<PAGE>
As filed with the Securities and Exchange Commission on March 14, 1997
Registration No.333-20489
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------------------
ROCKY FORD FINANCIAL, INC.
------------------------------------------
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 6035 REQUESTED
- ------------------------------- ---------------------------- ---------------------
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
801 SWINK AVENUE, ROCKY FORD, COLORADO 81067-0032
(719) 254-7642
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices and
principal place of business)
MR. KEITH E. WAGGONER, PRESIDENT
ROCKY FORD FINANCIAL, INC.
801 SWINK AVENUE
ROCKY FORD, COLORADO 81067-0032
(719) 254-7642
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(Name, address, and telephone number of agent for service)
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
Allan D. Housley, Esquire
Howard S. Parris, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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>
PROSPECTUS
ROCKY FORD FINANCIAL, INC.
(HOLDING COMPANY FOR
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION)
Up to 368,000 Shares of Common Stock
$10.00 Per Share
Rocky Ford Financial, Inc. (the "Company"), a Delaware corporation, is
offering up to 368,000 shares, subject to adjustment, of its common stock, par
value $.01 per share (the "Common Stock"), in connection with the conversion of
Rocky Ford Federal Savings and Loan Association (the "Association") from a
federal mutual savings and loan association to a federal stock savings and loan
association (the "Converted Association") and the issuance of the Converted
Association's capital stock to the Company pursuant to the Plan of Conversion
(the "Plan") of the Association. The conversion of the Association to the
Converted Association, the acquisition of control of the Converted Association
by the Company and the issuance and sale of the Common Stock are collectively
referred to herein as the "Conversion."
The shares of the Common Stock are being offered pursuant to
nontransferable subscription rights ("Subscription Rights") in a subscription
offering (the "Subscription Offering"). SUBSCRIPTION RIGHTS ARE NOT
TRANSFERABLE, AND PERSONS WHO ATTEMPT TO TRANSFER THEIR SUBSCRIPTION RIGHTS MAY
LOSE THE RIGHT TO SUBSCRIBE FOR STOCK IN THE CONVERSION AND MAY BE SUBJECT TO
OTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION
("OTS"). The Company may offer any shares of Common Stock not subscribed for
in the Subscription Offering in a community offering (the "Community Offering")
to certain members of the general public to whom the Company delivers a copy of
this Prospectus and a stock order form (the "Stock Order Form"), with preference
given to natural persons and trusts of natural persons who are permanent
residents of Otero County, Colorado (the "Local Community"). The Association
and the Company may, in their absolute discretion, reject orders in the
Community Offering in whole or in part. It is anticipated that shares of the
Common Stock not otherwise subscribed for in the
(continued on following page)
For information on how to subscribe, call the Stock Information Center at
(719) 254-____.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER
THE DISCUSSION UNDER "RISK FACTORS" BEGINNING ON PAGE __.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION,
NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE BANK INSURANCE FUND,THE
SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
================================================================================================
Estimated Fees
and Expenses,
Including
Underwriting
Purchase Discounts and Estimated Net
Price (1) Commissions (2) Proceeds (3)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share (4)......................... $10.00 $1.09 $8.91
- ------------------------------------------------------------------------------------------------
Total Minimum......................... $2,720,000 $340,000 $2,380,000
- ------------------------------------------------------------------------------------------------
Total Midpoint........................ $3,200,000 $350,000 $2,850,000
- ------------------------------------------------------------------------------------------------
Total Maximum......................... $3,680,000 $350,000 $3,330,000
- ------------------------------------------------------------------------------------------------
Total Maximum, as adjusted (5)........ $4,232,000 $350,000 $3,882,000
================================================================================================
</TABLE>
(footnotes on following page)
TRIDENT SECURITIES, INC.
The date of this Prospectus is ___________, 1997
<PAGE>
(continued from preceding page)
Subscription and Community Offerings may be offered at the discretion of the
Company to certain members of the general public as part of a community offering
on a best efforts basis by a selling group of selected broker-dealers to be
managed by Trident Securities, Inc. (the "Syndicated Community Offering").
Neither Trident Securities, Inc. nor any selected broker-dealers will have any
obligation to purchase any shares of the Common Stock. See "The Conversion --
Offering of Common Stock," " --Subscription Offering," " -- Community Offering,"
and " -- Syndicated Community Offering."
The total number of shares to be issued in the Conversion may be
significantly increased or decreased to reflect market and financial conditions
at the completion of the Conversion. The aggregate purchase price of all shares
of the Common Stock will be based on the estimated pro forma market value of the
Association, as converted, as determined by an independent appraisal. All
shares of the Common Stock will be sold for $10.00 per share (the "Purchase
Price"). With the exception of the ESOP, which intends to purchase 8.0% of the
total number of shares of Common Stock issued in the Conversion, no Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member, nor person
(together with associates of and persons acting in concert therewith) in the
Community Offering and Syndicated Community Offering may purchase more than
$125,000 of the shares of Common Stock issued in the Conversion. In addition,
no person (together with associates and persons acting in concert therewith) may
purchase in the aggregate more than $125,000 of the shares of Common Stock
issued in the Conversion. The maximum overall purchase limitation and the
amount permitted to be subscribed for may be increased or decreased under
certain circumstances in the sole discretion of the Company. The minimum
purchase is 25 shares. See "The Conversion -- Limitations on Purchase of
Shares."
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 12:00 NOON, LOCAL TIME, ON
___________, 1997, UNLESS EXTENDED BY THE COMPANY FOR UP TO AN ADDITIONAL __
DAYS. THE COMMUNITY OFFERING, IF ANY, MAY COMMENCE WITHOUT NOTICE AT ANY TIME
AFTER THE COMMENCEMENT OF THE SUBSCRIPTION OFFERING AND MAY TERMINATE AT ANY
TIME
(continued on following page)
(footnotes from preceding table)
______________________
(1) The estimated aggregate value of the Common Stock is based on an
independent appraisal by Ferguson & Company ("Ferguson") as of December 13,
1996. See "The Conversion -- Stock Pricing and Number of Shares to be
Issued." Based on such appraisal, the Company has determined to offer up
to 368,000 shares, subject to adjustment, at a purchase price of $10.00 per
share (the "Purchase Price"). The final aggregate value will be determined
at the time of closing of the Conversion and is subject to change due to
changing market conditions and other factors. If a change in the final
valuation is required, an appropriate adjustment will be made in the number
of shares being offered within a range of 272,000 shares at the minimum of
the Estimated Valuation Range (defined herein) to 368,000 shares at the
maximum of the Estimated Valuation Range and, with OTS approval, to 423,200
shares at approximately 15% above the maximum of the Estimated Valuation
Range.
(2) Includes estimated printing, postage, legal, accounting and miscellaneous
expenses which will be incurred in connection with the Conversion. Also
includes estimated fees, sales commissions and reimbursable expenses to be
paid to Trident Securities, Inc. ("Trident Securities") in connection with
the Subscription and Community Offerings, estimated to be $82,200, $92,600,
$92,600 and $92,600 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range. The actual fees and expenses may
vary from the estimates. See "Pro Forma Data" for the assumptions
underlying these estimates. Trident Securities may be deemed to be an
underwriter, and certain amounts to be paid to Trident Securities may be
deemed to be underwriting compensation for purposes of the Securities Act
of 1933, as amended. The Company and the Association have agreed to
indemnify Trident Securities against certain liabilities arising out of its
services as financial and sales advisor.
(3) Includes the ESOP's expected purchase of 8% of the shares sold in the
Conversion with funds borrowed from the Company. Does not reflect a
possible purchase by a management recognition plan of a number of shares
equal to up to 4% of the shares to be issued in the Conversion with funds
contributed by the Converted Association. See "Capitalization" and "Pro
Forma Data."
(4) Based on the midpoint of the Estimated Valuation Range. At the minimum,
maximum and 15% above the maximum of the Estimated Valuation Range, the
estimated fees and expenses, including underwriting discounts and
commissions, per share are expected to be $1.25, $.95 and $0.83,
respectively, and the estimated net proceeds per share are expected to be
$8.75, $9.05 and $9.17, respectively.
(5) Gives effect to an increase in the number of shares which could occur
without a resolicitation of subscribers or any right of cancellation due to
an increase in the Estimated Valuation Range of up to 15% above the maximum
of the Estimated Valuation Range to reflect changes in market and financial
conditions. See "The Conversion -- Stock Pricing and Number of Shares to
be Issued."
2
<PAGE>
(continued from preceding page)
WITHOUT NOTICE, BUT MAY NOT TERMINATE LATER THAN __________, 1997. An executed
Stock Order Form, once received by the Association, may not be modified, amended
or rescinded without the consent of the Association. Subscriptions paid by
check, cash or money order will be held in a separate account at the Association
established specifically for this purpose, and interest will be paid at the
Association's passbook rate from the date payment is received until the
Conversion is completed or terminated. In the case of payments to be made
through withdrawal from deposit accounts at the Association, all sums authorized
for withdrawal will continue to earn interest at the contract rate until the
date of the completion of the Conversion but, following completion of the
Conversion, funds withdrawn from deposit accounts and used to purchase Common
Stock will no longer be deposit accounts and will not be insured by the Federal
Deposit Insurance Company, the Bank Insurance Fund, the Savings Association
Insurance Fund or any other governmental agency. If the Conversion is not
completed within 45 days after the last day of the Subscription Offering (which
date will be no later than __________, 1997) and the OTS consents to an
extension of time to complete the Conversion, subscribers must affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering and may, in the alternative, modify or cancel their subscriptions. See
"The Conversion -- Subscription for Stock in Subscription and Community
Offerings."
The Association has retained Trident Securities, a broker-dealer registered
with the Securities and Exchange Commission ("SEC") and a member of the National
Association of Securities Dealers, Inc. ("NASD"), to provide financial and sales
assistance in connection with the Subscription and Community Offerings. Trident
Securities has agreed to use its best efforts to assist the Company and the
Association with the sale of the Common Stock in the Subscription Offering and
the Community Offering, if any.
3
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
ROCKY FORD, COLORADO
[INSERT MAP]
THE ASSOCIATION'S CONVERSION TO A STOCK ORGANIZATION IS CONTINGENT UPON APPROVAL
OF THE PLAN OF CONVERSION BY ITS MEMBERS, THE SALE OF AT LEAST THE MINIMUM
NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN OF CONVERSION AND THE SATISFACTION
OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and the Financial Statements
and accompanying Notes appearing elsewhere in this Prospectus.
ROCKY FORD FINANCIAL, The Company was incorporated under the laws of the State
INC. of Delaware in January 1997 at the direction of the
Board of Directors of the Association for the purpose of
serving as a holding company of the Converted
Association upon its conversion from mutual to stock
form. The Company has received approval from the OTS to
acquire control of the Converted Association subject to
satisfaction of certain conditions. Prior to the
Conversion, the Company has not engaged and will not
engage in any material operations. Upon consummation of
the Conversion, the Company will have no significant
assets other than the outstanding capital stock of the
Converted Association, a portion of the net proceeds of
the Conversion and a note receivable from the ESOP.
Following the Conversion, the Company's principal
business will be overseeing and directing the business
of the Converted Association and investing the net
Conversion proceeds retained by it, and the Company will
register with the OTS as a savings and loan holding
company.
ROCKY FORD FEDERAL The Association is a federal mutual savings and loan
SAVINGS AND LOAN association operating through a single office located in
ASSOCIATION Rocky Ford, Colorado and serving Otero County, Colorado.
The Association was chartered as a federal savings and
loan association and received federal insurance of its
deposit accounts in 1934. At December 31, 1996, the
Association had total assets of $20.5 million, total
deposits of $17.3 million and equity of $2.9
million.
Historically, the Association has operated as a
traditional savings institution by emphasizing the
origination of loans secured by one- to four-family
("single-family") residences. At December 31, 1996,
$12.5 million, or 98.81% of the Association's net loan
portfolio, consisted of one- to four-family residential
mortgage loans, all of which were originated on
properties in its market area. Substantially all of
these loans have terms of 15 to 20 years, and are fixed-
rate loans.
Financial and operating characteristics of the
Association include the following:
Community Orientation. The Association has been
committed to meeting the financial needs of the
community in which it has operated for over 60 years.
The Board of Directors believes that with its long-term
presence in the community, the Association is well
positioned to provide financial services on a
personalized and efficient basis. Management believes
that the Association is effective in servicing its
customers because of the Association's ability to
quickly and effectively provide responses to customer
needs and inquiries. Management plans to continue to
emphasize the community orientation of the Association
and believes that this emphasis will represent a
continuing competitive advantage to the
Association.
Capital Strength. At December 31, 1996, the Association
had $2.9 million of total equity, representing 13.92% of
total assets. At such date, the Association exceeded all
of its minimum regulatory capital requirements, with
tangible and core capital of 13.10% of adjusted total
assets and risk-based capital of 35.31% of total risk-
weighted assets. See "Regulation -- Depository
Institution Regulation -- Capital Requirements." As a
result of the Conversion, assuming the Company
5
<PAGE>
retains 50% of the net proceeds of the Conversion at the
midpoint of the Estimated Valuation Range, at December
31, 1996, the Association would have had pro forma
stockholders' equity of approximately $3.9 million, or
17.86% of pro forma total assets, and the Company would
have had pro forma consolidated stockholders' equity of
$5.3 million, or approximately 23%, of total pro forma
consolidated assets. See "Historical and Pro Forma
Regulatory Capital Compliance."
Profitability. The Association has been profitable in
each of the last five fiscal years. For the years ended
September 30, 1996 and 1995 and the three months ended
December 31, 1996, the Association's net income was
$129,000, $287,000 and $57,000, respectively. The
Association's return on average assets was .64%, 1.50%
and 1.11% for the years ended September 30, 1996 and
1995 and the three months ended December 31, 1996,
respectively. The Association's return on average total
equity was 4.81%, 12.24% and 8.09% for the years ended
September 30, 1996 and 1995 and the three months ended
December 31, 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations."
Asset Quality. At December 31, 1996, and September 30,
1996 and 1995, the Association had no nonperforming
assets and no loans accounted for on a nonaccrual basis.
The Association's allowance for loan losses at December
31, 1996 totaled $60,000.
The information set forth above should be considered in
the context of the detailed information contained
elsewhere herein, including "Risk Factors." For
additional information, see "Rocky Ford Federal Savings
and Loan Association."
The Association is subject to examination and
comprehensive regulation by the OTS, and the
Association's savings deposits are insured up to
applicable limits by the Savings Association Insurance
Fund ("SAIF"), which is administered by the FDIC. The
Association is a member of and owns capital stock in the
Federal Home Bank ("FHLB") of Topeka, which is one of 12
regional banks in the FHLB System. The Association is
further subject to regulations of the Federal Reserve
Board governing reserves to be maintained and certain
other matters. Regulations significantly affect the
operations of the Association. See "Regulation --
Depository Institution Regulation."
THE CONVERSION The Board of Directors of the Association adopted the
Plan on January 14, 1997 pursuant to which the
Association will convert from a federally chartered
mutual savings and loan association to a federally
chartered stock savings and loan association, (i.e., the
Converted Association), and will thereafter operate as a
wholly owned subsidiary of the Company. See "The
Conversion -- General." Upon consummation of the
Conversion, the Converted Association will issue all of
its outstanding capital stock to the Company in exchange
for at least 50% of the net proceeds from the sale of
the Common Stock in the Conversion.
The OTS has approved the Plan, subject to member
approval and satisfaction of certain other conditions.
The OTS has also approved the Company's application to
acquire all of the capital stock of the Converted
Association and thereby become a savings and loan
holding company, as part of the Conversion.
6
<PAGE>
The Conversion is subject to certain conditions,
including the prior approval of the Plan at a special
meeting of members to be held on ____________, 1997 (the
"Special Meeting").
The portion of the net proceeds from the sale of Common
Stock in the Conversion to be distributed to the
Converted Association by the Company will substantially
increase the Converted Association's capital position,
which will in turn increase the amount of funds
available for lending and investment and provide greater
resources to support current operations by the Converted
Association. This capital will also provide the
Association with additional liquid assets to improve the
Association's interest rate risk position and "cushion"
the effect of a significant increase in interest rates.
The holding company structure will provide greater
flexibility than the Association alone would have for
diversification of business activities and geographic
expansion. Management believes that this increased
capital will enable the Converted Association to compete
more effectively with other types of financial services
organizations. In addition, the Conversion will enhance
the future access of the Company and the Converted
Association to the capital markets and will afford
depositors and others the opportunity to become
stockholders of the Company and thereby participate in
any future growth of the Converted Association.
STOCK PRICING AND Federal regulations require that the aggregate purchase
NUMBER OF SHARES price of the Common Stock to be issued in the Conversion
TO BE ISSUED be consistent with an independent appraisal of the
estimated pro forma market value of the Common Stock
following the Conversion. Ferguson, a firm experienced
in valuing savings institutions, has made an independent
appraisal of the estimated aggregate pro forma market
value of the Common Stock to be issued in the
Conversion. Ferguson has determined that as of December
13, 1996, such estimated pro forma market value was
$3,200,000. See "The Conversion -- Stock Pricing and
Number of Shares to be Issued." The resulting valuation
range in Ferguson's appraisal, which under OTS
regulations extends 15% below and above the estimated
value, is from $2,720,000 to $3,680,000 (the "Estimated
Valuation Range"). The Company, in consultation with its
advisors, has determined to offer the shares of Common
Stock in the Conversion at the Purchase Price of $10.00
per share. SUCH APPRAISAL IS NOT INTENDED AND MUST NOT
BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE
ADVISABILITY OF PURCHASING SUCH SHARES OR AS ANY FORM OF
ASSURANCE THAT, AFTER THE CONVERSION, SUCH SHARES MAY BE
RESOLD AT OR ABOVE THE PURCHASE PRICE. The appraisal
considered a number of factors and was based upon
estimates derived from those factors, all of which are
subject to change from time to time. In preparing the
valuation, Ferguson relied upon and assumed the accuracy
and completeness of financial and statistical
information provided by the Association and the Company.
Ferguson did not verify the financial statements
provided or independently value the assets of the
Association. The appraisal will be further updated
immediately prior to the completion of the Conversion
and could be increased to up to $4,232,000 without a
resolicitation of subscribers based on market and
financial conditions at the completion of the
Conversion. Ferguson received fees and reimbursement of
out-of-pocket expenses totalling not more than $30,000
for its appraisal and for assisting in the preparation
of the Company's business plan.
The total number of shares to be issued in the
Conversion may be increased or decreased without a
resolicitation of subscribers so long as the aggregate
purchase price is not less than the minimum or more than
15% above the maximum of the Estimated Valuation Range.
Based on the Purchase Price of $10.00 per share, the
total number of shares which may be issued without a
resolicitation of subscribers is
7
<PAGE>
from 272,000 to 423,200. For further information, see
"The Conversion --Stock Pricing and Number of Shares to
be Issued."
THE SUBSCRIPTION, The shares of Common Stock to be issued in the
COMMUNITY AND Conversion are being offered at the Purchase Price of
SYNDICATED COMMUNITY $10.00 per share in the Subscription Offering pursuant
OFFERINGS to nontransferable Subscription Rights in the following
order of priority: (i) Eligible Account Holders (the
term "Eligible Account Holders" shall hereinafter mean
depositors whose accounts in the Association totaled
$50.00 or more on December 31, 1995, and those
depositors who had accounts (which totaled $50.00 or
more upon being closed) which were closed by the
Association (for reasons other than at the request of
the depositor) during calendar year 1994); (ii) the ESOP
(i.e., the Company's tax-qualified stock benefit plan);
(iii) Supplemental Eligible Account Holders (i.e.,
depositors whose accounts in the Association totaled
$50.00 or more on _____________, 199_, other than
Eligible Account Holders); and (iv) Other Members (i.e.,
certain depositors and borrower members of the
Association as of ___________, 1997, other than Eligible
Account Holders and Supplemental Eligible Account
Holders). Subscription Rights received in any of the
foregoing categories will be subordinated to the
Subscription Rights received by those in a prior
category, with the exception that any shares of Common
Stock sold in excess of the maximum of the Estimated
Valuation Range may first be sold to the ESOP.
