his name if authority to do so is contained in an
appropriate order of the court or other public authority by which such receiver
was appointed.
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A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Savings Bank
nor shares held by another corporation, if a majority of the shares entitled to
vote for the election of directors of such other corporation are held by the
Savings Bank, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Unless otherwise provided in the
Savings Bank's charter, every shareholder entitled to vote at an election for
directors shall have the right to vote, in person or by proxy, the number of
shares owned by the shareholder for as many persons as there are directors to be
elected and for whose election the shareholder has a right to vote, or to
cumulate the votes by giving one candidate as many votes as the number of such
directors to be elected multiplied by the number of shares shall equal or by
distributing such votes on the same principle among any number of candidates.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the Board of Directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the Chairman of the Board or the President may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the Board of
Directors in advance of the meeting or at the meeting by the Chairman of the
Board or the President.
Unless otherwise prescribed by regulations of the Office, the
duties of such inspectors shall include: determining the number of shares and
the voting power of each share, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect of proxies;
receiving votes, ballots, or consents; hearing and determining all challenges
and questions in any way arising in connection with the rights to vote; counting
and tabulating all votes or consents; determining the result; and such acts as
may be proper to conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The Board of Directors shall act
as a nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Savings Bank. No nominations for
directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the Secretary of the Savings Bank at least five days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the Savings Bank. Ballots bearing the
names of all persons nominated by the nominating committee and by shareholders
shall be provided for use at the annual meeting. However, if the nominating
committee shall fail or refuse to act at least 20 days prior to the annual
meeting, nominations for directors may be made at the annual meeting by any
shareholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the Secretary of the Savings
Bank at least five days before the date of the annual meeting, and all business
so stated, proposed, and filed shall be considered at the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the Secretary at least
five days before the meeting, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the shareholders taking place 30 days
or more thereafter. This provision shall not prevent the consideration and
approval
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or disapproval at the annual meeting of reports of officers, directors, and
committees; but in connection with such reports, no new business shall be acted
upon at such annual meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required
to be taken at a meeting of the shareholders, or any other action which may be
taken at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the Savings
Bank shall be under the direction of its Board of Directors. The Board of
Directors shall annually elect a Chairman of the Board and a President from
among its members and shall designate, when present, either the Chairman of the
Board or the President to preside at its meetings.
Section 2. Number and Term. The Board of Directors shall consist
of seven members and shall be divided into three classes as nearly equal in
number as possible. The members of each class shall be elected for a term of
three years and until their successors are elected and qualified. One class
shall be elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The Board of
Directors may provide, by resolution, the time and place, within the Savings
Bank's normal lending territory, for the holding of additional regular meetings
without other notice than such resolution.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Savings
Bank unless the Savings Bank is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the Board of
Directors may be called by or at the request of the Chairman of the Board, the
President, or one-third of the directors. The persons authorized to call special
meetings of the Board of Directors may fix any place, within the Savings Bank's
normal lending territory, as the place for holding any special meeting of the
Board of Directors called by such persons.
Members of the Board of Directors may participate in special
meetings by means of conference telephone or similar communications equipment by
which all persons participating in the meeting can hear each other. Such
participations shall constitute presence in person but shall not constitute
attendance for the purpose of compensation pursuant to Section 12 of this
Article.
Section 6. Notice. Written notice of any special meeting shall be
given to each director at least two days prior thereto when delivered personally
or by telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the Secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the Board of Directors need be
specified in the notice of waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
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Section 8. Manner of Acting. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors, unless a greater number is prescribed by regulation of
the Office or by these bylaws.
Section 9. Action Without a Meeting. Any action required or
permitted to be taken by the Board of Directors at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by
sending a written notice of such resignation to the home office of the Savings
Bank addressed to the Chairman of the Board or the President. Unless otherwise
specified, such resignation shall take effect upon receipt by the Chairman of
the Board or the President. More than three consecutive absences from regular
meetings of the Board of Directors, unless excused by resolution of the Board of
Directors, shall automatically constitute a resignation, effective when such
resignation is accepted by the Board of Directors.
Section 11. Vacancies. Any vacancy occurring on the Board of
Directors may be filled by the affirmative vote of a majority of the remaining
directors although less than a quorum of the Board of Directors. A director
elected to fill a vacancy shall be elected to serve until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the Board of
Directors for a term of office continuing only until the next election of
directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the Board of Directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the Board of Directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the Board of
Directors may determine.