The Company may offer any shares of Common Stock not
subscribed for in the Subscription Offering at the same
price in the Community Offering to members of the
general public to whom the Company delivers a copy of
this Prospectus and the Stock Order Form. In the
Community Offering, preference will be given to natural
persons and trusts of natural persons who are permanent
residents of the Local Community. Subscription Rights
will expire if not exercised by 12:00 Noon, local time,
on ____________, 1997, unless extended (the "Expiration
Date"). THE COMPANY AND THE ASSOCIATION RESERVE THE
ABSOLUTE RIGHT TO ACCEPT OR REJECT ANY ORDERS IN THE
COMMUNITY OFFERING, IN WHOLE OR IN PART, EITHER AT THE
TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE
FOLLOWING THE EXPIRATION DATE.
It is anticipated that shares of Common Stock not
otherwise subscribed for in the Subscription Offering
and Community Offering, if any, may be offered at the
discretion of the Company to certain members of the
general public as part of a Syndicated Community
Offering on a best efforts basis by a selling group of
selected broker-dealers to be managed by Trident
Securities. See "The Conversion -- Syndicated Community
Offering." The Subscription and Community Offerings and
Syndicated Community Offering are referred to
collectively herein as the "Offerings."
The Association and the Company have engaged Trident
Securities to consult with and advise the Company and
the Association with respect to the Offerings, and
Trident Securities has agreed to solicit subscriptions
and purchase orders for shares of Common Stock in the
Offerings. Trident Securities will receive sales
commissions with respect to shares sold in the
Subscription and Community Offerings and Syndicated
Community Offering, if necessary. The Company and the
Association have agreed to indemnify Trident Securities
against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). See "The Conversion -- Plan of
Distribution and Marketing Agent."
The Association has established a Stock Information
Center, which will be managed by Trident Securities, to
coordinate the Offerings, including tabulation of orders
and
8
<PAGE>
answering questions about the Offerings by telephone.
All subscribers will be instructed to mail payment to
the Stock Information Center or deliver payment directly
to the office of the Association. Payment for shares of
Common Stock may be made by cash (if delivered in
person), check or money order or by authorization of
withdrawal from deposit accounts maintained with the
Association. If payment is made through such deposit
account authorization, funds in the account to be used
for such payment will not be available for withdrawal
and will not be released until the Conversion is
completed or terminated or if the subscriber fails to
affirmatively confirm his or her order in the event of a
resolicitation. See "The Conversion --Subscriptions for
Stock in Subscription and Community Offerings."
The Plan provides that the Conversion must be completed
within 24 months after the date of the approval of the
Plan by the members of the Association. The Plan has
been approved by the OTS and is subject to the approval
of the Association's members at the Special Meeting to
be held on ____________, 1997.
PURCHASE LIMITATIONS With the exception of the ESOP, which intends to
purchase 8.0% of the total number of shares of Common
Stock issued in the Conversion, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other
Member nor person (together with associates of and
persons acting in concert therewith) in the Community
Offering and Syndicated Community Offering may purchase
more than $125,000 of the shares of Common Stock sold in
the Conversion. In addition, no person (together with
associates and persons acting in concert therewith) may
purchase in the aggregate more than $125,000 of the
shares of Common Stock issued in the Conversion. The
maximum overall purchase limitation and the amount
permitted to be subscribed for may be increased or
decreased under certain circumstances in the sole
discretion of the Company. The minimum purchase is 25
shares. See "The Conversion -- Limitations on Purchase
of Shares." In the event of an oversubscription, shares
will be allocated as provided in the Plan. See "The
Conversion -- Subscription Offering," " --Community
Offering" and " -- Syndicated Community Offering." In
the event of an increase in the total number of shares
up to the number issuable at 15% above the maximum of
the Estimated Valuation Range, the additional shares may
be distributed and allocated without the resolicitation
of subscribers. See "The Conversion -- Limitations on
Purchase of Shares."
POTENTIAL BENEFITS Option Plan. The Board of Directors of the Company
OF CONVERSION TO intends to implement the Option Plan, contingent upon
MANAGEMENT receipt of OTS non-objection and stockholder approval at
a meeting held no earlier than six months following
completion of the Conversion, but which may be held more
than one year following completion of the Conversion.
Assuming 320,000 shares are issued in the Conversion (at
the midpoint of the Estimated Valuation Range) and
receipt of the required approvals, the Company currently
plans to grant options to purchase 8,000 shares of the
Common Stock to Keith E. Waggoner, Chief Executive
Officer, and 17,600 shares of the Common Stock to all
executive officers and directors as a group (8 persons,
including the chief executive officer), respectively,
under the Option Plan in the year following the
Conversion. The exercise price of the options, which
would be granted at no cost to the recipient thereof,
would be the fair market value of the Common Stock
subject to the option on the date the option is granted.
See "Management of the Association -- Certain Benefit
Plans and Agreements."
MRP. The Board of Directors of the Company intends to
implement the Rocky Ford Financial, Inc. Management
Recognition Plan ("MRP"), subject to receipt of OTS
9
<PAGE>
approval and to stockholder approval at a meeting of the
Company's stockholders which may be held within one year
but no earlier than six months following the Conversion
or may be held more than one year following completion
of the Conversion. Subject to such approvals, the MRP
will purchase an amount of shares after the Conversion
equal to up to 4% of the shares issued in the Conversion
(12,800 shares at the midpoint of the Estimated
Valuation Range), for issuance to executive officers and
directors of the Association and the Company. At the
Purchase Price in the Conversion of $10.00 per share,
the shares to be awarded by the MRP to the directors and
executive officers of the Company would have a value of
$70,400. No shares will be awarded under the MRP prior
to receipt of regulatory and stockholder approval.
Awards under the MRP would be granted at no cost to the
recipients thereof. See "Management of the Association
-- Certain Benefit Plans and Agreements."
Other Benefits. In addition to the Option Plan and the
MRP, the following benefits may or will be realized as a
result of the Conversion, subject in certain cases to
approval of such plans by the OTS: (i) under the
Association's Retirement Plan for Directors and Senior
Officer, each participant will receive, after
terminating service on the Board, an amount equal to
their plan account balance, plus earnings over the
distribution period; (ii) under the ESOP, employees of
the Association, including the executive officers, will
have shares of Common Stock allocated to their
respective accounts in the ESOP; (iii) under the
Association's Incentive Compensation Plan employees of
the Association will receive annual performance and cash
compensation; and (iv) the Chief Executive Officer of
the Association (to be President of the Company and the
Converted Association) has entered into separate
employment agreements with the Association and the
Company to serve in his post-Conversion positions. In
addition to the possible financial benefits under the
benefit plans, management could benefit from certain
statutory and regulatory provisions, as well as certain
provisions in the Company's Certificate of Incorporation
and Bylaws, that may tend to promote the continuity of
existing management. See "Management of the Association
-- Director Compensation," " -- Executive Compensation"
and "-- Certain Benefit Plans and Agreements," "Certain
Restrictions on Acquisitions of the Company and the
Association" and "Certain Anti-takeover Provisions in
the Certificate of Incorporation and Bylaws."
PROSPECTUS DELIVERY AND To ensure that each subscriber receives a Prospectus at
PROCEDURE FOR least 48 hours prior to the Expiration Date in
PURCHASING SHARES accordance with Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), no
Prospectus will be mailed any later than five days prior
to the Expiration Date or hand delivered any later than
two days prior to such date. Execution of a Stock Order
Form will confirm receipt or delivery in accordance with
Rule 15c2-8. Stock Order Forms will be distributed only
with a Prospectus. The executed Stock Order Form must be
accompanied by payment by check, money order, bank draft
or withdrawal authorization to an existing account at
the Association.
To ensure that Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are properly
identified as to their stock purchase priorities, as
well as for purposes of allocating shares based on
subscribers' deposit balances in the event of
oversubscription, such persons must list all of their
deposit accounts at the Association on the Stock Order
Form. Failure to list all such deposit accounts may
result in the inability of the Company or the
Association to fill all or part of a subscription order.
Neither the Company, the Association nor any of their
agents
10
<PAGE>
shall be responsible for any order on which all deposit
accounts of the subscriber have not been fully and
accurately disclosed.
NON-TRANSFERABILITY OF Applicable federal regulations provide that prior to the
SUBSCRIPTION RIGHTS completion of the Conversion, no person shall transfer
or enter into any agreement or understanding to transfer
the legal or beneficial ownership of the Subscription
Rights issued under the Plan or the shares of Common
Stock to be issued upon their exercise. PERSONS
VIOLATING SUCH PROHIBITION MAY LOSE THEIR RIGHT TO
SUBSCRIBE FOR STOCK IN THE CONVERSION AND MAY BE SUBJECT
TO SANCTIONS BY THE OTS. EACH PERSON EXERCISING
SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HIS
OR HER PURCHASE OF COMMON STOCK IS SOLELY FOR THE
PURCHASER'S OWN ACCOUNT AND THAT THERE IS NO AGREEMENT
OR UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH
SHARES.
USE OF PROCEEDS The amount of proceeds from the sale of the Common Stock
in the Conversion will depend upon the total number of
shares actually sold, the number of shares of Common
Stock sold in the Subscription Offering and the
Community Offering and Syndicated Community Offering, if
any, and the actual expenses of the Conversion. As a
result, the actual net proceeds from the sale of the
Common Stock cannot be determined until the Conversion
is completed. Based on the sale of $3,200,000 million of
Common Stock at the midpoint of the Estimated Valuation
Range, the net proceeds are estimated to be
approximately $2,850,000. It is anticipated, however,
that the net proceeds will be between approximately
$2,380,000 and $3,330,000 if the aggregate purchase
price is within the Estimated Valuation Range and that
the net proceeds will be approximately $3,882,000 if the
aggregate purchase price is increased to 15% above the
maximum of the Estimated Valuation Range. See "Pro Forma
Data."
The Company has received OTS approval to purchase all of
the capital stock of the Converted Association to be
issued in the Conversion in exchange for at least 50% of
the net proceeds. Assuming the sale of 320,000 shares of
the Common Stock at the midpoint of the Estimated
Valuation Range and the purchase of 8% of such shares by
the ESOP, the Association would receive $1,425,000 in
cash, and the Company would retain approximately
$1,169,000 in cash and $256,000 in the form of a note
receivable from the ESOP. The ESOP note receivable will
be for a ten-year term and carry an interest rate, which
adjusts annually, equal to the prime rate as published
in The Wall Street Journal plus one percent.
-----------------------
The proceeds retained by the Company after funding the
ESOP initially will be invested in short-term and
intermediate-term securities, including cash and cash
equivalents and U.S. government and agency obligations.
Also, such proceeds will be available for a variety of
corporate purposes, including funding the MRP, if the
MRP is implemented, future acquisitions and
diversification of business, additional capital
contributions, dividends to stockholders and future
repurchases of the Common Stock to the extent permitted
by applicable regulations. The Company currently has no
specific plans, intentions, arrangements or
understandings regarding any acquisitions, dividends or
repurchases.
The proceeds contributed to the Converted Association
will substantially increase the capital of the Converted
Association. The Converted Association ultimately
intends to use such funds for general corporate
purposes, including the origination of loans and other
investments. It is expected that in the interim all or
part of the proceeds will be invested in short-term and
intermediate-term securities, including cash and cash
equivalents and U.S. government and agency
obligations.
11
<PAGE>
MARKET FOR THE
COMMON STOCK
Neither the Company nor the Association has ever issued stock before, and due to
the relatively small size of the Subscription and Community Offerings, it is
unlikely that an active and liquid trading market will develop or be maintained.
Following the completion of the Subscription and Community Offerings, the
Company anticipates that the Common Stock will be traded on the over-the-counter
market through the OTC "Electronic Bulletin Board," under the symbol "RFFI."
Trident Securities intends to make a market in the Common Stock. HOWEVER,
PURCHASERS OF COMMON STOCK SHOULD HAVE A LONG-TERM INVESTMENT INTENT AND
RECOGNIZE THAT THE ABSENCE OF AN ACTIVE AND LIQUID TRADING MARKET MAY MAKE IT
DIFFICULT TO SELL THE COMMON STOCK, AND MAY HAVE AN ADVERSE EFFECT ON THE PRICE.
The development of a public trading market depends upon the existence of willing
buyers and sellers, the presence of which is not within the control of the
Company, the Association or any market maker. There can be no assurance that an
active and liquid market for the Common Stock will develop in the foreseeable
future or, once developed, will continue. Even if a market develops, there can
be no assurance that stockholders will be able to sell their shares at or above
the initial Purchase Price after the completion of the Stock Conversion.
Purchasers of Common Stock should consider the potentially illiquid and long-
term nature of their investment in the shares being offered hereby. See "Risk
Factors -- Potentially Limited and Illiquid Market for the Common Stock" and
"Market for the Common Stock."
DIVIDENDS
The Board of Directors currently intends to adopt a policy of paying regular
semi-annual cash dividends on the Common Stock at an initial annual rate of 3.0%
of the $10.00 per share purchase price of the Common Stock in the Conversion
($0.30 per share), with the first dividend being declared and paid no earlier
than for the quarter ending December 31, 1997. However, there can be no
assurance that dividends will be paid or, if paid initially, will continue to be
paid in the future. In addition, subject to regulatory approval, the Board of
Directors may determine to pay special cash dividends. Special cash dividends,
if paid, may be paid in addition to, or in lieu of, regular cash dividends.
Like all possible dividend payments, there can be no assurance that special
dividends will ever be paid. The payment of regular or special dividends will
be subject to the requirements of applicable law and the determination by the
Board of Directors of the Company that the net income, capital and financial
condition of the Company and the Association, thrift industry trends and general
economic conditions justify the payment of dividends. See "Dividend Policy" and
"Regulation -- Depository Institution Regulation -- Dividend Restrictions."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be considered
by prospective investors.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following summary of selected consolidated financial information and
other data does not purport to be complete and is qualified in its entirety by
reference to the detailed information and Financial Statements and accompanying
Notes appearing elsewhere in this Prospectus.
FINANCIAL CONDITION AND OTHER DATA:
<TABLE>
<CAPTION>
At
December 31, At September 30,
- --------------------------------------------------------------- ---------------------------------------------
1996 1996 1995 1994 1993 1992
----------- ------ ------ ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total assets..................................... $20,536 $20,388 $19,653 $19,621 $19,667 $19,805
Interest-bearing deposits........................ 3,697 3,897 3,683 3,380 4,170 3,937
Securities available for sale.................... 627 585 445 295 295 295
U.S. governmental agency
securities-held to maturity..................... 500 500 2,700 3,573 2,004 500
Mortgage-backed securities, held
to maturity..................................... 2,595 2,617 1,373 1,568 2,049 2,884
Loans receivable, net............................ 12,596 12,287 10,984 10,361 10,491 10,751
Savings deposits................................. 17,335 17,145 16,702 17,137 17,420 17,858
Equity substantially restricted.................. 2,859 2,778 2,573 2,192 1,962 1,689
Number of:
Real estate loans outstanding.................. 418 403 401 401 425 440
Savings accounts............................... 1,663 1,652 1,675 1,709 1,815 1,867
Offices open................................... 1 1 1 1 1 1
</TABLE>
13
<PAGE>
OPERATING DATA:
<TABLE>
<CAPTION>
Three Months Ended
December 31, Years Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................. $ 395 $ 371 $ 1,525 $ 1,471 $ 1,479 $ 1,583 $1,796
Interest expense.................. 207 208 820 734 684 763 1,042
------- ------- ------- ------- ------- ------- ------
Net interest income............ 188 163 705 737 795 820 754
(Provision for) recovery of
loan losses...................... -- -- -- 69 (18) (24) (40)
------------------------------------------------------------------------
Net interest income after
provision for loan losses..... 188 163 705 806 777 796 714
------- ------- ------- ------- ------- ------- ------
Noninterest income................ 11 5 21 26 18 33 10
------- ------- ------- ------- ------- ------- ------
Subtotal....................... 199 168 726 832 795 829 724
------- ------- ------- ------- ------- ------- ------
Noninterest expense:
Compensation and benefits........ 61 53 232 230 217 203 174
Other (1)........................ 56 41 307 197 191 210 189
------- ------- ------- ------- ------- ------- ------
Total noninterest expense........ 117 94 539 427 408 413 363
------- ------- ------- ------- ------- ------- ------
Income before taxes............ 82 74 187 405 387 416 361
Income tax expense................ 25 28 58 118 157 143 142
------- ------- ------- ------- ------- ------- ------
Net income..................... $ 57 $ 46 $ 129 $ 287 $ 230 $ 273 $ 219
======= ======= ======= ======= ======= ======= ======
</TABLE>
_______________
(1) For the year ended September 30, 1996, includes an additional expense of
$106,000 for payment of the SAIF Special Assessment.
14
<PAGE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
At or for the Three Months
Ended December 31, At or For the Years Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on assets (ratio of net
earnings to average total
assets)............................. 1.11% (a) .94% (a) 0.64% 1.50% 1.14% 1.38% 1.08%
Return on equity (ratio of net
earnings to average equity)......... 8.03 (a) 7.32 (a) 4.81 12.24 10.69 14.45 13.79
Ratio of average interest-earning
assets to average interest-bearing
liabilities......................... 116.53 113.54 116.14 114.83 111.93 110.39 107.85
Ratio of net interest income, after
provision for loan losses, to
noninterest expense................... 160.08 172.82 130.85 188.60 190.25 192.74 197.02
Net interest rate spread............... 3.06 2.82 2.90 3.33 3.60 3.81 3.38
Net yield on average interest-
earning assets........................ 3.74 3.42 3.57 3.91 4.02 4.23 3.78
QUALITY RATIOS:
Non-performing loans to total loans
at end of period.................... -- -- 0.00 0.00 0.05 0.00 0.63
Non-performing loans to total assets... -- -- 0.00 0.00 0.03 0.00 0.34
Non-performing assets to total
assets at end of period............. -- -- 0.00 0.00 0.15 0.41 1.00
Allowance for loan losses to non-
performing loans at end of
period.............................. -- -- 0.00 0.00 2560.00 0.00 155.88
Allowance for loan losses to
total loans, net.................... .48 .54 0.49 0.55 1.24 1.12 0.99
CAPITAL RATIOS:
Equity to total assets at end
of period............................ 13.92 13.56 13.63 13.09 11.17 9.98 8.53
Average equity to average assets....... 13.70% 12.78% 13.27% 12.24% 10.70% 9.56% 7.82%
</TABLE>
_______________
(a) Annualized
15
<PAGE>
RISK FACTORS
BEFORE INVESTING IN THE SHARES OF THE COMMON STOCK OFFERED BY THIS
PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS
PRESENTED BELOW.
ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION
As a result of the Conversion, the Association's equity will be
substantially increased. At December 31, 1996, the Association's ratio of total
equity to total assets was 13.92%, and, assuming the sale of 320,000 shares in
the Conversion (i.e., the midpoint of the Estimated Valuation Range), such ratio
at the Company is expected to increase to 23.15%. Absent an increase in
consolidated net income that corresponds to the increase in the consolidated
equity of the Company and the Association from the Conversion, the Company and
the Association are unlikely to maintain a return on average equity (i.e., net
income divided by average equity) at historical levels and, as a result, it is
expected that the Company's return on equity initially will be below industry
norms. Additionally, the increased costs resulting from the obligations
associated with being a public company, including increased professional costs
and compensation-related expenses, will have a negative effect on net income.
Consequently, investors should carefully evaluate and consider the effect of a
subpar return on equity on the market price of the Common Stock. Further, there
can be no assurance that the Company will be able to increase net income
following the Conversion in amounts commensurate with the increase in equity
resulting from the Conversion.
FUTURE OF THRIFT INDUSTRY
It is currently expected that the U.S. Congress will soon take up
legislation that may eliminate savings associations as a separate industry.
Legislation enacted in September 1996 provides that the SAIF, the current
federal insurer of the Association's deposit accounts, will be merged with the
Bank Insurance Fund (the "BIF") which insures the deposits of commercial banks
on January 1, 1999 but only if there are no thrift institutions left. The
legislation directs the Department of the Treasury to submit a report to the
Congress by March 31, 1997 with its findings with respect to the development of
a common charter for banks and thrifts. The Association cannot predict what the
attributes of any such common charter would be or whether any legislation will
result from this study. It is possible, however, that the common charter may
not offer all the advantages which the Association now enjoys such as
unrestricted nationwide branching and the absence of activities restrictions on
savings and loan holding companies which do not control more than one savings
association. If the Association were to become subject to the restrictions
applicable to branching by banks headquartered in Colorado, its branching would
generally be restricted to Colorado. If the Company were to become subject to
the restrictions on bank holding companies, its activities would be limited to
activities that have been determined by the Board of Governors of the Federal
Reserve System to be so closely related to banking as to be a proper incident
thereto. If Congress fails to take action to create a common charter for banks
and thrift institutions or otherwise fails to end the thrift industry's separate
existence, the currently contemplated merger of the deposit insurance funds
would not take place and a shrinking thrift industry would be required to
support a separate deposit fund with certain fixed costs with a shrinking
assessment base.
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
EFFECT ON NET INTEREST INCOME. The operations of the Association are
substantially dependent on its net interest income, which is the difference
between the interest income earned on its interest-earning assets and the
interest expense paid on its interest-bearing liabilities. Like most savings
institutions, the Association's earnings are affected by changes in market
interest rates and other economic factors beyond its control. Substantially all
of the Association's loans have terms of 10 to 15 years, while deposit accounts
have significantly shorter terms to maturity. If an institution's interest-
earning assets (primarily loans) have longer effective maturities than its
interest-bearing liabilities (deposits), the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in
16
<PAGE>
interest rates. In addition, rising interest rates may negatively affect the
Association's earnings due to diminished loan demand. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset and Liability Management" and "Business of the Bank -- Lending Activities"
and " -- Deposit Activities and Other Sources of Funds."
EFFECT ON SECURITIES. In addition to affecting interest income and
expenses, changes in interest rates also can affect the value of the
Association's investment portfolio, a substantial portion of which is comprised
of fixed-rate instruments. Generally, the value of fixed-rate instruments
fluctuates inversely with changes in interest rates. The Association has sought
to reduce the vulnerability to changes in interest rates by managing the nature
and composition of its securities portfolio and by maintaining a high level of
liquid assets. As a consequence of the fluctuation in interest rates, the
carrying value of the Association's held-to-maturity securities, including
mortgage-backed securities can exceed the market value of such securities. At
December 31, 1996, the fair value of such securities, including mortgage-backed
securities exceeded the carrying value by $59,000. The market value of the
available-for-sale securities held by the Association exceeded the amortized
cost of such securities by $309,000 at December 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset and Liability Management."
PREPAYMENT RISK. Changes in interest rates also can affect the
average life of loans and mortgage-backed securities. Lower interest rates in
recent periods have resulted in increased prepayments of loans and mortgage-
backed securities, as borrowers refinanced to reduce borrowing costs. Under
these circumstances, the Association is subject to reinvestment risk to the
extent that it is not able to reinvest such prepayments at rates which are
comparable to the rates on the maturing loans or securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LIMITED AND ILLIQUID MARKET FOR THE COMMON STOCK
Based on the midpoint of the Estimated Valuation Range, it is
anticipated that, following completion of the Conversion, the Company will have
approximately 320,000 shares of Common Stock issued and outstanding. Of such
amount, 25,600 of such shares will be held by the ESOP and an additional 100,000
shares will be held by directors and management of the Association and the
Company, limiting the number of shares held by the general public. The Company
has never issued stock before and, due to the relatively small size of the
offering and the significant amount of stock expected to be held by Management
and the ESOP, it is highly unlikely that an active market for the Common Stock
will develop or, if developed, will be maintained, or that quotations for the
Common Stock will be available. The presence of a sufficient number of buyers
and sellers at any given time is a factor over which neither the Company nor any
market maker has control. The Company does not intend to list the Common Stock
on a national securities exchange or apply to have the Common Stock quoted on
any automated quotation system upon completion of the Conversion. Following the
completion of the Subscription and Community Offerings, the Company anticipates
that the Common Stock will be traded on the over-the-counter market through the
OTC "Electronic Bulletin Board" under the symbol "RFFI." Trident Securities
intends to make a market in the Common Stock. Such efforts are expected to
include solicitation of potential buyers and sellers in order to match buy and
sell orders. However, Trident Securities will not be subject to any continuing
obligation to continue such efforts in the future.
The development of a liquid public market depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Association or any market maker. Due to the size of the
Offering it is highly unlikely that a stockholder base sufficiently large to
create an active trading market will develop and be maintained. Investors in
the Common Stock could have difficulty disposing of their shares and should not
view the Common Stock as a short-term and liquid investment. The absence of an
active and liquid trading market for the Common Stock could affect the price and
liquidity of the Common Stock. See "Market for the Common Stock."
17
<PAGE>
DEPENDENCE ON CHIEF EXECUTIVE OFFICER
The Company and the Association depend to a considerable degree on
Chief Executive Officer, Keith Waggoner, and the loss of Mr. Waggoner could
adversely affect the Company and the Association. The Company and the
Association have entered into an employment agreement with Mr. Waggoner to serve
as President and Chief Executive Officer of the Company and the Association upon
consummation of the Conversion. See "Management of the Association."
CERTIFICATE OF INCORPORATION, BYLAW AND STATUTORY PROVISIONS THAT COULD
DISCOURAGE HOSTILE ACQUISITIONS OF CONTROL
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage nonnegotiated takeover attempts that certain
stockholders might deem to be in their interests or through which stockholders
might otherwise receive a premium for their shares over the then current market
price and that may tend to perpetuate existing management. These provisions
include: the classification of the terms of the members of the Board of
Directors; supermajority voting provisions for the approval of certain business
combinations; elimination of cumulative voting by stockholders in the election
of directors; certain provisions relating to meetings of stockholders;
restrictions on the acquisition of the Company's equity securities; and
provisions allowing the Board of Directors to consider nonmonetary factors in
evaluating a business combination or a tender or exchange offer. The provisions
in the Company's Certificate of Incorporation requiring a supermajority vote for
the approval of certain business combinations and containing restrictions on
acquisitions of the Company's equity securities provide that the supermajority
voting requirements or acquisition restrictions do not apply to business
combinations or acquisitions meeting specified Board of Directors approval
requirements. The Certificate of Incorporation also authorizes the issuance of
1,000,000 shares of serial preferred stock as well as additional shares of
Common Stock up to a total of 4,000,000 outstanding shares of capital stock.
These shares could be issued without stockholder approval on terms or in
circumstances that could deter a future takeover attempt.
The Certificate of Incorporation, Bylaw and statutory provisions, as
well as certain other provisions of state and federal law and certain provisions
in the Company's and the Association's employee benefit plans and employment
agreements and change in control severance agreements, may have the effect of
discouraging or preventing a future takeover attempt in which stockholders of
the Company otherwise might receive a substantial premium for their shares over
then current market prices. For a detailed discussion of those provisions, see
"Management of the Association -- Certain Benefit Plans and Agreements,"
"Description of Capital Stock," "Certain Restrictions on Acquisition of the
Company, the Converted Association and the Association" and "Certain Anti-
Takeover Provisions in the Certificate of Incorporation and Bylaws."
VALUATION NOT INDICATIVE OF FUTURE PRICE OF COMMON STOCK
The final aggregate purchase price of the Common Stock in the
Conversion will be based upon an independent appraisal. Such valuation is not
intended, and must not be construed, as a recommendation of any kind as to the
advisability of purchasing such shares of Common Stock. Because such valuation
is necessarily based upon estimates and projections of a number of matters, all
of which are subject to change from time to time, no assurance can be given that
persons purchasing shares of Common Stock in the Conversion will thereafter be
able to sell such shares at or above the Purchase Price. See "The Conversion --
Stock Pricing and Number of Shares to be Issued."
POSSIBLE INCOME TAX CONSEQUENCES OF DISTRIBUTION OF SUBSCRIPTION RIGHTS
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are deemed to have an
ascertainable value, the receipt of such rights would be taxable to recipients
who exercise the Subscription Rights in an amount equal to such value and the
Association could recognize a gain on such distribution. Whether Subscription
Rights are considered to have ascertainable value is an inherently factual
determination. The Association has received an opinion of Ferguson that such
rights have no value. The opinion
18
<PAGE>
of Ferguson is not binding on the IRS. See "The Conversion -- Effect of
Conversion to Stock Form on Depositors and Borrowers of the Association -- Tax
Effects."
POSSIBLE DILUTIVE EFFECT OF MRP AND STOCK OPTIONS
It is expected that, following the consummation of the Conversion, the
Company will adopt the Option Plan and the MRP, both of which would be subject
to stockholder approval, and that such plans would be considered and voted upon
at a meeting of the Company's stockholders to be held within one year but not
less than six months after the Conversion. Under the MRP, employees and
directors could be awarded an aggregate amount of Common Stock equal to 4% of
the shares issued in the Conversion, and under the Option Plan, employees and
directors could be granted options to purchase an aggregate amount of Common
Stock equal to 10% of the shares issued in the Conversion at exercise prices
equal to the market price of the Common Stock on the date of grant. Under the
MRP, the shares issued to directors and employees could be newly issued shares
or shares purchased in the open market. In the event the shares issued under
the MRP and the Option Plan consist of newly issued shares of Common Stock, the
interests of existing stockholders would be diluted. If the shares to fund the
MRP and Option Plan are assumed to come from newly issued shares purchased
directly from the Company, and further assuming that all options granted under
the Option Plan are exercised, existing stockholders' ownership interests will
be diluted by 12.30%. At the midpoint of the Estimated Valuation Range, if all
shares under the MRP and the Option Plan were newly issued and the exercise
price for the option shares were equal to the Purchase Price per share in the
Conversion, the number of outstanding shares of Common Stock would increase from
320,000 to 364,800, the pro forma stockholders' equity per share of the
outstanding Common Stock at December 31, 1996 would have been $15.83, compared
with $16.64 without such plans, and the pro forma net income per share of the
outstanding Common Stock for the year ended September 30, 1996 would have been
$.60, compared with $.63 without such plans. See "Pro Forma Data" and
"Management of the Association -- Certain Benefit Plans and Agreements --
Management Recognition Plan" and "-- Stock Option and Incentive Plan."
POTENTIAL IMPACT ON VOTING CONTROL OF PURCHASES BY MANAGEMENT
The level of ownership or control of the Common Stock after the
Conversion by directors and officers of the Company is expected to be
sufficiently high such that, if each member of management were to act
consistently with each other, management as a whole would have significant
influence over the outcome of any stockholder vote requiring a majority vote and
in the election of directors, and would have veto power in matters requiring the
approval of 80% of the Company's outstanding Common Stock. Thus, such level of
ownership may tend to promote the continuity of existing management. Further,
under such circumstances, management might have the power to authorize actions
that could be viewed as contrary to the best interests of non-affiliated holders
of the Common Stock and might have veto power over actions that such holders may
deem to be in their best interests.
In particular, it is currently expected that directors and executive
officers will subscribe for approximately 100,000 shares, or 31.25% of the
Common Stock (assuming the sale of 320,000 shares at the midpoint of the
Estimated Valuation Range). Based upon the ESOP's purchase of 8.0% of the
Common Stock in the Conversion (25,600 shares at the midpoint of the Estimated
Valuation Range) and assuming the issuance to the MRP of newly issued shares of
Common Stock equal to 4.0% of the Common Stock issued in the Conversion (12,800
shares at the midpoint of the Estimated Valuation Range), management would
initially control 41.59% of the Common Stock outstanding (based upon the
midpoint of the Estimated Valuation Range). If all of the options currently
expected to be granted under the Option Plan (options for 32,000 shares at the
midpoint of the Estimated Valuation Range) were exercised, the percentage of
shares controlled by such persons would be 46.71% of the total number of shares
of Common Stock outstanding (based upon the midpoint of the Estimated Valuation
Range). See "Pro Forma Data," "Proposed Management Purchases," "Management of
the Association -- Certain Benefit Plans and Agreements," "The Conversion --
Regulatory Restrictions on Acquisition of the Common Stock," "Certain
Restrictions on Acquisition of the Company and the Association" and "Certain
Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws."
19
<PAGE>
POTENTIAL COST OF ESOP AND MRP
It is anticipated that the ESOP will purchase 8% of the Common Stock
sold in the Conversion with funds borrowed from the Company. The cost of
acquiring the ESOP shares will be $217,600, $256,000, $294,400 and $338,560 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. In addition, following the Conversion, and
subject to regulatory and stockholder approval, the Company intends to implement
the MRP, under which employees and directors could be awarded (at no cost to
them) an aggregate amount of Common Stock equal to 4% of the shares issued in
the Conversion. Assuming the sale in the Conversion of the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range, and assuming
the shares of Common Stock to be awarded under the MRP have a cost equal to the
Purchase Price of $10.00 per share, the reduction to stockholders' equity of
funding the MRP would be $108,800, $128,000, $147,200 and $169,280,
respectively.
Accounting practices require an employer such as the Company to record
compensation expense in an amount equal to the fair value of shares committed to
be released from plans such as the ESOP. If shares of Common Stock appreciate
in price over time, compensation expense related to the ESOP may be materially
increased as a result, although the extent of such an increase in expense cannot
be accurately quantified at this time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Impact of New
Accounting Standards."
ROCKY FORD FINANCIAL, INC.
Rocky Ford Financial, Inc. was incorporated under the laws of the
State of Delaware in January 1997 at the direction of the Board of Directors of
the Association for the purpose of serving as a savings and loan holding company
of the Converted Association upon the acquisition of all of the capital stock
issued by the Converted Association in the Conversion. The Company has received
approval from the OTS to acquire control of the Converted Association, subject
to satisfaction of certain conditions. Prior to the Conversion, the Company has
not engaged and will not engage in any material operations. Upon consummation
of the Conversion, the Company will have no significant assets other than the
outstanding capital stock of the Converted Association, up to 50% of the net
proceeds of the Conversion (after deducting amounts infused into the
Association and used to fund the ESOP) and a note receivable from the ESOP.
Upon consummation of the Conversion, the Company's principal business will be
overseeing the business of the Converted Association and investing the portion
of the net Conversion proceeds retained by it, and the Company will register
with the OTS as a savings and loan holding company.
As a holding company, the Company will have greater flexibility than
the Association to diversify its business activities through existing or newly
formed subsidiaries or through acquisition or merger with other financial
institutions, although the Company currently does not have any plans,
agreements, arrangements or understandings with respect to any such acquisitions
or mergers. After the Conversion, the Company will be classified as a unitary
savings and loan holding company and will be subject to regulation by the OTS.
The Company's executive offices are located at 801 Swink Avenue, Rocky
Ford, Colorado 81067-0032, and its main telephone number is (719) 254-7642.
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
The Association is a federal mutual savings and loan association
operating through a single office located in Rocky Ford, Colorado and serving
Otero County, Colorado. The Association was chartered as a federal mutual
savings and loan association and received federal insurance of its deposit
accounts in 1934, under its current name of Rocky Ford Federal Savings and Loan
Association. At December 31, 1996, the Association had total assets of $20.5
million, total deposits of $17.3 million and equity of $2.9 million.
20
<PAGE>
The principal business of the Association consists of attracting
deposits from the general public and investing these deposits in loans secured
by first mortgages on single-family residences in the Association's market area.
The Association derives its income principally from interest earned on loans
and, to a lesser extent, interest earned on mortgage-backed securities and
investment securities and noninterest income. Funds for these activities are
provided principally by operating revenues, deposits and repayments of
outstanding loans and investment securities and mortgage-backed securities.
The Association's executive offices are located at 801 Swink Avenue,
Rocky Ford, Colorado 81067-0032, and its main telephone number is (719) 254-
7642.
USE OF PROCEEDS
The amount of proceeds from the sale of the Common Stock in the
Conversion will depend upon the total number of shares actually sold in the
Subscription Offering and the Community Offering and the Syndicated Community
Offering, if any, and the actual expenses of the Conversion. As a result, the
actual net proceeds from the sale of the Common Stock cannot be determined until
the Conversion is completed. Based on the sale of $3,200,000 of Common Stock at
the midpoint of the Estimated Valuation Range, the net proceeds from the sale of
the Common Stock are estimated to be approximately $2,850,000. The Company has
received regulatory approval from the OTS to purchase all of the capital stock
of the Converted Association to be issued in the Conversion in exchange for at
least 50% of the net proceeds. Based on the foregoing assumption and the
purchase of 8% of the shares to be issued in the Conversion by the ESOP, the
Association would receive approximately $1,425,000 in cash, and the Company
would retain approximately $1,169,000 in cash and $256,000 in the form of a note
receivable from the ESOP. The ESOP note receivable will be for a ten-year term
and carry an interest rate, which adjusts annually, equal to the prime rate as
published in The Wall Street Journal plus one percent.
-----------------------
The proceeds retained by the Company, after funding the ESOP,
initially will be invested in short-term and intermediate-term securities
including cash and cash equivalents and U.S. government and agency obligations.
Such proceeds will be available for a variety of corporate purposes, including
funding the MRP, if implemented, future acquisitions and diversification of
business, additional capital contributions, dividends to stockholders and
future repurchases of the Common Stock to the extent permitted by applicable
regulations. The Company currently has no specific plans, intentions,
arrangements or understandings regarding acquisitions, capital contributions,
dividends or repurchases. Due to the limited nature of the Company's business
activities, the Company believes that the net proceeds retained after the
Conversion, earnings on such proceeds and payments on the ESOP note receivable
will be adequate to meet the Company's financial needs until dividends are paid
by the Converted Association. However, no assurance can be given that the
Company will not have a need for additional funds in the future. For additional
information, see "Regulation -- Depository Institution Regulation -- Dividend
Restrictions."
The proceeds contributed to the Converted Association will ultimately
become part of the Converted Association's general corporate funds to be used
for its business activities, including making loans and investments. Initially
it is expected that the proceeds will be invested in short-term and
intermediate-term securities including cash and cash equivalents and U.S.
government and agency obligations. The additional capital will also provide the
Association with additional liquidity to improve the Association's interest rate
risk position and "cushion" the effect of a significant increase in interest
rates. The Converted Association ultimately plans to use such proceeds
primarily to originate loans in the ordinary course of business.
Following the one-year anniversary of the completion of the Conversion
(or sooner if permitted by the OTS), and based upon then existing facts and
circumstances, the Company's Board of Directors may determine to repurchase
shares of Common Stock, subject to any applicable statutory and regulatory
requirements. Such facts and circumstances may include, but are not limited to:
(i) market and economic factors such as the price at which the stock is trading
in the market, the volume of trading, the attractiveness of other investment
alternatives in terms of the rate of return and risk involved in the investment,
the ability to increase the book value and/or earnings per share
21
<PAGE>
of the remaining outstanding shares, and an improvement in the Company's return
on equity; (ii) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its stockholders. Any stock
repurchases will be subject to the determination of the Company's Board of
Directors that the Company and the Association will be capitalized in excess of
all applicable regulatory requirements after any such repurchases. The payment
of dividends or repurchasing of stock, however, would be prohibited if
stockholders' equity would be reduced below the amount required for the
liquidation account. See "Dividend Policy" and "The Conversion -- Certain
Restrictions on Purchase or Transfer of Shares After the Conversion."
Set forth below are the estimated investable net proceeds from the
Conversion, assuming the sale of the Common Stock at the minimum, midpoint,
maximum and maximum, as adjusted, of the Estimated Valuation Range and assuming
that the ESOP purchases 8% of the shares issued in the Conversion and the MRP
purchases 4% of the shares issued in the Conversion.