Section 13. Presumption of Assent. A director of the Savings Bank
who is present at a meeting of the Board of Directors at which action on any
Association matter is taken shall be presumed to have assented to the action
taken unless his or her dissent or abstention shall be entered in the minutes of
the meeting or unless he or she shall file a written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the Secretary of the Savings
Bank within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in favor
of such action.
Section 14. Removal of Directors. At a meeting of shareholders
called expressly for that purpose, any director may be removed for cause by a
vote of the holders of a majority of the shares then entitled to vote at an
election of directors. If less than the entire board is to be removed, no one of
the directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of the
shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a director or directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
ARTICLE IV - Executive And Other Committees
Section 1. Appointment. The Board of Directors, by resolution adopted
by a majority of the full board, may designate the chief executive officer and
two or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the Board of Directors, or any director,
of any responsibility imposed by law or regulation.
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Section 2. Authority. The executive committee, when the Board of
Directors is not in session, shall have and may exercise all of the authority of
the Board of Directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the Board of
Directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the Savings Bank, or recommending to the shareholders a
plan of merger, consolidation, or conversion; the sale, lease, or other
disposition of all or substantially all of the property and assets of the
Savings Bank otherwise than in the usual and regular course of its business; a
voluntary dissolution of the Savings Bank; a revocation of any of the foregoing;
or the approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the Board of Directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee
may be held without notice at such times and places as the executive committee
may fix from time to time by resolution. Special meetings of the executive
committee may be called by any member thereof upon not less than one day's
notice stating the place, date, and hour of the meeting, which notice may be
written or oral. Any member of the executive committee may waive notice of any
meeting and no notice of any meeting need be given to any member thereof who
attends in person. The notice of a meeting of the executive committee need not
state the business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or
permitted to be taken by the executive committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full Board of Directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full Board of Directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the President or Secretary of the Savings Bank. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a
presiding officer from its members and may fix its own rules of procedure which
shall not be inconsistent with these bylaws. It shall keep regular minutes of
its proceedings and report the same to the Board of Directors for its
information at the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The Board of Directors may by
resolution establish an audit, loan, or other committee composed of directors as
they may determine to be necessary or appropriate for the conduct of the
business of the Savings Bank and may prescribe the duties, constitution, and
procedures thereof.
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ARTICLE V - Officers
Section 1. Positions. The officers of the Savings Bank shall be a
President, one or more Vice Presidents, a Secretary, and a Treasurer, each of
whom shall be elected by the Board of Directors. The Board of Directors may also
designate the Chairman of the Board as an officer. The President shall be the
Chief Executive Officer unless the Board of Directors designates the Chairman of
the Board as Chief Executive Officer. The President shall be a Director of the
Savings Bank. The offices of the Secretary and Treasurer may be held by the same
person and a Vice President may also be either the Secretary or the Treasurer.
The Board of Directors may designate one or more vice presidents as Executive
Vice President or Senior Vice President. The Board of Directors may also elect
or authorize the appointment of such other officers as the business of the
Savings Bank may require. The officers shall have such authority and perform
such duties as the Board of Directors may from time to time authorize or
determine. In the absence of action by the Board of Directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
Section 2. Election and Term of Office. The officers of the
Savings Bank shall be elected annually at the first meeting of the Board of
Directors held after each annual meeting of the stockholders. If the election of
officers is not held at such meeting, such election shall be held as soon
thereafter as possible. Each officer shall hold office until a successor has
been duly elected and qualified or until the officer's death, resignation, or
removal in the manner hereinafter provided. Election or appointment of an
officer, employee, or agent shall not of itself create contractual rights. The
Board of Directors may authorize the Savings Bank to enter into an employment
contract with any officer in accordance with regulations of the Office; but no
such contract shall impair the right of the Board of Directors to remove any
officer at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the Board of
Directors whenever in its judgment the best interests of the Savings Bank will
be served thereby, but such removal, other than for cause, shall be without
prejudice to any contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the Board of Directors.
ARTICLE VI - Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of
the Board, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the Board of Directors may authorize any officer,
employee, or agent of the Savings Bank to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Savings Bank. Such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Savings
Bank and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
Section 3. Checks, Drafts, etc. All checks, drafts, or other
orders for the payment of money, notes, or other evidences of indebtedness
issued in the name of the Savings Bank shall be signed by one or more officers,
employees, or agents of the Savings Bank in such manner as shall from time to
time be determined by the Board of Directors.