<TABLE>
<CAPTION>
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
272,000 Shares 320,000 Shares 368,000 Shares 423,200 Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Gross offering proceeds............ $2,720 $3,200 $3,680 $4,232
Less estimated offering expenses... (340) (350) (350) (350)
------ ------ ------ ------
Estimated net offering
proceeds....................... 2,380 2,850 3,330 3,882
Less: ESOP funded by the Company.. (218) (256) (294) (339)
MRP........................ (109) (128) (147) (169)
------ ------ ------ ------
Estimated investable net
proceeds....................... $2,054 $2,466 $2,888 $3,374
====== ====== ====== ======
</TABLE>
DIVIDEND POLICY
GENERAL
The payment of dividends on the Common Stock will be subject to
determination and declaration by the Board of Directors of the Company. The
Board of Directors currently intends to establish a policy of paying regular
semi-annual cash dividends on the Common Stock at an initial annual rate of 3.0%
of the $10.00 per share purchase price of the Common Stock in the Conversion
($0.30 per share), with the first dividend being declared and paid no earlier
than for the quarter ending December 31, 1997. In addition, from time to time,
the Board of Directors may determine to pay special cash dividends. Special
cash dividends, if paid, may be paid in addition to, or in lieu of, regular cash
dividends. The payment of dividends, however, will be subject to the
requirements of applicable law and the determination by the Board of Directors
of the Company that the net income, capital and financial condition of the
Company and the Association, thrift industry trends and general economic
conditions justify the payment of dividends, and there can be no assurance that
dividends will be paid or, if paid, will continue to be paid in the future.
Since the Company initially will have no significant source of income
other than dividends from the Converted Association, principal and interest
payments on the note payable from the ESOP and earnings from investment of the
cash proceeds of the Conversion retained by the Company, the payment of
dividends by the Company will depend in large part upon the amount of the
proceeds from the Conversion retained by the Company and the Company's earnings
thereon and the receipt of dividends from the Converted Association, which is
subject to various tax and regulatory restrictions on the payment of dividends.
At December 31, 1996, assuming the Association was a stock association, the
amount that would have been available to be paid by the Association to the
Company in the form of dividends under existing regulatory limitations and
restrictions was approximately $1.5 million (this does not consider the need for
the Association to maintain the liquidation account for Association
22
<PAGE>
members). Unlike the Converted Association, the Company is not subject to
regulatory restrictions on the payment of dividends to stockholders. Under the
Delaware General Corporation Law, dividends may be paid either out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. For additional
information, see "Regulation -- Depository Institution Regulation -- Capital
Requirements," " -- Dividend Restrictions" and "Taxation."
TAX CONSIDERATIONS
In addition to the foregoing, earnings of the Association or the
Converted Association appropriated for bad debt reserves and deducted for
federal income tax purposes cannot be used by the Converted Association to pay
cash dividends to the Company without the payment of federal income taxes by the
Association at the then current income tax rate on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation -- Federal Income Taxation" and
Note 9 of the Notes to Financial Statements included elsewhere herein. The
Company does not contemplate any distribution by the Association that would
result in a recapture of the Association's bad debt reserve or create the above-
mentioned federal tax liabilities.
MARKET FOR THE COMMON STOCK
It is anticipated that following completion of the Conversion the
Company will have approximately 320,000 shares of Common Stock issued and
outstanding based on the midpoint of the Estimated Valuation Range. The Company
has never issued stock before, and due to the relatively small size of the
Offering it is highly unlikely that an active market for the Common Stock will
develop or be maintained, or that quotations for the Common Stock will be
available. The presence of a sufficient number of buyers and sellers at any
given time is a factor over which neither the Company nor any market maker has
control. Following the completion of the Subscription and Community Offerings,
the Company anticipates that the Common Stock will be traded on the over-the-
counter market through the OTC "Electronic Bulletin Board," under the symbol
"RFFI." Trident Securities intends to make a market in the Common Stock.
However, purchasers of Common Stock should have a long-term investment intent
and recognize that the absence of an active and liquid trading market may make
it difficult to sell the Common Stock, and may have an adverse effect on the
price.
23
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization, including deposits, of the Association at December 31, 1996 and
the pro forma consolidated capitalization of the Company giving effect to the
sale of the Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range based upon the assumptions set forth
under "Use of Proceeds" and below. For additional financial information
regarding the Association, see the Financial Statements and related Notes
appearing elsewhere herein. Depending on market and financial conditions, the
total number of shares to be issued in the Conversion may be significantly
increased or decreased above or below the midpoint of the Estimated Valuation
Range. No resolicitation of subscribers and other purchasers will be made
unless the aggregate purchase price of the Common Stock sold in the Conversion
is below the minimum of the Estimated Valuation Range or is above 15% above the
maximum of the Estimated Valuation Range. A CHANGE IN THE NUMBER OF SHARES TO
BE ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT THE COMPANY'S PRO FORMA
CAPITALIZATION. SEE "PRO FORMA DATA" AND "THE CONVERSION -- STOCK PRICING AND
NUMBER OF SHARES TO BE ISSUED."
<TABLE>
<CAPTION>
Capitalization Pro Forma Consolidated Capitalization of
of the the Company at December 31, 1996 Based on the Sale of
------------------------------------------------------------------
Association at 272,000 Shares 320,000 Shares 368,000 Shares 423,200 Shares
December 31, at $10.00 at $10.00 at $10.00 at $10.00
1996 Per Share Per Share Per Share Per Share
-------------- --------------- --------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1)................................... $17,335 $17,335 $17,335 $17,335 $17,335
FHLB advances.................................. -- -- -- -- --
-------------- -------------- -------------- ------------- --------------
Total deposits and borrowed funds.......... $17,335 $17,335 $17,335 $17,335 $17,335
============== ============== ============== ============= ==============
Capital stock:
Preferred stock, par value $.01 per share:
authorized - 1,000,000 shares;
assumed outstanding - none............... $ -- $ -- $ -- $ -- $ --
Common Stock, par value $.01 per share
authorized - 3,000,000 shares;
shares to be outstanding - as shown
(2)(3).................................. -- 3 3 4 4
Paid-in capital (2)(3)....................... -- 2,377 2,847 3,326 3,878
Less: Common Stock acquired by ESOP (4)..... -- (218) (256) (294) (339)
Common stock acquired by MRP (3)... -- (109) (128) (147) (169)
Retained earnings (5)....................... 2,664 2,664 2,664 2,664 2,664
Unrealized gain on securities available for
sale....................................... 195 195 195 195 195
-------------- -------------- -------------- ------------- --------------
Total stockholders' equity (6)........... $ 2,859 $ 4,913 $ 5,325 $ 5,747 $ 6,233
============== ============== ============== ============= ==============
</TABLE>
(footnotes on following page)
24
<PAGE>
____________________
(1) Does not reflect withdrawals from savings accounts for the purchase of
Common Stock in the Conversion; any withdrawals will reduce pro forma
capitalization by the amount of such withdrawals.
(2) Does not reflect additional shares of Common Stock that possibly could be
purchased by participants in the Option Plan, if implemented, under which
directors, executive officers and other employees could be granted options
to purchase an aggregate amount of Common Stock equal to 10% of the shares
issued in the Conversion (32,000 shares at the midpoint of the Estimated
Valuation Range) at exercise prices equal to the market price of the Common
Stock on the date of grant. Implementation of the Option Plan will require
regulatory and stockholder approval. See "Management of the Association --
Certain Benefit Plans and Agreements -- Stock Option and Incentive Plan"
and "Risk Factors -- Possible Dilutive Effect of MRP and Stock Options."
(3) Assumes a number of shares of Common Stock equal to 4% of the Common Stock
to be sold in the Conversion will be purchased by the MRP through open
market purchases. The dollar amount of the Common Stock to be purchased by
the MRP is based on the $10.00 per share Purchase Price in the Conversion,
represents unearned compensation and is reflected as a reduction of
capital. Such amount does not reflect possible increases or decreases in
the value of such stock relative to the Purchase Price in the Conversion.
As the Association accrues compensation expense to reflect the vesting of
such shares pursuant to the MRP, the charge against capital will be reduced
accordingly. Implementation of the MRP will require regulatory and
stockholder approval. If the shares to fund the MRP are assumed to come
from authorized but unissued shares purchased by the MRP from the Company
at the Purchase Price within the year following the Conversion, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, the number of outstanding shares would be 282,880 shares,
332,800 shares, 382,720 shares and 440,128 shares, respectively, and total
stockholders' equity would be $5,021,000, $5,453,000, $5,895,000 and
$6,402,000, respectively. If the MRP acquires authorized but unissued
shares from the Company, stockholders' ownership in the Company would be
diluted by approximately 3.85%. See "Management of the Association --
Certain Benefit Plans and Agreements -- Management Recognition Plan," "Pro
Forma Data" and "Risk Factors -- Possible Dilutive Effect of MRP and Stock
Options."
(4) Assumes 8% of the shares of Common Stock to be sold in the Conversion are
purchased by the ESOP, and that the funds used to purchase such shares are
borrowed from the Company out of net proceeds. Although repayment of such
debt will be secured solely by the shares purchased by the ESOP, the
Association or the Company expects to make discretionary contributions to
the ESOP in an amount at least equal to the principal and interest payments
on the ESOP debt. The approximate amount expected to be borrowed by the
ESOP is not reflected in this table as borrowed funds but is reflected as a
reduction of capital. As the Association accrues compensation expense to
reflect the allocation of such shares pursuant to the ESOP, the charge
against capital will be reduced accordingly. See "Management of the
Association -- Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
(5) The retained earnings of the Association are substantially restricted. All
capital distributions by the Association are subject to regulatory
restrictions tied to its regulatory capital level. In addition, after the
Conversion, the Association will be prohibited from paying any dividend
that would reduce its regulatory capital below the amount in the
liquidation account to be provided for the benefit of the Association's
Eligible Account Holders and Supplemental Eligible Account Holders at the
time of the Conversion and adjusted downward thereafter. See "Regulation -
- Depository Institution Regulation -- Dividend Restrictions" and "The
Conversion -- Effect of Conversion to Stock Form on Depositors and
Borrowers of the Association -- Liquidation Account."
(6) Pro forma stockholders' equity information is not intended to represent the
fair market value of the Common Stock, the current value of the
Association's assets or liabilities or the amounts, if any, that would be
available for distribution to stockholders in the event of liquidation.
Such pro forma data may be materially affected by a change in the number of
shares to be sold in the Conversion and by other factors. See "Pro Forma
Data."
25
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The table below presents the Association's historical and pro forma capital
position relative to its various minimum statutory and regulatory capital
requirements at December 31, 1996 at the minimum, midpoint, maximum and maximum,
as adjusted, of the Estimated Valuation Range. For a discussion of the
assumptions underlying the pro forma capital calculations presented below, see
"Use of Proceeds," "Capitalization," "Pro Forma Data" and the financial
statements and related notes appearing elsewhere herein. For a detailed
description of the regulatory capital requirements applicable to the
Association, see "Regulation -- Regulation of the Association -- Regulatory
Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma at December 31, 1996 (1)
Assuming Issuance of Shares of Common Stock at the:
----------------------------------------------------------------------------------
Minimum of Midpoint of Maximum of Maximum, as Adjusted,
Historical at 272,000 Shares 320,000 Shares 368,000 Shares of 423,200 Shares
December 31, 1996 at $10 Per Share at $10 Per Share at $10 Per Share at $10 Per Share
------------------ ------------------ ------------------- ------------------ ---------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets (2)
------ ---------- ------ ----------- ------ ---------- ------ --------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles.............. $2,859 13.92% $3,722 17.22% $3,900 17.86% $4,083 18.51% $4,292 19.24%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tangible capital........... $2,664 13.10% $3,527 16.46% $3,705 17.12% $3,888 17.79% $4,097 18.53%
Tangible capital
requirement............... 305 1.50 321 1.50 325 1.50 328 1.50 332 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.................. $2,359 11.60% $3,206 14.96% $3,380 15.62% $3,560 16.29% $3,765 17.03%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Core capital............... $2,664 13.10% $3,527 16.46% $3,705 17.12% $3,888 17.79% $4,097 18.53%
Core capital requirement
(3)....................... 610 3.00 643 3.00 649 3.00 656 3.00 663 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.................. $2,054 10.10% $2,884 13.46% $3,056 14.12% $3,232 14.79% $3,434 15.53%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Risk-based capital......... $2,724 35.31% $3,587 42.79% $3,765 44.46% $3,948 46.15% $4,157 48.04%
Risk-based capital
requirement............... 617 8.00 671 8.00 677 8.00 684 8.00 692 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.................. $2,107 27.31% $2,916 34.79% $3,088 36.46% $3,264 38.15% $3,465 40.04%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
____________________
(1) Assumes that the Company will purchase all of the capital stock of the
Association to be issued upon Conversion in exchange for 50% of the net
proceeds. Also assumes net proceeds distributed to the Association are
initially invested in assets with an average risk weight of 38%. Further
assumes that 8% of the Common Stock to be sold in the Conversion is acquired
by the ESOP, and that the funds used to acquire such shares are borrowed
from the Company. In accordance with generally accepted accounting
principles, the amount of Common Stock to be purchased by the ESOP
represents unearned compensation and is reflected in this table as a
reduction of capital. Although repayment of such debt will be secured
solely by the Common Stock purchased by the ESOP, the Association or the
Company expects to make discretionary contributions to the ESOP in an amount
at least equal to the principal and interest payments on the ESOP debt. As
the Association makes contributions to the ESOP for simultaneous payment in
an equal amount on the ESOP debt, there will be a corresponding reduction in
the charge against capital. See "Management of the Association -- Certain
Benefit Plans and Agreements -- Employee Stock Ownership Plan." Also
assumes that the MRP will purchase in the open market Common Stock in an
amount equal to 4% of the Common Stock issued in the Conversion. The
implementation of the MRP is subject to regulatory and stockholder
approvals. For purposes of this table, the cost of the Common Stock to be
purchased by the MRP is assumed to be equal to the $10 price per share being
offered in the Conversion. Such price may increase or decrease between the
date of consummation of the Conversion and the date that, following receipt
of regulatory and stockholder approvals, the shares are actually purchased
by the MRP. The purchase of shares of Common Stock by the MRP following
receipt of such approvals may be from authorized but unissued shares of
Common Stock or in the open market. In accordance with generally accepted
accounting principles, the amount of Common Stock to be purchased by the MRP
represents unearned compensation and is reflected in this table as a
reduction of capital. As the Association accrues compensation expense over
the five year period following such purchase in accordance with generally
accepted accounting principles to reflect the vesting of such shares of
Common Stock pursuant to the MRP, there will be a corresponding reduction in
the charge against capital. See "Management of the Association -- Certain
Benefit Plans and Agreements -- Management Recognition Plan."
(2) Based on the Association's adjusted total assets for the purpose of the
tangible and core capital requirements and risk-weighted assets for the
purpose of the risk-based capital requirement. See "Regulation --
Depository Institution Regulation -- Capital Requirements."
(3) Does not reflect potential increases in the Association's core capital
requirement to between 4% and 5% of adjusted total assets in the event the
OTS amends its capital requirements to conform to the more stringent
leverage ratio adopted by the Office of the Comptroller of the Currency for
national banks as described in "Regulation."
26
<PAGE>
PRO FORMA DATA
The following table sets forth the actual and, after giving effect to
the Conversion for the periods and at the dates indicated, pro forma
consolidated income, stockholders' equity and other data of the Association
prior to the Conversion and of the Company following the Conversion. Unaudited
pro forma consolidated income and related data have been calculated for the
three months ended December 31, 1996 and the year ended September 30, 1996 as if
the Common Stock had been sold at the beginning of such periods, and the
estimated net proceeds had been invested at 5.50% and 5.70% at the beginning of
the period. The foregoing yield approximates the yield on the One-Year U.S.
Treasury bill at December 31, 1996 and September 30, 1996, respectively. (While
OTS regulations provide for the use of a yield representing the arithmetic
average of the average yield on the Association's interest-earning assets and
the average cost of deposits, the Association believes that the use of the One-
year Treasury bill rate is more relevant in the current interest rate
environment). The pro forma after-tax yield for the Company and the Association
is assumed to be 3.58% and 3.71% for the three months ended December 31, 1996
and year ended September 30, 1996, respectively, based on the effective tax rate
of 35% of each period. Unaudited pro forma consolidated stockholders' equity
and related data have been calculated as if the Common Stock had been sold and
was outstanding at the end of the periods, without any adjustment of historical
or pro forma equity to reflect assumed earnings on estimated net proceeds. Per
share amounts have been computed as if the Common Stock had been outstanding at
the beginning of the period or at the dates shown, but without any adjustment of
historical or pro forma stockholders' equity to reflect the earnings on
estimated net proceeds. The pro forma data set forth below do not reflect
withdrawals from deposit accounts to purchase shares, accruals expected to be
made by the Association with regard to employee benefit plans to be adopted in
connection with the Conversion or increases in capital and, in the case of newly
issued shares, outstanding Common Stock upon the exercise of options by
participants in the Option Plan, under which an aggregate amount of Common Stock
equal to 10% of the shares issued in the Conversion (32,000 shares at the
midpoint of the Estimated Valuation Range) are expected to be reserved for
issuance to directors, executive officers and employees upon the exercise of
stock options at exercise prices equal to the market price of the Common Stock
on the date of grant. See "Management of the Association -- Certain Benefit
Plans and Agreements."
The estimated net proceeds to the Company, as set forth in the
following tables, assume the sale of the Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. The actual
net proceeds from the sale of the Common Stock cannot be determined until the
Conversion is completed. However, net proceeds set forth on the following
tables are estimated based upon the following assumptions: (i) 100% of the
shares of Common Stock will be sold in the Subscription and Community Offerings
as follows: (a) 8% will be sold to the ESOP and 60,000 shares will be sold to
directors and officers of the Association and their associates, for which
commissions will not be paid; and (b) the remaining shares will be sold to
others in the Subscription and Community Offerings; and (ii) other Conversion
expenses, not including sales commissions, will be approximately $295,000. The
foregoing assumptions regarding estimated purchases in the Subscription and
Community Offerings are based on reasonable market assumptions, market
conditions, consultations between the Association and Trident Securities and
planned purchases by the ESOP. Actual expenses may vary from those estimated.
THE STOCKHOLDERS' EQUITY AND RELATED DATA PRESENTED HEREIN ARE NOT
INTENDED TO REPRESENT THE FAIR MARKET VALUE OF THE COMMON STOCK, THE CURRENT
VALUE OF ASSETS OR LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE
FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL
INFORMATION REGARDING THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION -- EFFECT OF
CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE ASSOCIATION --
LIQUIDATION ACCOUNT." THE PRO FORMA INCOME AND RELATED DATA DERIVED FROM THE
ASSUMPTIONS SET FORTH ABOVE SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL
RESULTS OF OPERATIONS OF THE CONVERTED ASSOCIATION AND THE COMPANY FOR ANY
PERIOD. SUCH PRO FORMA DATA MAY BE MATERIALLY AFFECTED BY A CHANGE IN THE
NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION AND OTHER FACTORS. SEE "THE
CONVERSION -- STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED."
27
<PAGE>
<TABLE>
<CAPTION>
At or for the Three Months Ended December 31, 1996
----------------------------------------------------
272,000 320,000 368,000 423,200
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(Dollars in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds................................... $ 2,720 $ 3,200 $ 3,680 $ 4,232
Less estimated offering expenses.......................... (340) (350) (350) (350)
-------- -------- -------- --------
Estimated net offering proceeds......................... 2,380 2,850 3,330 3,882
Less Common stock acquired by ESOP...................... (218) (256) (294) (339)
Less Common stock acquired by MRP....................... (109) (128) (147) (169)
-------- -------- -------- --------
Estimated investable net proceeds....................... $ 2,054 $ 2,466 $ 2,888 $ 3,374
======== ======== ======== ========
Net income
Historical net income................................... $ 57 $ 57 $ 57 $ 57
Pro forma adjustments:
Net income from proceeds.............................. 18 22 26 30
ESOP (1).............................................. (4) (4) (5) (6)
MRP (2)............................................... (4) (4) (5) (6)
-------- -------- -------- --------
Pro Forma Net Income.................................... $ 68 $ 71 $ 73 $ 76
======== ======== ======== ========
Net Income Per share
Historical.............................................. $ 0.23 $ 0.19 $ 0.17 $ 0.15
Pro forma adjustments:
Net income from proceeds.............................. 0.07 0.07 0.08 0.08
ESOP (1).............................................. (0.01) (0.01) (0.01) (0.01)
MRP (2)............................................... (0.01) (0.01) (0.01) (0.01)
-------- -------- -------- --------
Pro Forma -- Net Income
Per Share.......................................... $ 0.27 $ 0.24 $ 0.21 $ 0.19
======== ======== ======== ========
Number of shares used in calculating earnings
per share (1)(2)......................................... 252,416 296,960 341,504 392,730
======== ======== ======== ========
Stockholders' equity (book value) (3)
Historical............................................... $ 2,859 $ 2,859 $ 2,859 $ 2,859
Estimated net proceeds (2)............................... 2,380 2,850 3,330 3,882
Less common stock acquired by:
ESOP (1)............................................... (218) (256) (294) (339)
MRP (2)................................................ (109) (128) (147) (169)
-------- -------- -------- --------
Pro Forma............................................ $ 4,913 $ 5,325 $ 5,747 $ 6,233
======== ======== ======== ========
Per Share
Historical............................................... $ 10.51 $ 8.93 $ 7.77 $ 6.76
Estimated net proceeds.................................... 8.75 8.91 9.05 9.17
Less common stock acquired by:
ESOP (1)................................................. (0.80) (0.80) (0.80) (0.80)
MRP (2).................................................. (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro Forma.............................................. $ 18.06 $ 16.64 $ 15.62 $ 14.73
======== ======== ======== ========
Number of shares used in calculating
equity per share......................................... 272,000 320,000 368,000 423,200
======== ======== ======== ========
Pro forma price to book value (4)......................... 55.37% 60.09% 64.03% 67.89%
======== ======== ======== ========
Pro forma price to earnings (P/E ratio)................... 9.26 10.42 11.90 13.16
======== ======== ======== ========
</TABLE>
28
<PAGE>
NOTE: TOTALS MAY NOT ADD DUE TO ROUNDING. (Footnotes on succeeding page)
29
<PAGE>
- --------------------
(1) Assumes 8% of the shares to be sold in the Conversion are purchased by the
ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from the Company. The approximate amount expected to
be borrowed by the ESOP is not reflected as a liability but is reflected as
a reduction of capital. Although repayment of such debt will be secured
solely by the shares purchased by the ESOP, the Association expects to make
discretionary contributions to the ESOP in an amount at least equal to the
principal and interest payments on the ESOP debt. Pro forma net income has
been adjusted to give effect to such contributions, based upon a fully
amortizing debt with a ten-year term. Because the Company will be
providing the ESOP loan, only principal payments on the ESOP loan are
reflected as employee compensation and benefits expense. For purposes of
this table the Purchase Price of $10.00 was utilized to calculate the ESOP
expense. The Association intends to record compensation expense related to
the ESOP in accordance with American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") No. 93-6. As a result,
to the extent the value of the Common Stock appreciates over time,
compensation expense related to the ESOP will increase. SOP 93-6 also
changes the earnings per share computations for leveraged ESOPs to include
as outstanding only shares that have been committed to be released to
participants. For purposes of the preceding table, it was assumed that 10%
of the ESOP shares purchased in the Conversion were committed to be
released at December 31, 1996. If it is assumed that 100% of the ESOP
shares were committed to be released at December 31, 1996, the application
of SOP 93-6 would result in net income per share of $0.25, $0.22, $0.20 and
$0.18, respectively, based on the sale of shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. See
"Management of the Association -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
(2) Assumes a number of shares of Common Stock equal to 4% of the Common Stock
to be sold in the Conversion will be purchased by the MRP in the open
market in the year following the Conversion. The dollar amount of the
Common Stock to be purchased by the MRP is based on the Purchase Price in
the Conversion and represents unearned compensation and is reflected as a
reduction of capital. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the Purchase Price in the
Conversion. As the Association accrues compensation expense to reflect the
vesting of such shares pursuant to the MRP, the charge against capital will
be reduced accordingly. MRP adjustment is based on amortization of the MRP
over five years. Implementation of the MRP would require stockholder
approval at a meeting of the Company's stockholders to be held within one
year but no earlier than six months after the Conversion. For purposes of
this table, it is assumed that the MRP will be adopted by the Association's
Board of Directors and approved by the Company's stockholders, and that the
MRP will purchase the shares of Common Stock in the open market within the
year following the Conversion. If the shares to be purchased by the MRP
are assumed to be newly issued shares purchased from the Company by the MRP
at the Purchase Price, at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, the offering price as a
percentage of pro forma stockholders' equity per share would be 56.34%,
61.01%, 64.94% and 68.73%, respectively, and pro forma net income per share
would have been $0.26, $0.23, $0.21 and $0.19, respectively. As a result
of the MRP, stockholders' interests will be diluted by approximately 3.85%.
See "Management of the Association -- Certain Benefit Plans and Agreements
-- Management Recognition Plan" and "Risk Factors -- Dilutive Effect of MRP
and Stock Options."
(3) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The amounts shown
do not reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation. The amounts shown
also do not reflect the amounts required to be distributed in the event of
liquidation to eligible depositors from the liquidation account which will
be established upon the consummation of the Conversion. Pro forma
stockholders' equity information is not intended to represent the fair
market value of the Common Stock, the current value of the Association's
assets or liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the Conversion and by other factors.
(4) It is expected that following the consummation of the Conversion the
Company will adopt the Option Plan, which would be subject to stockholder
approval, and that such plan would be considered and voted upon at a
meeting of the Company's stockholders to be held within one year but no
earlier than six months after the Conversion. Upon adoption of the Option
Plan, employees and directors could be granted options to purchase an
aggregate amount of Common Stock equal to 10% of the shares issued in the
Conversion at exercise prices equal to the market price of the Common Stock
on the date of grant. In the event the shares issued under the Option Plan
consist of newly issued shares of Common Stock and all options available
for award under the Option Plan were awarded, the interests of existing
stockholders would be diluted. At the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, if all shares under the
Option Plan were newly issued and the exercise price for the option shares
were equal to the Purchase Price in the Conversion, net income per share
would be $0.25, $0.22, $0.20 and $0.18, respectively, and the stockholders'
equity per share would be $17.33, $16.04, $15.11 and $14.30,
respectively.
30
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended September 30, 1996
-------------------------------------------
272,000 320,000 368,000 423,200
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(Dollars in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds.............................................. $ 2,720 $ 3,200 $ 3,680 $ 4,232
Less estimated offering expenses..................................... (340) (350) (350) (350)
-------- -------- -------- --------
Estimated net offering proceeds.................................... 2,380 2,850 3,330 3,882
Less Common stock acquired by ESOP................................. (218) (256) (294) (339)
Less Common stock acquired by MRP.................................. (109) (128) (147) (169)
-------- -------- -------- --------
Estimated investable net proceeds.................................. $ 2,054 $ 2,466 $ 2,888 $ 3,374
======== ======== ======== ========
Net income (1)
Historical net income.............................................. $ 129 $ 129 $ 129 $ 129
Pro forma adjustments:
Net income from proceeds......................................... 76 91 107 125
ESOP (2)......................................................... (14) (17) (19) (22)
MRP (3).......................................................... (14) (17) (19) (22)
-------- -------- -------- --------
Pro Forma Net Income............................................... $ 177 $ 187 $ 198 $ 210
======== ======== ======== ========
Net Income Per share (1)
Historical......................................................... $ 0.51 $ 0.43 $ 0.38 $ 0.33
Pro forma adjustments:
Net income from proceeds......................................... 0.30 0.31 0.31 0.32
ESOP (2)......................................................... (0.06) (0.06) (0.06) (0.06)
MRP (3).......................................................... (0.06) (0.06) (0.06) (0.06)
-------- -------- -------- --------
Pro Forma -- Net Income
Per Share..................................................... $ 0.70 $ 0.63 $ 0.58 $ 0.53
======== ======== ======== ========
Number of shares used in calculating earnings
per share (2)(3).................................................... 252,416 296,960 341,504 392,730
======== ======== ======== ========
Stockholders' equity (book value) (4)
Historical.......................................................... $ 2,778 $ 2,778 $ 2,778 $ 2,778
Estimated net proceeds (3).......................................... 2,380 2,850 3,330 3,882
Less common stock acquired by:
ESOP (2).......................................................... (218) (256) (294) (339)
MRP (3)........................................................... (109) (128) (147) (169)
-------- -------- -------- --------
Pro Forma....................................................... $ 4,832 $ 5,244 $ 5,666 $ 6,152
======== ======== ======== ========
Per Share
Historical.......................................................... $ 10.21 $ 8.68 $ 7.55 $ 6.56
Estimated net proceeds............................................... 8.75 8.91 9.05 9.17
Less common stock acquired by:
ESOP (2)............................................................ (0.80) (0.80) (0.80) (0.80)
MRP (3)............................................................. (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro Forma......................................................... $ 17.76 $ 16.39 $ 15.40 $ 14.54
======== ======== ======== ========
Number of shares used in calculating
equity per share.................................................... 272,000 320,000 368,000 423,200
======== ======== ======== ========
Pro forma price to book value (5).................................... 56.30% 61.02% 64.94% 68.79%
======== ======== ======== ========
Pro forma price to earnings (P/E ratio) (1).......................... 14.29 15.87 17.24 18.87
======== ======== ======== ========
</TABLE>
NOTE: TOTALS MAY NOT ADD DUE TO ROUNDING. (Footnotes on succeeding page)
31
<PAGE>
____________
(1) Net income includes an after-tax charge of approximately $68,000 taken
during the year ended September 30, 1996, representing a special assessment
of 65.7 basis points on the Association's deposits at March 31, 1995,
pursuant to legislation enacted to recapitalize the SAIF. Excluding that
charge, based on the other assumptions as reflected in this table,
Management estimates that pro forma earnings per share would have been
$0.97, $0.86, $0.78 and $0.71, and the price to earnings ratio would have
been 10.31, 11.63, 12.82, and 14.08 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(2) Assumes 8% of the shares to be sold in the Conversion are purchased by the
ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from the Company. The approximate amount expected to be
borrowed by the ESOP is not reflected as a liability but is reflected as a
reduction of capital. Although repayment of such debt will be secured
solely by the shares purchased by the ESOP, the Association expects to make
discretionary contributions to the ESOP in an amount at least equal to the
principal and interest payments on the ESOP debt. Pro forma net income has
been adjusted to give effect to such contributions, based upon a fully
amortizing debt with a ten-year term. Because the Company will be providing
the ESOP loan, only principal payments on the ESOP loan are reflected as
employee compensation and benefits expense. For purposes of this table the
Purchase Price of $10.00 was utilized to calculate the ESOP expense. The
Association intends to record compensation expense related to the ESOP in
accordance with American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 93-6. As a result, to the
extent the value of the Common Stock appreciates over time, compensation
expense related to the ESOP will increase. SOP 93-6 also changes the
earnings per share computations for leveraged ESOPs to include as
outstanding only shares that have been committed to be released to
participants. For purposes of the preceding table, it was assumed that 10%
of the ESOP shares purchased in the Conversion were committed to be
released at September 30, 1996. If it is assumed that 100% of the ESOP
shares were committed to be released at September 30, 1996, the application
of SOP 93-6 would result in net income per share of $0.65, $0.58, $0.54 and
$0.50, respectively, based on the sale of shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. See
"Management of the Association -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
(3) Assumes a number of shares of Common Stock equal to 4% of the Common Stock
to be sold in the Conversion will be purchased by the MRP in the open
market in the year following the Conversion. The dollar amount of the
Common Stock to be purchased by the MRP is based on the Purchase Price in
the Conversion and represents unearned compensation and is reflected as a
reduction of capital. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the Purchase Price in the
Conversion. As the Association accrues compensation expense to reflect the
vesting of such shares pursuant to the MRP, the charge against capital will
be reduced accordingly. MRP adjustment is based on amortization of the MRP
over five years. Implementation of the MRP would require stockholder
approval at a meeting of the Company's stockholders to be held within one
year but no earlier than six months after the Conversion. For purposes of
this table, it is assumed that the MRP will be adopted by the Association's
Board of Directors and approved by the Company's stockholders, and that the
MRP will purchase the shares of Common Stock in the open market within the
year following the Conversion. If the shares to be purchased by the MRP
are assumed to be newly issued shares purchased from the Company by the MRP
at the Purchase Price, at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, the offering price as a
percentage of pro forma stockholders' equity per share would be 57.27%,
61.96%, 65.83% and 69.64%, respectively, and pro forma net income per share
would have been $0.69, $0.62, $0.57 and $0.53, respectively. As a result
of the MRP, stockholders' interests will be diluted by approximately 3.85%.
See "Management of the Association -- Certain Benefit Plans and Agreements
-- Management Recognition Plan" and "Risk Factors -- Dilutive Effect of MRP
and Stock Options."
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The amounts shown
do not reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation. The amounts shown
also do not reflect the amounts required to be distributed in the event of
liquidation to eligible depositors from the liquidation account which will
be established upon the consummation of the Conversion. Pro forma
stockholders' equity information is not intended to represent the fair
market value of the Common Stock, the current value of the Association's
assets or liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the Conversion and by other factors.
(5) It is expected that following the consummation of the Conversion the
Company will adopt the Option Plan, which would be subject to stockholder
approval, and that such plan would be considered and voted upon at a
meeting of the Company's stockholders to be held within one year but no
earlier than six months after the Conversion. Upon adoption of the Option
Plan, employees and directors could be granted options to purchase an
aggregate amount of Common Stock equal to 10% of the shares issued in the
Conversion at exercise prices equal to the market price of the Common Stock
on the date of grant. In the event the shares issued under the Option Plan
consist of newly issued shares of Common Stock and all options available
for award under the Option Plan were awarded, the interests of existing
stockholders would be diluted. At the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, if all shares under the
Option Plan were newly issued and the exercise price for the option shares
were equal to the Purchase Price in the Conversion, net income per share
would be $0.67, $0.60, $0.56 and $0.52, respectively, and the stockholders'
equity per share would be $17.06, $15.81, $14.91 and $14.12, respectively.
32
<PAGE>
PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate number
of shares of the Common Stock intended to be purchased by each of the directors
and executive officers of the Association and by all directors and executive
officers as a group, including their associates. For purposes of the following
table, it has been assumed that 320,000 shares of the Common Stock will be sold
at $10.00 per share, the midpoint of the Estimated Valuation Range (see "--Stock
Pricing and Number of Shares to be Issued") and that sufficient shares will be
available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Percent Aggregate Purchase
Total of Price of
Name and Position Shares Total Proposed Purchases
------------------ ------- ----- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Donald F. Gause, President and Director 12,500 3.91 $ 125,000
Keith E. Waggoner, Executive Vice President
and Chief Executive Officer 12,500 3.91 125,000
Norman L. Bailey, Director 12,500 3.91 125,000
William E. Burrell, Director 12,500 3.91 125,000
Francis E. Clute, Director 12,500 3.91 125,000
Brian H. Hancock, Director 12,500 3.91 125,000
R. Dean Jones, Director 12,500 3.91 125,000
Wayne W. Whittaker, Director 12,500 3.91 125,000
------- ----- ----------
100,000 31.25 1,000,000
------- ----- ----------
All directors and executive officers, as a
group (8 persons) and their associates
ESOP (1) 25,600 8.0 256,000
MRP (2) 12,800 4.0 128,000
------- ----- ----------
Total (3) 138,400 43.25% $1,384,000
======= ===== ==========
</TABLE>
(percentage totals may not add due to rounding)
________________________
(1) Consists of shares that could be allocated to participants in the ESOP,
under which executive officers and other employees would be allocated in
the aggregate 8% of the Common Stock issued in the Conversion. See
"Management of the Association -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
(2) Consists of shares that are expected to be awarded to participants in the
MRP, if implemented, under which directors, executive officers and other
employees would be awarded an aggregate number of shares equal to 4% of the
Common Stock sold in the Conversion (12,800 shares at the midpoint of the
Estimated Valuation Range). The dollar amount of the Common Stock to be
purchased by the MRP is based on the Purchase Price in the Conversion and
does not reflect possible increases or decreases in the value of such stock
relative to the Purchase Price per share in the Conversion. Implementation
of the MRP would require stockholder approval. See "Management of the
Association -- Certain Benefit Plans and Agreements -- Management
Recognition Plan." Such shares could be newly issued shares or shares
purchased in the open market following implementation of the MRP, in the
sole discretion of the Company's Board of Directors. The percentage shown
assumes the shares are purchased in the open market. If all shares acquired
by the MRP are newly issued shares, the percentage of the outstanding
Common Stock owned by the MRP would be 3.85%. Any sale of newly issued
shares to the MRP would be dilutive to existing stockholders. See "Risk
Factors -- Possible Dilutive Effect of MRP and Stock Options."
(3) Does not include shares that might be purchased by participants in an
Option Plan, intended to be implemented, under which directors, executive
officers and other employees would be granted options to purchase an
aggregate amount of Common Stock equal to 10% of the shares issued in the
Conversion (32,000 shares at the midpoint of the Estimated Valuation Range)
at exercise prices equal to the market price of the Common Stock on the
date of grant. Shares issued pursuant to the exercise of options could be
from treasury stock or newly issued shares. Implementation of the Option
Plan would require stockholder approval. See "Management of the
Association -- Certain Benefit Plans and Agreements -- Stock Option and
Incentive Plan."
33
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF INCOME
The following Statements of Income of Rocky Ford Federal Savings and
Loan Association for each of the years in the two-year period ended September
30, 1996 have been audited by Grimsley, White & Company, independent certified
public accountants, whose report thereon appears elsewhere herein. The
statements of income for the three months ended December 31, 1996 and 1995 were
not audited by the Association's independent auditors, but in the opinion of the
Association's management, the statements of income reflect all adjustments
necessary for a fair presentation of the results of such periods. All
adjustments are of a normal recurring nature. The results for the three month
periods are not necessarily indicative of the results of the Association which
may be expected for the entire year or for any future periods. The Statements of
Income should be read in conjunction with the Financial Statements and related
notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, September 30,
---------------------------- -------------------------
1996 1995 1996 1995
------------- ------------ ----------- ----------
(Unaudited)
---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans receivable............... $274,176 $248,339 $1,030,195 $ 983,109
Dividend on securities available for sale.. 5,953 4,650 23,499 19,999
Interest on securities held to maturity.... 60,256 50,310 224,192 276,752
Interest on other interest-bearing assets.. 54,305 68,093 247,451 191,199
-------- -------- ---------- ----------
TOTAL INTEREST INCOME.................... 394,690 371,392 1,525,337 1,471,059
INTEREST ON DEPOSITS........................ 206,896 208,680 820,431 733,829
-------- -------- ---------- ----------
NET INTEREST INCOME...................... 187,794 162,712 704,906 737,230
(PROVISION FOR) RECOVERY OF LOAN LOSSES..... -- -- -- 68,407
-------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES......................... 187,794 162,712 704,906 805,637
-------- -------- ---------- ----------
NON-INTEREST INCOME
Other charges.............................. 11,403 5,271 16,585 15,261
Income (loss) on real estate operations.... -- -- -- 779
Gain on sale of foreclosed real estate..... -- -- 4,157 10,214
-------- -------- ---------- ----------
TOTAL NON-INTEREST INCOME................ 11,403 5,271 20,742 26,254
-------- -------- ---------- ----------
NON-INTEREST EXPENSE
GENERAL AND ADMINISTRATIVE
Compensation and benefits................. 60,566 52,820 231,849 230,119
Occupancy and equipment................... 7,790 8,892 38,703 30,775
Computer services......................... 8,023 5,733 30,202 45,784
SAIF deposit insurance.................... 11,553 11,075 45,026 45,628
Other..................................... 29,377 15,630 87,022 74,862
Special SAIF assessment................... -- -- 105,929 --
-------- -------- ---------- ----------
TOTAL NON-INTEREST EXPENSE............... 117,309 94,150 538,731 427,168
-------- -------- ---------- ----------
INCOME BEFORE TAXES...................... 81,888 73,833 186,917 404,723
INCOME TAX EXPENSE.......................... 25,300 27,827 58,375 117,735
-------- -------- ---------- ----------
NET INCOME............................... $ 56,588 $ 46,006 $ 128,542 $ 286,988
======== ======== ========== ==========
</TABLE>
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no
results of operations at this time. As a result, this discussion relates to the
financial condition and results of operations of the Association. The principal
business of the Association consists of accepting deposits from the general
public and investing these funds primarily in loans and in investment securities
and mortgage-backed securities. The Association's loan portfolio consists
primarily of loans secured by residential real estate located in its market
area, with terms of 15 to 20 years. See "Prospectus Summary -- Rocky Ford
Federal Savings and Loan Association."