Section 4. Deposits. All funds of the Savings Bank not otherwise
employed shall be deposited from time to time to the credit of the Savings Bank
in any duly authorized depositories as the Board of Directors may select.
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ARTICLE VII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing
shares of capital stock of the Savings Bank shall be in such form as shall be
determined by the Board of Directors and approved by the Office. Such
certificates shall be signed by the Chief Executive Officer or by any other
officer of the Savings Bank authorized by the Board of Directors, attested by
the Secretary or an Assistant Secretary, and sealed with the corporate seal or a
facsimile thereof. The signatures of such officers upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer agent
or a registrar other than the Savings Bank itself or one of its employees. Each
certificate for shares of capital stock shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the Savings Bank. All certificates surrendered to the
Savings Bank for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares has been
surrendered and canceled, except that in the case of a lost or destroyed
certificate, a new certificate may be issued upon such terms and indemnity to
the Savings Bank as the Board of Directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock
of the Savings Bank shall be made only on its stock transfer books. Authority
for such transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
Savings Bank. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Savings Bank shall be deemed by the Savings Bank
to be the owner for all purposes.
ARTICLE VIII - Fiscal Year; Annual Audit
The fiscal year of the Savings Bank shall end on the 31st day of
December of each year. The Savings Bank shall be subject to an annual audit as
of the end of its fiscal year by independent public accountants appointed by and
responsible to the Board of Directors. The appointment of such accountants shall
be subject to annual ratification by the shareholders.
ARTICLE IX - Dividends
Subject to the terms of the Savings Bank's charter and the
regulations and orders of the Office, the Board of Directors may, from time to
time, declare, and the Savings Bank may pay, dividends on its outstanding
classes of capital stock.
ARTICLE X - Corporate Seal
The Board of Directors shall provide a Savings Bank seal which
shall be two concentric circles between which shall be the name of the Savings
Bank. The year of incorporation or an emblem may appear in the center.
ARTICLE XI - Amendments
These bylaws may be amended in a manner consistent with
regulations of the Office at any time by a majority vote of the full Board of
Directors or by a majority vote of the votes cast by the stockholders of the
Savings Bank at any legal meeting.
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REVOCABLE PROXY
SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
OF
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
FOR THE SPECIAL MEETING OF MEMBERS
TO BE HELD ON ________________ __, 1996
The undersigned member of Empire Federal Savings and Loan Association
("Association") hereby appoints the Board of Directors, with full powers of
substitution, as attorneys-in-fact and agents for and in the name of the
undersigned, to vote such shares as the undersigned may be entitled to cast at
the Special Meeting of Members ("Meeting") of the Association, to be held at the
Association's office at 123 South Main Street, Livingston, Montana, on the date
and time indicated on the Notice of Special Meeting of Members, and at any
adjournment thereof. They are authorized to cast all votes to which the
undersigned is entitled, as follows:
<TABLE>
<CAPTION>
FOR AGAINST
<S> <C> <C>
(1) To approve a Plan of Conversion adopted by the Board of Directors
on August 29, 1996, to convert the Association from a federally
chartered mutual savings and loan association to a federally chartered
capital stock savings bank, to be held as a wholly-owned subsidiary
of a new holding company, Empire Federal Bancorp, Inc., including
the adoption of a Federal Stock Charter and Bylaws for the
Association, pursuant to the laws of the United States and the rules
and regulations of the Office of Thrift Supervision.
[ ] [ ]
</TABLE>
NOTE: The Board of Directors is not aware of any other matter that may come
before the Meeting.
<PAGE>
THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS
STATED IF NO CHOICE IS MADE HEREIN
Should the undersigned be present and elect to vote at said Meeting or
at any adjournment thereof and, after notification to the Secretary of the
Association at said Meeting of the member's decision to terminate this Proxy,
then the power of said attorney-in-fact or agents shall be deemed terminated and
of no further force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of
Members of the Association called on the date and time indicated on the Notice
of Special Meeting, and a Proxy Statement relating to said Meeting from the
Association, prior to the execution of this Proxy.
- -------------------------
Date
- -------------------------
Signature
Note: Only one signature is required in the case of a joint account.
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