The Association's net income is dependent primarily on its net
interest income, which is the difference between interest income earned on its
loan, investment securities and mortgage-backed securities portfolio and
interest paid on interest-bearing liabilities. Net interest income is determined
by (i) the difference between yields earned on interest-earning assets and rates
paid on interest-bearing liabilities ("interest rate spread") and (ii) the
relative amounts of interest-earning assets and interest-bearing liabilities.
The Association's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. To a lesser extent, the Association's net income also is affected by the
level of noninterest expenses such as compensation and employee benefits and
FDIC insurance premiums.
The operations of the Association are significantly affected by
prevailing economic conditions, competition and the monetary, fiscal and
regulatory policies of governmental agencies. Lending activities are influenced
by the demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Association's market area.
ASSET/LIABILITY MANAGEMENT
The Association seeks to reduce its exposure to changes in interest
rates by originating fixed-rate loans with maturities of no more than 15 years
and by maintaining a relatively high level of liquid assets. The matching of the
Association's assets and liabilities may be analyzed by examining the extent to
which its assets and liabilities are interest rate sensitive and by monitoring
the expected effects of interest rate changes on the Association's net interest
income.
An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If the
Association's assets mature or reprice more quickly or to a greater extent than
its liabilities, the Association's net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If the Association's assets mature or
reprice more slowly or to a lesser extent than its liabilities, the
Association's net portfolio value and net interest income would tend to decrease
during periods of rising interest rates but increase during periods of falling
interest rates. As a result of the interest rate risk inherent in the historical
savings institution business of originating long-term loans funded by short-term
deposits, the Association has pursued certain strategies designed to decrease
the vulnerability of its earnings to material and prolonged changes in interest
rates.
In accordance with the Association's interest rate risk policy, the
Association emphasizes the origination of fixed rate loans with maturities of no
more than 15 years and maintains a relatively high level of liquid assets.
Maintaining a high level of liquid assets tends to reduce potential net income
because liquid assets usually provide a lower yield than longer term (less
liquid) assets. At December 31, 1996, the average weighted term to maturity of
the Association's loan portfolio was 13 years.
35
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are "interest rate sensitive"
and by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. At December 31, 1996, the Association had an excess of
interest-bearing liabilities over interest-earning assets maturing or repricing
within one year of approximately $7.3 million, resulting in a negative one-year
interest rate sensitivity gap of 41.69%. Generally, during a period of rising
interest rates, a negative gap would be expected to adversely affect net
interest income while a positive gap would be expected to result in an increase
in net interest income, while conversely during a period of declining interest
rates, a negative gap would be expected to result in an increase in net interest
income and a positive gap would be expected to adversely affect net interest
income. The Association's current one-year gap is within the guidelines
established by management and approved by the Board of Directors. Management
considers numerous factors when establishing these guidelines, including current
interest rate margins, capital levels, and any guidelines provided by the
OTS.
36
<PAGE>
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996 which are
expected to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Three Over One Over Three Over Five Over
Three Months Months to Through Through Through Ten
or Less One Year Three Years Five Years Ten Years Years Total
------------- ---------- ------------ ----------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
- -----------------------
Mortgage loans..................... $ 151 $ 1,072 $ 2,327 $ 2,185 $ 4,680 $ 2,190 $12,605
Share loans........................ 43 22 43 -- -- -- 108
Interest-bearing deposits.......... 2,300 1,297 100 -- -- -- 3,697
U.S. government agency securities.. -- -- 500 -- -- -- 500
Mortgage-backed securities......... 8 155 306 281 609 1,236 2,595
Equity securities.................. -- -- -- -- -- 627 627
------- ------- ------- ------- --------- ------- -------
Total interest-earning assets...... $ 2,502 $ 2,546 $ 3,276 $ 2,466 $ 5,289 $ 4,053 $20,132
======= ======= ======= ======= ========= ======= =======
Interest-bearing liabilities
- ----------------------------
Certificate accounts............... $ 2,876 $ 5,018 $ 4,953 $ 32 $ -- $ -- $12,879
Money market deposit accounts...... 3,398 -- -- -- -- -- 3,398
Passbook accounts.................. 1,058 -- -- -- -- -- 1,058
------- ------- ------- ------- --------- ------- -------
Total interest-bearing
liabilities...................... $ 7,332 $ 5,018 $ 4,953 $ 32 $ -- $ -- $17,335
======= ======= ======= ======= ========= ======= =======
Interest-earning assets less
interest-bearing liabilities..... $(4,830) $(2,472) $(1,677) $ 2,434 $ 5,289 $ 4,053 $ 2,797
Cumulative interest-rate
sensitivity gap.................. (4,830) (7,302) (8,979) (6,545) (1,256) 2,797
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities.............. 34.12% 40.87% 47.56% 61.53% 91.70% 114.81%
Cumulative interest-rate
sensitivity gap as a percentage
of assets........................ (23.99) (36.27) (44.60) (32.51) (6.24) 13.89
</TABLE>
Share loans, interest-bearing deposits, and U.S. government agency
securities are included in the period in which they mature. Equity securities,
which have no specified maturity, are included in the over ten years period.
Mortgage loans and mortgage-backed securities, all of which are fixed rate, are
based on normal amortization plus estimated annual prepayments of 5%. Deposit
certificate accounts are scheduled according to contractual maturities. Money
market and passbook deposit accounts are included in the earliest period.
Net Portfolio Value. In recent years, the Association has measured its
interest rate sensitivity by computing the "gap" between the assets and
liabilities which were expected to mature or reprice within certain periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts by
which the net present value of an institution's cash flows from assets,
liabilities and off balance sheet items (the institution's net portfolio value,
or "NPV") would change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on an institution's NPV
from instantaneous and permanent 1% to 4% increases and decreases in market
interest rates. In
37
<PAGE>
the Association's interest rate sensitive policy, the Board of Directors has
established a maximum decrease in net interest income and maximum decreases in
NPV given these instantaneous changes in interest rates.
The following table sets forth the interest rate sensitivity of the
Association's net portfolio value as of December 31, 1996 in the event of 1%,
2%, 3% and 4% instantaneous and permanent increases and decreases in market
interest rates, respectively. These changes are set forth below as basis points,
where 100 basis points equals one percentage point.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of Portfolio Value of Assets
------------------------------- --------------------------------------
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
-------- -------- --------- -------- --------- ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp 1,877 (1,779) (49) 9.85 (741)
+ 300 bp 2,323 (1,332) (36) 11.87 (540)
+ 200 bp 2,788 (867) (24) 13.85 (341)
+ 100 bp 3,252 (404) (11) 15.73 (154)
0 bp 3,655 -- -- 17.27 --
- 100 bp 3,906 250 7 18.16 89
- 200 bp 3,977 322 9 18.35 108
- 300 bp 4,003 348 10 18.37 110
- 400 bp 4,107 451 12 18.68 141
</TABLE>
The following table sets forth the interest rate risk capital component for
the Association at December 31, 1996 given a hypothetical 200 basis point rate
change in market interest rates. See "Regulation -- Depository Institution
Regulation -- Capital Requirements."
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets......... 17.27%
Exposure Measure: Post-Shock NPV Ratio............................. 13.85%
Sensitivity Measure: Change in NPV Ratio........................... (341) bp
Interest Rate Risk Capital Component ($000)........................ (1)
</TABLE>
_______________
(1) Although this calculation is not applicable to the Association, the
Association has a negative interest rate sensitivity gap which would
adversely affect net interest income during a period of rising interest
rates. The Association believes its high level of liquid assets would,
however, allow the Association to address this negative impact.
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates and loan prepayments, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any actions the
Association may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other assets
38
<PAGE>
and liabilities may lag behind changes in market rates. Based on the above, net
interest income should decline with instantaneous increases in interest rates
while net interest income should increase with instantaneous declines in
interest rates. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in the tables.
Rocky Ford Federal originates only fixed-rate real estate loans and holds
them in portfolio until maturity. Because Rocky Ford Federal's interest-bearing
liabilities which mature or reprice within short periods substantially exceed
its earning assets with similar characteristics, material and prolonged
increases in interest rates generally would adversely affect net interest
income, while material and prolonged decreases in interest rates generally, but
to a lesser extent because of their historically low levels, would have the
opposite effect. The Association's high level of liquid assets and investments
"available for sale" provides Management with the flexibility to address this
interest rate sensitivity gap position.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the
Association's average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods and at the date indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Management does not believe that the
use of month-end balances instead of daily balances has caused any material
difference in the information presented.
The table also presents information for the periods and at the date
indicated with respect to the difference between the average yield earned on
interest-earning assets and average rate paid on interest-bearing liabilities,
or "interest rate spread," which savings institutions have traditionally used as
an indicator of profitability. Another indicator of an institution's net
interest income is its "net yield on interest-earning assets," which is its net
interest income divided by the average balance of interest-earning assets. Net
interest income is affected by the interest rate spread and by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
39
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 31,
---------------------------------------------------------
At December 31, 1996 1995
--------------------------- ---------------------------
1996 Average Average
-----------------
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
-------- ------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits............ $ 3,697 5.95% $ 3,730 $ 55 5.90% $ 4,483 $ 68 6.07%
Investments.......................... 3,723 7.09 3,705 66 7.13 3,163 55 6.96
Loans................................ 12,596 8.70 12,696 274 8.63 11,276 248 8.80
------- ------- ---- ------- ----
Total interest-earning assets........... 20,016 7.89 20,131 395 7.85 18,922 371 7.84
Non-interest-earning assets............. 519 441 -- 725 --
------- ------- ---- ------- ----
Total assets............................ $20,535 $20,572 $19,647
======= ======= =======
INTEREST-BEARING LIABILITIES:
Certificates of deposit.............. $12,879 5.25 $12,940 169 5.22 $13,036 175 5.37
Savings deposits and money market
accounts........................... 4,456 3.41 4,335 38 3.51 3,629 34 3.75
------- ------- ---- ------- ----
Total interest-bearing liabilities...... 17,335 4.78 17,275 207 4.79 16,665 209 5.02
Non-interest-bearing liabilities........ 341 478 470
------- ------- -------
Total liabilities....................... 17,676 17,753 17,135
Equity.................................. 2,859 2,819 2,512
------- ------- -------
Total liabilities and equity............ $20,535 $20,572 $19,647
======= ======= =======
Net interest income..................... $188 $162
==== ====
Interest rate spread (1)................ 2.91% 3.06% 2.82%
==== ==== ====
Net interest-earning assets............. $ 2,681 $ 2,856 $ 2,257
======= ======= =======
Net interest margin (2)................. 3.76% 3.74% 3.42%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities.. 115.47% 116.53% 113.54%
======= ======= =======
</TABLE>
_____________
(1) Includes nonaccrual loans.
40
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------
1996 1995
-------- ----------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits............. $ 4,330 $ 247 5.70% $ 3,347 $ 191 5.71%
Investments........................... 3,676 248 6.75 4,659 297 6.37
Loans................................. 11,730 1,030 8.78 10,838 983 9.07
------- ------ ------- ------
Total interest-earning assets........... 19,736 1,525 7.73 18,844 1,471 7.81
------ ------
Non-interest-earning assets............. 405 316
------- -------
Total assets............................ $20,141 $19,160
======= =======
INTEREST-BEARING LIABILITIES:
Certificates of deposit............... $12,873 677 5.26 $12,717 587 4.62
Passbook money market................. 4,120 143 3.47 3,694 147 3.98
------- ------ ------- ------
Total interest-bearing liabilities...... 16,993 820 4.83 16,411 734 4.47
------ ------
Non-interest bearing liabilities........ 476 403
------- -------
Total liabilities....................... 17,469 16,814
Equity.................................. 2,672 2,346
------- -------
Total liabilities and equity............ $20,141 $19,160
======= =======
Net interest income..................... $ 705 $ 737
====== ======
Net interest rate spread (1)............ 2.90% 3.33%
==== ====
Net interest-earning assets............. $ 2,743 $ 2,433
======= =======
Net interest margin (2)................. 3.57% 3.91%
==== ====
Average interest-earning assets to
average interest-bearing liabilities.. 116.14% 114.83%
======= =======
</TABLE>
____________________
(1) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
41
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes
in interest income and interest expense of the Association for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to: (i) changes in
volume (changes in volume multiplied by old rate); (ii) changes in rate (changes
in rate multiplied by old volume); and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Three Months Ended December 31, Year Ended September 30,
--------------------------------- -------------------------
1996 vs. 1995 1996 vs. 1995 1995 vs. 1994
--------- ------ ------- ------- ----- -------- -------- ----- -------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
-------------- ------------ ------------
Rate/ Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total Volume Rate Volume Total
-------- ------ ------- ------ ------- ----- ------- ------ -------- ----- ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits $ (11) $ (2) $ -- $ (13) $ 56 $ -- $-- $ 56 $ (22) $ 55 $ (7) $ 26
Investments.............. 9 2 -- 11 (62) 18 (4) (48) (46) 23 (4) (27)
Loans.................... 31 (5) -- 26 81 (31) (3) 47 30 (38) 1 (7)
----- ---- ------- ----- ----- ---- --- ---- ----- ---- ----- ----
Total interest-earning
assets................ 29 (5) -- 24 75 (13) (7) 55 (38) 40 (10) (8)
----- ---- ------- ----- ----- ---- --- ---- ----- ---- ----- ----
INTEREST-BEARING
LIABILITIES:
Deposits................. 8 (10) -- (2) 26 59 2 87 (49) 106 (8) 49
----- ---- ------- ----- ----- ---- --- ---- ----- ---- ----- ----
Increase (decrease) in
net interest
income................. $ 21 $ 5 $ -- $ 26 $ 49 $(72) $(9) $(32) $ 11 $(66) $ (2) $(57)
===== ==== ======= ===== ===== ==== === ==== ===== ==== ===== ====
</TABLE>
42
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER, 31, 1996, AND SEPTEMBER 30, 1996
AND 1995
The Association's total assets increased by $147,000 from September
30, 1996 to December 31, 1996, with the majority of the increase reported in
loans receivable.
The Association's loan portfolio increased by $305,000 during the
three months ended December 31, 1996. Net loans totaled $12.7 million and $12.4
million at December 31, 1996 and September 30, 1996, respectively. The increase
in the loan activity during the three months ended December 31, 1996 is due to
increased loan demand in the Association's market area. The allowance for loan
losses totaled $60,000 at December 31, 1996 and September 30, 1996 and 1995. As
of those dates, the Association had no non-performing loans in its portfolio.
There were no loans charged off or recoveries of previous loan losses during the
year ended September 30, 1996, or for the three months ended December 31, 1996.
At September 30, 1996, the ratio of the allowance for loan losses to net loans
was .49% as compared to .47% at December 31, 1996. The decrease in the ratio is
attributable to loan growth.
At December 31, 1996, the Association's investment portfolio included
mortgage-backed and government securities classified as "held to maturity"
carried at amortized cost of $3.1 million and estimated fair value of $3.1
million, and equity securities classified as "available for sale" with an
estimated fair value of $627,000. The balance of the Association's investment
portfolio at December 31, 1996 consisted of interest-bearing deposits totaling
$3.7 million.
At December 31, 1996 deposits increased to $17.3 million from $17.1
million at September 30, 1996, or a net increase of 1.11%. Certificates of
deposit at December 31, 1996 and September 30, 1996 included approximately $1.4
million and $1.5 million, respectively, of deposits with balances of $100,000 or
more.
The Association's total assets increased by $735,000, or 3.74%, from
$19.7 million at September 30, 1995 to $20.4 million at September 30, 1996.
The Association's loan portfolio increased by $1.3 million during the
year ended September 30, 1996. Net loans totaled $12.3 million and $11.0
million at September 30, 1996 and 1995, respectively. The increase in the loan
activity during the year ended September 30, 1996 is due to increased loan
demand in the Association's market area.
The allowance for loan losses totaled $60,000 at December 31, 1996 and
September 30, 1996 and 1995. As of those dates the Association did not have any
non-performing loans in its portfolio. There were no loans charged off or
recoveries of previous loan losses during the year ended September 30, 1996.
The determination of the allowance for loan losses is based on management's
analysis, performed on a quarterly basis. Various factors are considered,
including the market value of the underlying collateral, growth and composition
of the loan portfolio, the relationship of the allowance for loan losses to
outstanding loans, historical loss experience, delinquency trends and prevailing
economic conditions. Although management believes its allowance for loan losses
is adequate, there can be no assurance that additional allowances will not be
required or that losses on loans will not be incurred. The Association has had
minimal losses on loans in prior years. At September 30, 1996, the ratio of the
allowance for loan losses to net loans was .49% as compared to .55% at September
30, 1995. The decrease in the ratio is attributed to loan growth for the year
ended September 30, 1996.
At September 30, 1996, the Association's investment portfolio included
mortgage-backed and government securities classified as "held to maturity"
carried at amortized cost of $3.1 million and an estimated fair value of $3.1
million, and equity securities classified as "available for sale" with an
estimated fair value of $585,000. The balance of the Association's investment
portfolio at September 30, 1996 consisted of interest bearing deposits totaling
$3.9 million.
At September 30, 1996 deposits increased to $17.1 million and $16.7
million at September 30, 1995 or a net increase of 2.65%. Management is
continually evaluating the investment alternatives available to the
Association's customers, and adjusts the pricing on its savings products to
maintain its existing deposits.
43
<PAGE>
Certificates of deposit at September 30, 1996 included approximately
$1.5 million of deposits with balances of $100,000 or more. Such time deposits
may be risky because their continued presence in the Association is dependent
partially upon the rates paid by the Association rather than any customer
relationship and, therefore, may be withdrawn upon maturity if another
institution offers higher interest rates. The Association may be required to
resort to other funding sources such as borrowing or sales of its securities
held available for sale if the Association believes that increasing its rates to
maintain such deposits would adversely affect its operating results. At this
time, the Association does not believe that it will need to significantly
increase its deposit rates to maintain such certificates of deposit and,
therefore, does not anticipate resorting to alternative funding sources.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND
1995
Net Income. The Association's net income (unaudited) for the three
months ended December 31, 1996 was $57,000 compared to $46,000 for the three
months ended December 31, 1995. The increase for 1996 is attributable to the
growth in loans where the Association received a better yield than on
investments held as of December 31, 1995.
Net Interest Income. Net interest income for the three months ended
December 31, 1996 was $188,000 compared to $163,000 for the three months ended
December 31, 1995. The increase in net interest income for the three months
ended December 31, 1996 was due to an increase in the interest rate spread to
3.08% for the three months ended December 31, 1996 from 2.82% for the three
months ended December 31, 1995. The increase was due to an increase from period
to period in the amount of higher yielding loans outstanding compared to
investment securities, as well as on overall increase in interest-earning
assets.
Interest Income. Interest income increased by $24,000 from $371,000 to
$395,000 or by 6.47%, during the 1996 period compared to the 1995 period. This
change resulted in part from an overall increase of average interest-earning
assets by $1.2 million from $18.9 million to $20.1 million or by 6.38% from the
1995 period to the 1996 period. The Association experienced an increase in the
average yield on the interest-earning assets from 7.84% in the 1995 to 7.85% in
the 1996 period. Although loans were made at slightly lower rates during the
three months ended December 31, 1996 compared to loans originated during the
three months ended December 31, 1995, these loan rates provided the Association
with a competitive product that lead to growth in residential lending and earned
a higher yield than short-term investments, which had been held by the
Association during the three months ended December 31, 1995.
Interest Expense. Interest expense decreased $2,000 or 1% to $207,000
for the three months ended December 31, 1996 from $209,000 for the three months
ended December 31, 1995. For the three months ended December 31, 1996, the
average cost of deposits was 4.79%, compared to 5.02% for the three months ended
December 31, 1995.
Income Taxes. The Association's effective tax rate for the three
months ended December 31, 1996 and 1995 was 31% and 38%, respectively. The tax
expense for the three months ended December 31, 1996, was less due to Enterprise
Zone Credits in the amount of $5,000 earned in the State of Colorado.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Net Income. The Association's net income for the year ended September
30, 1996 was $129,000 compared to $287,000 for the year ended September 30,
1995. The decrease in net earnings for the year resulted primarily from the
special SAIF assessment expense of $106,000 for the year ended September 30,
1996, and the recognition of adjusting the allowance for loan losses and
recording income of $68,000 during the year ended September 30, 1995.
44
<PAGE>
Net Interest Income. Net interest income for the year ended September
30, 1996 was $705,000 compared to $737,000 for the year ended September 30,
1995. The decrease in net interest income for the year ended September 30, 1996
was due to a decrease in the interest rate spread from 3.33% in 1995 to 2.90% in
1996. The decline was due to an increase in the cost of interest-bearing
liabilities and a decrease in the yield on interest earning assets.
Interest Income. Interest income increased by $55,000 from $1,471,000
to $1,526,000 or by 3.67%, during 1996 compared to 1995. This increase resulted
in part from an overall increase of average interest-earning assets by $892,000
from $18,844,000 to $19,736,000 or by 4.73% from 1995 to 1996. The Association
experienced a decrease in the average yield on the interest-earning assets from
7.81% in 1995 to 7.73% in 1996. The decrease in the yield is attributed to
lower rates on mortgage loans, the average yield on loans in 1996 was 8.78% as
compared to 9.07% in 1995. Although these loans were made at lower rates, it
provided the Association with a competitive product that lead to growth in
residential lending and earned a higher yield than alternative short-term
investments.
Interest Expense. Interest expense increased $87,000 or 11.85% to
$820,000 for the year ended September 30, 1996 from $734,000 for the year ended
September 30, 1995. The increase was primarily attributable to the increase in
the average cost of deposits from 4.47% in 1995 to 4.83% in 1996 and an increase
in average deposits from $16,411,000 in 1995 to $16,993,000 in 1996. Due to the
increasing interest rate environment in fiscal 1996, there was an increase in
the number of savings customers.
Provision for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in its loan portfolio and the general economy. Such
evaluation considers numerous factors including, general economic conditions,
loan portfolio composition, prior loss experience, the estimated fair value of
the underlying collateral and other factors that warrant recognition in
providing for an adequate loan loss allowance.
The Association determined that a provision for loan loss was not
required for the year ended September 30, 1996. The negative provision for the
year ended September 30, 1995, was the result of a decrease in the general loan
loss allowance of $68,000, resulting in income to the Association in that
amount, due to the performance of the loan portfolio. For the years ended
September 30, 1996 and 1995, the Association did not have any loans 90 days or
more delinquent, nor had they incurred any losses during the years then
ended.
Non-Interest Expense. The $112,000 increase in non-interest expense
in 1996 compared to 1995 was primarily attributable to the $106,000 special SAIF
assessment during 1996. The special assessment was accrued as of September 30,
1996 and paid in November 1996.
Income Taxes. The Association's effective tax rate for the years
ended September 30, 1996 and September 30, 1995 was 31% and 29%, respectively.
The decrease in income tax expense of $58,000 in 1996 compared to 1995 was due
to the decrease in income in 1996 compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
Following the completion of the Conversion, the Company initially will
have no business other than that of the Converted Association and investing the
net proceeds retained by it. Management believes that the net proceeds to be
retained by the Company, earnings on such proceeds and principal and interest
payments on the ESOP loan, together with dividends that may be paid from the
Converted Association to the Company following the Conversion, will provide
sufficient funds for its initial operations and liquidity needs; however, no
assurance can be given that the Company will not have a need for additional
funds in the future. The Converted Association will be subject to certain
regulatory limitations with respect to the payment of dividends to the Company.
See "Dividend Policy" and "Regulation -- Depository Institution Regulation --
Dividend Restrictions." The Company intends to lend
45
<PAGE>
a portion of the net proceeds retained from the Conversion to the ESOP to permit
its purchase of Common Stock in the Conversion. See "Use of Proceeds."
At December 31, 1996, the Association exceeded all regulatory minimum
capital requirements. For a detailed discussion of the OTS's regulatory capital
requirements, and for a tabular presentation of the Association's compliance
with such requirements, see "Regulation -- Depository Institution Regulation --
Capital Requirements," and Note 9 of Notes to Financial Statements.
The Association's primary sources of funds consists of deposits,
repayment of loans and mortgage-backed securities, maturities of investments and
interest-bearing deposits, and funds provided from operations. While scheduled
repayments of loans and mortgage-backed securities and maturities of investment
securities are predicable sources of funds, deposit flows and loan prepayments
are greatly influenced by the general level of interest rates, economic
conditions and competition. The Association uses its liquidity resources
principally to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meeting operating
expenses. Management believes that loan repayments and other sources of funds
will be adequate to meet the Association's liquidity needs for the immediate
future.
The Association is required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of deposits and short-term borrowings. The required
minimum ratio is currently 5%. The Association has historically maintained a
level of liquid assets in excess of regulatory requirements. The Association's
liquidity ratios at September 30, 1996 and 1995 were 27% and 41%, respectively.
The Association's relatively high liquidity ratios at September 30, 1996 and
1995 were reflective of accelerated loan prepayments, and management's
determination to refrain from investing excess liquidity in assets with longer
terms.
A major portion of the Association's liquidity consists of cash and
cash equivalents, which include investments in highly liquid, short-term
deposits.
The level of these assets is dependent on the Association's operating,
investing, lending and financing activities during any given period. At
December 31, 1996, cash and cash equivalents totaled $2.1 million.
The primary investing activities of the Association include
origination of loans and purchase of investment securities. During the three
months ended December 31, 1996 and the year ended September 30, 1996, purchases
of investment securities and mortgage-backed securities totaled $0 and $2.1
million, respectively, while loan originations totaled $3.8 million. These
investments were funded in part by loan and mortgage-backed securities
prepayments of $2.5 million and investment securities maturities of $1.3
million.
Liquidity management is both a daily and long-term function of
business management. If the Association requires funds beyond its ability to
generate them internally, the Association believes that it could borrow funds
from the FHLB. At December 31, 1996, the Association had no outstanding
advances from the FHLB.
At December 31, 1996, the Association had $124,000 in outstanding
commitments to originate fixed-rate loans. The interest rate on the commitments
ranged from 7.75% to 8.25%, and are held open for ninety days. The Association
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificates of deposit which are scheduled to
mature in one year or less totaled $9.8 million at September 30, 1996. Based on
historical experience, management believes that a significant portion of such
deposits will remain with the Association.
Another source of liquidity is anticipated net proceeds from the
Conversion. Following the completion of the Conversion, the Association will
receive at least 50% of the net proceeds from the Conversion. These funds are
expected to be used by the Association for its business activities, including
investments in interest-earning assets.
46
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Association's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Association
are monetary in nature. As a result, interest rates have a greater impact on
the Association's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for ESOP. The Accounting Standards Division of the
American Institute of Certified Public Accountants approved Statement of
Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership
Plans," which is effective for fiscal years beginning after December 15, 1993.
SOP 93-6 changed, among other things, the measure of compensation recorded by
employers from the cost of ESOP shares to the fair value of ESOP shares. To the
extent that the fair value of the Common Stock held by the ESOP that are
committed to be released directly to compensate employees, differs from the cost
of such shares, compensation expenses and a related charge or credit to
additional paid-in capital will be reported in the Company's financial
statements. The adoption of the ESOP by the Association and the application of
SOP 93-6 is likely to result in fluctuations in compensation expense as a result
of changes in the fair value of the Common Stock. However, any such
compensation expense fluctuations will result in an offsetting adjustment to
paid-in capital, and therefore, total capital will not be affected. See "Pro
Forma Data."
Disclosure of Derivative Financial Instruments. In October 1994, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 119 "Disclosure
about Derivative Financial Instruments and Fair Value of Financial Instruments."
This statement addresses the disclosure of derivative financial instruments
including the face amount, nature and terms. For derivatives held for trading,
disclosure of average and period end fair values and disaggregated gains and
losses is required. For derivatives held for purposes other than trading,
disclosure of objectives, strategies, policies on reporting and income
recognition method is required. This statement is effective for financial
statements for fiscal years ending after December 15, 1995. Currently the
Association does not own any derivative financial instruments and therefore SFAS
No. 119 should not have any impact on the financial statements.
Impairment of Long-Lived Assets. In March 1995, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. This Statement requires that long-
lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the entity should estimate the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset. The impact on the financial statements for implementation
of the statement is not expected to be material.
Mortgage Servicing Rights. In May 1995, the FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." This Statement amends FASB
Statement No. 65, "Accounting for Certain Mortgage Banking Activities" to
require that a mortgage banking enterprise recognize as separate assets rights
to service mortgage loans
47
<PAGE>
for others, however those servicing rights are acquired. The total cost of the
mortgage loans to be sold should be allocated between the mortgage servicing
rights and the loans based on their relative fair values if it is practicable to
estimate those fair values. If not, the entire cost should be allocated to the
mortgage loans. This statement applies prospectively in fiscal years beginning
after December 15, 1995. The impact on the financial statements for
implementation of the Statement is not expected to be material.
Accounting for Stock-Based Compensation. In October 1995, the FASB
issued SFAS No. 123, "Accounting for Stock-Based Compensation to Employees."
This Statement encourages entities to adopt the fair value based method of
accounting for employee stock options or other stock compensation plans.
However, it allows an entity to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation cost is the excess of the
quoted market price of the stock at grant date over the amount an employee must
pay to acquire the stock. Most fixed stock option plans -- the most common type
of stock compensation plan -- have no intrinsic value at grant date, and under
Opinion No. 25 no compensation cost is recognized for them. Compensation cost
is recognized for other types of stock based compensation plans under Opinion
No. 25, including plans with variable, usually performance-based, features.
This Statement requires that an employer's financial statements include certain
disclosures about stock-based employee compensation arrangements regardless of
the method used to account for them. This statement is effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will adopt the Statement on the date the Company converts from a
federal mutual to a federal stock savings and loan association. The Company has
not determined which method it will use to account for the option at this time
and has not estimated the effect of adoption on the Company's financial
condition or results of operations.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125, which superceded FASB No. 122, provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished.
This statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive application is not
permitted.
The Association adopted the provisions of the Standard on January 1,
1997. Based on the Association's current operating activities, management does
not believe that the adoption of this statement will have a material impact on
the Association's financial condition or results of operations.
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors
of the Association in January 1997 for the purpose of becoming a holding company
to own all of the outstanding capital stock of the Association. Upon completion
of the Conversion, the Association will become a wholly owned subsidiary of the
Company. For additional information, see "Rocky Ford Financial, Inc."
The Company currently is not an operating company. Following the
Conversion, the Company will be engaged primarily in the business of directing,
planning and coordinating the business activities of the Association. In the
future, the Company may become an operating company or acquire or organize other
operating subsidiaries, including other financial institutions, though there are
no current plans in this regard. Initially, the Company will not maintain
offices separate from those of the Association or employ any persons other than
its officers who will not be separately compensated for such service.
48
<PAGE>
BUSINESS OF THE ASSOCIATION
GENERAL
The Association's principal business currently consists of attracting
deposits from the general public and investing these funds in loans secured by
first mortgages on owner-occupied, single-family residences in the Association's
market area.
The Association derives its income principally from interest earned on
loans, as well as interest earned on mortgage-backed securities and deposits in
other depository institutions. The Association's principal expenses are
interest expense on deposits and borrowings (if necessary) and noninterest
expenses such as compensation and employee benefits, deposit insurance and other
miscellaneous expenses. Funds for these activities are provided principally by
deposits, repayments of outstanding loans and mortgage-backed securities and
operating revenues.
MARKET AREA
The Association's market area for gathering deposits and making loans
is Otero County, Colorado, which is located in southeast Colorado, approximately
50 miles east of Pueblo, Colorado and 100 miles southeast of Colorado Springs,
Colorado.
Agricultural related businesses are the base of Otero County's
economy. The primary employers in Otero County are farming, retail, government
and service industries. As of 1990, Otero County had a population of 20,185.
Median family income for Otero County is an estimated $28,569 for 1996. Major
towns (population) in the county include La Junta (7,637), Rocky Ford (4,162),
Fowler (1,154), Swink (584), and Manzanola (437).
LENDING ACTIVITIES
General. The Association's loan portfolio totaled $12.3 million at
September 30, 1996, representing 60.27% of total assets at that date.
Substantially all loans are originated in the market area. At December 31,
1996, $12.5 million, or 98.81% of the Association's net loan portfolio consisted
of single-family, residential mortgage loans. Other loans secured by real
estate include non-residential real estate loans which amounted to $165,000 or
1.31% of the Association's net loan portfolio at December 31, 1996. To a lesser
extent, the Association also originates consumer loans secured by deposits. At
December 31, 1996, consumer loans totaled $108,000, or .85% of the Association's
net loan portfolio.
ANALYSIS OF LOAN PORTFOLIO
Set forth below is selected data relating to the composition of the
Association's loan portfolio by type of loan at the dates indicated. At
December 31, 1996, the Association had no concentrations of loans exceeding 10%
of total loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31, At September 30,
-------------- ---------------------------------------
1996 1996 1995
---------------- ---------------- ----------------
Amount % Amount % Amount %
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family............... $12,440 98.76% $12,132 98.74% $10,915 99.37%
Non-residential................... 165 1.31 174 1.42 123 1.12
------- ------ ------- ------ ------- ------
Total real estate loans........ 12,605 100.07 12,306 100.15 11,038 100.49
Consumer loans on savings accounts.. 108 .86 102 0.83 79 0.72
------- ------ ------- ------ ------- ------
Total loans......................... 12,713 100.93 12,408 100.98 11,117 101.21
------- ------ ------- ------ ------- ------
Less:
Deferred fees and discounts....... 57 .45 61 0.50 73 0.66
Allowance for losses.............. 60 .48 60 0.49 60 0.55
------- ------ ------- ------ ------- ------
Loan portfolio, net................. $12,596 100.00% $12,287 100.00% $10,984 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
49
<PAGE>
LOAN MATURITY SCHEDULE
The following table sets forth certain information at September 30,
1996 regarding the dollar amount of loans maturing in the Association's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less.
<TABLE>
<CAPTION>
Under One to Three to Five to Ten to Over
One Year Three Years Five Years Ten Years Twenty Years Twenty Years Total
-------- ----------- ---------- --------- ------------ ------------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family.. $ 64 $118 $797 $2,904 $7,339 $910 $12,132
Non-residential...... -- 4 37 133 -- -- 174
Consumer loans on
savings accounts..... 63 39 -- -- -- -- 102
---- ---- ---- ------ ------ ---- -------
Total............. $127 $161 $834 $3,037 $7,339 $910 $12,408
==== ==== ==== ====== ====== ==== =======
</TABLE>
The next table sets forth at September 30, 1996, the dollar amount of
all loans due one year or more after September 30, 1996 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
<S> <C> <C>
(In thousands)
Mortgage loans
One- to four-family................ $12,068 $ --
Non-residential.................... 174 --
Consumer loans on savings accounts.. 39 --
------- ---------
Total.......................... $12,281 $ --
======= =========
</TABLE>
50
<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Association the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when current mortgage loan market rates are substantially
lower than rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Association generally
has authority to originate and purchase loans secured by real estate located
throughout the United States. Consistent with its emphasis on being a
community-oriented financial institution, the Association conducts substantially
all of its lending activities in its market area.
The following table sets forth certain information with respect to the
Association's loan origination activity for the periods indicated. The
Association has not purchased or sold any loans in the periods presented.
ORIGINATION, PURCHASE AND SALE OF LOANS
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Net loans, beginning of period........... $12,287 $10,984 $10,984 $10,361
Origination by type:
- --------------------
One- to four-family...................... $ 883 $ 629 $ 3,636 $ 2,457
Non-residential.......................... -- -- 80 --
Consumer loans on savings accounts....... 32 20 37 178
------- ------- ------- -------
Total loans originated.............. 915 649 3,753 2,635
------- ------- ------- -------
Repayments............................... 610 440 2,461 2,068
------- ------- ------- -------
Decrease (increase) in other items, net.. 4 (2) 11 56
------- ------- ------- -------
Net increase (decrease) in loans
receivable, net...................... 309 207 1,303 623
------- ------- ------- -------
Net loans, end of period................. $12,596 $11,191 $12,287 $10,984
======= ======= ======= =======
</TABLE>
The Association's loan originations are derived from a number of
sources, including referrals by realtors, depositors and borrowers and
advertising, as well as walk-in customers. The Association's solicitation
programs consist of advertisements in local media, in addition to occasional
participation in various community organizations and events. Real estate loans
are originated by the Association's loan personnel. All of the Association's
loan personnel are salaried, and the Association does not compensate loan
personnel on a commission basis for loans originated. Loan applications are
accepted at the Association's office.
Loan Underwriting Policies. The Association's lending activities are
subject to the Association's written, non-discriminatory underwriting standards
and to loan origination procedures prescribed by the Association's Board of
Directors and its management. Detailed loan applications are obtained to
determine the borrower's ability to repay, and the more significant items on
these applications are verified through the use of credit reports, financial
statements and confirmations. All loans must be reviewed by the Association's
loan committee, which is comprised
51
<PAGE>
of the Association's Board of Directors, for which a quorum is required to
approve a loan. In addition, the full Board of Directors reviews and approves
all loans on a monthly basis.
Applications for single-family real estate loans are underwritten and
closed in accordance with the standards of FHLMC and Federal National Mortgage
Association ("FNMA") except that, consistent with banking practice in Colorado,
title opinions rather than title insurance are obtained. Generally, upon
receipt of a loan application from a prospective borrower, a credit report and
verifications are ordered to confirm specific information relating to the loan
applicant's employment, income and credit standing. If a proposed loan is to be
secured by a mortgage on real estate, an appraisal of the real estate is usually
undertaken by an appraiser approved by the Association's Board of Directors and
licensed or certified (as necessary) by the State of Colorado. In the case of
single-family residential mortgage loans, except when the Association becomes
aware of a particular risk of environmental contamination, the Association
generally does not obtain a formal environmental report on the real estate at
the time a loan is made. A formal environmental report may be required in
connection with nonresidential real estate loans.
It is the Association's policy to record a lien on the real estate
securing a loan and to obtain a title opinion from Colorado counsel which
provides that the property is free of prior encumbrances and other possible
title defects. Borrowers must also obtain hazard insurance policies prior to
closing and, when the property is in a flood plain as designated by the
Department of Housing and Urban Development, pay flood insurance policy
premiums.
The Association is permitted to lend up to 100% of the appraised value
of the real property securing a mortgage loan. The Association is required by
federal regulations to obtain private mortgage insurance on that portion of the
principal amount of any loan that is greater than 90% of the appraised value of
the property. The Association will make a single-family residential mortgage
loan for owner-occupied property with a loan-to-value ratio of up to 80% on such
loans. For residential properties that are not owner-occupied, the Association
generally does not lend more than 80% of the appraised value. For all
residential mortgage loans, the Association may go up to 90% of appraised value
with private mortgage insurance. The federal banking agencies, including the
OTS, have adopted regulations that would establish new loan-to-value ratio
requirements for specific categories of real estate loans. See "Regulation --
Regulation of the Association -- Uniform Lending Standards."
Under applicable law, with certain limited exceptions, loans and
extensions of credit by a savings institution to a person outstanding at one
time shall not exceed 15% of the institution's unimpaired capital and surplus.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of unimpaired capital and surplus. Applicable
law additionally authorizes savings institutions to make loans to one borrower,
for any purpose, in an amount not to exceed the lesser of $30.0 million or 30%
of unimpaired capital and surplus to develop residential housing, provided
certain requirements are satisfied. Under these limits, the Association's loans
to one borrower were limited to $500,000 at December 31, 1996. At that date,
the Association had no lending relationships in excess of the loans-to-one-
borrower limit. At December 31, 1996, the Association's largest lending
relationship was a $185,000 relationship consisting of single-family residences,
one of which serves as the borrowers' primary residence. All loans within this
relationship were current and performing in accordance with their terms at
December 31, 1996.
Interest rates charged by the Association on loans are affected
principally by competitive factors, the demand for such loans and the supply of
funds available for lending purposes. These factors are, in turn, affected by
general economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies and government
budgetary matters.
Single-Family Residential and Commercial Real Estate Lending. The
Association historically has been and continues to be an originator of single-
family, residential real estate loans in its market area. At December 31, 1996,
single-family residential mortgage loans, totaled approximately $12.4 million,
or 99% of the Association's net loan portfolio. The Association has no loans
secured by nonowner-occupied investment properties, no
52
<PAGE>
construction loans, and only $165,000 in loans on non-residential real estate.
All loans originated by the Association are maintained in its portfolio rather
than sold in the secondary market.
The Association only originates fixed-rate loans substantially all of
which have 10 years or 15 years to maturity. In each case, such loans are
secured by first mortgages on single-family, owner-occupied residential real
property located in the Association's market area. The Association's lending
policy does increase the Association's exposure to interest rate risk during
periods of rising interest rates. To reduce its interest rate risk associated
with such loans, the Association maintains a relatively high level of liquid
assets. The proceeds of the Conversion will also assist the Association in
reducing this exposure.
The Association's commercial real estate portfolio generally consists
of fixed rate loans secured by first mortgages on commercial real estate
including industrial properties, professional buildings and small retail
establishments. All properties are located in Otero County, Colorado. At
December 31, 1996, the Association had $165,000 of such loans, which comprised
1.0% of its loan portfolio. Commercial real estate loans are originated on a
fixed-rate basis with terms of up to 15 years and are underwritten with loan-to-
value ratios of up to 70% of the lesser of the appraised value or the purchase
price of the property. The Association does not intend to significantly expand
commercial real estate lending following the Conversion.
Consumer and Other Lending. The consumer loans currently in the
Association's loan portfolio consist of loans secured by savings deposits. Such
savings account loans are usually made for up to 90% of the depositor's savings
account balance. The interest rate is normally 2.0% above the rate paid on such
deposit account serving as collateral, and the account must be pledged as
collateral to secure the loan. Interest generally is billed on a quarterly
basis. At December 31, 1996, loans on deposit accounts totaled $108,000, or
.86% of the Association's net loan portfolio.
Loan Fees and Servicing. The Association receives fees in connection
with late payments and for miscellaneous services related to its loans. The
Association also charges a $150 document preparation fee and a $350 appraisal
fee for loan originations. The Association does not service loans for others.
Nonperforming Loans and Other Problem Assets. It is management's
policy to continually monitor its loan portfolio to anticipate and address
potential and actual delinquencies. When a borrower fails to make a payment on
a loan, the Association takes immediate steps to have the delinquency cured and
the loan restored to current status. Loans which are delinquent 26 days incur a
late fee of 4.0% of principal and interest due. As a matter of policy, the
Association will contact the borrower after the loan has been delinquent 30
days. If payment is not promptly received, the borrower is contacted again, and
efforts are made to formulate an affirmative plan to cure the delinquency.
Generally, after any loan is delinquent 90 days or more, formal legal
proceedings are commenced to collect amounts owed. Loans are placed on
nonaccrual status if the loan becomes past due more than 90 days unless such
loans are well-secured and in the process of collection. Loans are charged off
when management concludes that they are uncollectible. See Note 1 of Notes to
Financial Statements.
Real estate acquired by the Association as a result of foreclosure is
classified as real estate acquired through foreclosure until such time as it is
sold. When such property is acquired, it is initially recorded at estimated
fair value and subsequently at the lower of book value or fair value, less
estimated costs to sell. Costs relating to holding such real estate are charged
against income in the current period, while costs relating to improving such
real estate are capitalized until a saleable condition is reached. Any required
write-down of the loan to its fair value less estimated selling costs upon
foreclosure is charged against the allowance for loan losses. See Note 1 of
Notes to Financial Statements.
53
<PAGE>
The following table sets forth information with respect to the
Association's nonperforming assets at the dates indicated. Further, no loans
were recorded as restructured loans within the meaning of SFAS No. 15 at the
dates indicated.
<TABLE>
<CAPTION>
At
December 31, At September 30,
-------------------------
1996 1996 1995
------------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Total loans accounted for on a non-accrual basis:.. $ -- $ -- --
============ =========== ===========
Total accruing loans which are contractually
past due 90 days or more......................... $ -- $ -- --
============ =========== ===========
Total nonperforming loans...................... $ -- $ -- $ --
============ =========== ===========
Percentage of total loans.......................... --% NA% NA%
============ =========== ===========
Other non-performing assets (2).................... $ -- $ -- $ 17
============ =========== ===========
</TABLE>
_________________
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely.
Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income,
depending on management's assessment of the collectibility of the
loan.
(2) Other non-performing assets includes property acquired by the
Association through foreclosure or repossession. This property is
carried at the lower of its fair value less estimated selling costs or
the principal balance of the related loan, whichever is lower. Other
non-performing assets also includes real estate developed and held for
sale.
At December 31, 1996, the Association had no loans outstanding that
were classified as non-accrual, 90 days past due or restructured, and no loans
outstanding that were not classified as non-accrual, 90 days past due or
restructured, but as to which known information about possible credit problems
of borrowers caused management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and may result in
disclosure as non-accrual, 90 days past due or restructured.
Federal regulations require savings institutions to classify their
assets on the basis of quality on a regular basis. An asset meeting one of the
classification definitions set forth below may be classified and still be a
performing loan. An asset is classified as substandard if it is determined to be
inadequately protected by the current retained earnings and paying capacity of
the obligor or of the collateral pledged, if any. An asset is classified as
doubtful if full collection is highly questionable or improbable. An asset is
classified as loss if it is considered uncollectible, even if a partial recovery
could be expected in the future. The regulations also provide for a special
mention designation, described as assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Such assets designated as special mention may include nonperforming
loans consistent with the above definition. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount. Federal examiners may
disagree with a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. The Association regularly reviews
its assets to determine whether any assets require classification or re-
classification. At December 31, 1996, the Association had no assets classified
as special mention, no assets classified as substandard, no assets classified as
doubtful and no assets classified as loss. The special mention classification is
primarily used by management as a "watch list" to monitor loans that exhibit any
potential deviation in performance from the contractual terms of the loan.
54
<PAGE>
Allowance for Loan Losses. In originating loans, the Association
recognizes that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. It is
management's policy to maintain an adequate allowance for loan losses based on,
among other things, the Association's and the industry's historical loan loss
experience, evaluation of economic conditions, regular reviews of delinquencies
and loan portfolio quality and evolving standards imposed by federal bank
examiners. The Association increases its allowance for loan losses by charging
provisions for loan losses against the Association's income.
Management will continue to actively monitor the Association's asset
quality and allowance for loan losses. Management will charge off loans and
properties acquired in settlement of loans against the allowances for losses on
such loans and such properties when appropriate and will provide specific loss
allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses and believes such allowances are adequate, future adjustments may be
necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.
The Association's methodology for establishing the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific assets as well as losses that have not been identified
but can be expected to occur. Management conducts regular reviews of the
Association's assets and evaluates the need to establish allowances on the basis
of this review. Allowances are established by the Board of Directors on a
quarterly basis based on an assessment of risk in the Association's assets
taking into consideration the composition and quality of the portfolio,
delinquency trends, current charge-off and loss experience, loan concentrations,
the state of the real estate market, regulatory reviews conducted in the
regulatory examination process and economic conditions generally. Specific
reserves will be provided for individual assets, or portions of assets, when
ultimate collection is considered improbable by management based on the current
payment status of the assets and the fair value of the security. At the date of
foreclosure or other repossession, the Association would transfer the property
to real estate acquired in settlement of loans initially at the lower of cost or
estimated fair value and subsequently at the lower of book value or fair value
less estimated selling costs. Any portion of the outstanding loan balance in
excess of fair value less estimated selling costs would be charged off against
the allowance for loan losses. If, upon ultimate disposition of the property,
net sales proceeds exceed the net carrying value of the property, a gain on sale
of real estate would be recorded.
Banking regulatory agencies, including the OTS, have adopted a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. This policy includes an arithmetic
formula for determining the reasonableness of an institution's allowance for
loan loss estimate compared to the average loss experience of the industry as a
whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
12 months given the facts and circumstances as of the evaluation date. This
amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
55
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ 60 $ 60 $ 60 $ 128
---------- ----------- ----------- -----------
Total charge-offs.................................. -- -- -- --
---------- ----------- ----------- -----------
Total recoveries................................... -- -- -- --
---------- ----------- ----------- -----------
Net loan charge-offs............................... -- -- -- --
---------- ----------- ----------- -----------
Provision (credits to provision) for loan losses... -- -- -- (68)
---------- ----------- ----------- -----------
Balance at end of period........................... $ 60 $ 60 $ 60 $ 60
========== =========== =========== ===========
Allowance for loan losses to total non-performing
loans at end of period........................... NA NA NA NA
========== =========== =========== ===========
Allowance for loan losses to net loans
outstanding at end of period..................... .48% .54% 0.49% 0.55%
========== =========== =========== ===========
</TABLE>
56
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------
At December 31, 1996 1996 1995
------------------------ ----------------------- -----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Single-family residential........ $ 60 97.85% $ 60 97.78% $ 60 98.18%
Non-residential.................. -- 1.30 -- 1.40 -- 1.10
Consumer loans on savings accounts... -- .85 -- 0.82 -- 0.71
---------- ------ --------- ------ ---------- ------
Total allowance for loan losses.. $ 60 100.00% $ 60 100.00% $ 60 100.00%
========== ====== ========= ====== ========== ======
</TABLE>
INVESTMENT ACTIVITIES
- ---------------------
General. The Association is permitted under federal law to make
certain investments, including investments in securities issued by various
federal agencies and state and municipal governments, deposits at the FHLB of
Topeka, certificates of deposit in federally insured institutions, certain
bankers' acceptances and federal funds. It may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Association to maintain an investment in FHLB stock and a minimum
amount of liquid assets which may be invested in cash and specified securities.
From time to time, the OTS adjusts the percentage of liquid assets which savings
banks are required to maintain. See "Regulation -- Depository Institution
Regulation -- Liquidity Requirements."
The Association makes investments in order to maintain the levels of
liquid assets required by regulatory authorities and manage cash flow, diversify
its assets, obtain yield and to satisfy certain requirements for favorable tax
treatment. The investment activities of the Association consist primarily of
investments in mortgage-backed securities and other investment securities,
consisting primarily of securities issued or guaranteed by the U.S. government
or agencies thereof. Typical investments include federally sponsored agency
mortgage pass-through and federally sponsored agency and mortgage-related
securities. Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in the Association's
investment policy. The Association performs analyses on mortgage-related
securities prior to purchase and on an ongoing basis to determine the impact on
earnings and market value under various interest rate and prepayment conditions.
Under the Association's current investment policy, securities purchases must be
approved by the Association's Executive Vice President. The Board of Directors
reviews all securities transactions on a monthly basis.
The Association adopted SFAS No. 115 as of October 1, 1994. Pursuant
to SFAS No. 115, the Association has classified securities with an amortized
cost of $319,000 and an approximate market value of $627,300 at December 31,
1996 as available for sale. Management of the Association presently does not
intend to sell such securities and, based on the Association's current liquidity
level and the Association's access to borrowings through the FHLB of Topeka,
management currently does not anticipate that the Association will be placed in
a position of having to sell securities with material unrealized losses.
Securities designated as "held to maturity" are those assets which the
Association has the ability and intent to hold to maturity. Upon acquisition,
securities are classified as to the Association's intent, and a sale would only
be effected due to deteriorating investment quality. The held to maturity
investment portfolio is not used for
57
<PAGE>
speculative purposes and is carried at amortized cost. In the event the
Association sells securities from this portfolio for other than credit quality
reasons, all securities within the investment portfolio with matching
characteristics may be reclassified as assets available for sale. Securities
designated as "available for sale" are those assets which the Association may
not hold to maturity and thus are carried at market value with unrealized gains
or losses, net of tax effect, recognized in retained earnings.
Mortgage-Backed and Related Securities. Mortgage-backed securities
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the
Association. Such intermediaries may include quasi-governmental agencies such
as FHLMC, FNMA and GNMA which guarantee the payment of principal and interest to
investors, although all of the Association's mortgage-backed securities are
originated through GNMA. Mortgage-backed securities generally increase the
quality of the Association's assets by virtue of the guarantees that back them,
are more liquid than individual mortgage loans and may be used to collaterize
borrowings or other obligations of the Association.
Mortgage-related securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans. Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of
the underlying mortgages may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accredited over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the
coupon rate of the underlying mortgage significantly exceeds the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages.
Prepayment experience is more difficult to estimate for adjustable-rate
mortgage-backed securities.
The Association's mortgage-backed securities portfolio consists solely
of seasoned fixed-rate, mortgage-backed securities. The Association makes such
investments in order to manage cash flow, mitigate interest rate risk, diversify
assets, obtain yield, to satisfy certain requirements for favorable tax
treatment and to satisfy the qualified thrift lender test. See "Regulation --
Depository Institution Regulation -- Qualified Thrift Lender Test."
58
<PAGE>
The following table sets forth the carrying value of the Association's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
At
December 31, At September 30,
----------------
1996 1996 1995
------------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury securities................. $ 500 $ 500 $2,700
Interest-bearing deposits................ 3,697 3,897 3,683
Mortgage-backed securities through GNMA.. 2,596 2,617 1,374
Federal Home Loan Bank stock............. 307 302 284
Federal Home Loan Mortgage Corp. stock... 320 282 161
------ ------ ------
Total.............................. $7,420 $7,598 $8,202
====== ====== ======
</TABLE>
The following table sets forth information in the scheduled
maturities, amortized cost, market values and average yields for the
Association's investment portfolio at December 31, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Over Five Years Total Investment Portfolio
----------------- ----------------- ----------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities..... $ -- -- $500 4.75 $ -- -- $ 500 4.75
Interest-bearing deposits.... 3.697 5.95 -- -- -- -- 3,697 5.95
Mortgage-backed securities... 31 8.37 154 8.37 2,411 8.37 2,596 8.37
Federal Home Loan Bank
stock...................... -- -- -- -- 307 6.43 307 6.43
Federal Home Loan
Mortgage Corp.............. -- -- -- -- 320 2.15 320 2.15
-------- -------- -------- ------
Total investment securities.. $3,728 $654 $3,038 $7,420
======== ======== ======== ======
</TABLE>
The Association is required to maintain average daily balances of
liquid assets (cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
state and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage-backed securities with less than one year to maturity or subject to
repurchase within one year) equal to a monthly average of not less than a
specified percentage (currently 5%) of its net withdrawable savings deposits
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet liquidity requirements. The average liquidity ratio of the Association for
the month of December 31, 1996 was 22%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Association's funds
for lending, investment activities and general operational purposes. In
addition to deposits, the Association derives funds from loan principal and
interest repayments, maturities of investment securities and mortgage-backed
securities and interest payments thereon. Although loan repayments are a
relatively stable source of funds, deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds, or on a longer term basis for general operational
purposes.
59
<PAGE>
The Association has access to borrow from the FHLB of Topeka, and the Converted
Association will continue to have access to FHLB of Topeka advances.
Deposits. The Association attracts deposits principally from within
its market area by offering competitive rates on its deposit instruments,
including money market accounts, passbook savings accounts, Individual
Retirement Accounts, and certificates of deposit which range in maturity from
six months to six years. Deposit terms vary according to the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Association on a periodic basis. The
Association reviews its deposit mix and pricing on a weekly basis. In
determining the characteristics of its deposit accounts, the Association
considers the rates offered by competing institutions, lending and liquidity
requirements, growth goals and federal regulations. The Association does not
accept brokered deposits.
The Association attempts to compete for deposits with other
institutions in its market area by offering competitively priced deposit
instruments that are tailored to the needs of its customers. Additionally, the
Association seeks to meet customers' needs by providing convenient customer
service to the community, efficient staff and convenient hours of service.
Substantially all of the Association's depositors are Colorado residents who
reside in the Association's market area.
Savings deposits in the Association at December 31, 1996 were
represented by the various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Percentage of
Rate (1) Term Category Balances Total Deposits
- -------- ------- -------- -------- ---------------
(In Thousands)
<S> <C> <C> <C> <C>
Savings and transactions accounts
---------------------------------
3.70% None Passbook accounts $ 1,058 6.10
2.85 None Money market accounts 3,398 19.60
------- ------
4,456 25.70
------- ------
Certificates of deposit
-----------------------
4.87 6 months Fixed term, fixed rate 2,876 16.59
5.11 12 months Fixed term, fixed rate 7,115 41.05
5.89 18 months Fixed term, fixed rate 1,029 5.94
5.71 24 months Fixed term, fixed rate 966 5.57
5.62 30 months Fixed term, fixed rate 326 1.88
5.50 36 months Fixed term, fixed rate 567 3.27
------- ------
Total certificates of deposit 12,879 74.30
------- ------
Total deposits $17,335 100.00%
======= ======
</TABLE>
__________________
(1) Indicates weighted average interest rate at December 31, 1996.
60
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Association between the
dates indicated.
<TABLE>
<CAPTION>
Balance at Balance at Balance at
December % of Increase September % of Increase September % of
31, 1996 Deposits (Decrease) 30, 1996 Deposits (Decrease) 30, 1995 Deposits
--------- ---------- --------- --------- ---------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposit............... $ 3,398 19.60% $ 127 $ 3,271 19.08% $ 714 $ 2,557 15.31%
Savings deposits -- passbook....... 1,058 6.10 (20) 1,078 6.29 (1) 1,079 6.46
Certificates of deposit............ 11,510 66.40 226 11,284 65.81 (981) 12,265 73.43
Jumbo certificates................. 1,369 7.90 (143) 1,512 8.82 711 801 4.80
--------- ------ ------- --------- ------- ------- --------- ----------
$ 17,335 100.00% $ 190 $ 17,145 100.00% $ 443 $ 16,702 100.00%
========= ====== ======= ========= ======= ======= ========= ==========
</TABLE>
61
<PAGE>
The following table sets forth the time deposits in the Association
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
--------------- -----------------------------------------
1996 1996 1995
---------------- ------------------ -----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates
3.00 - 4.00........................ $ 320 1.85% $ 424 2.47% $ 967 5.79%
4.01 - 5.00........................ 5,594 32.27 4,565 26.63 3,468 20.76
5.01 - 6.00........................ 5,937 34.25 7,746 45.18 7,888 47.23
6.01 - 7.00........................ 996 5.75 -- 0.00 685 4.10
Over 7.00%......................... 32 .18 61 0.36 58 0.35
----------------- ------- -------- ------- -------
Total certificates................. 12,879 74.30 12,796 74.63 13,066 78.23
--------- ------ ------- -------- ------- -------
Total transaction accounts......... 4,456 25.70 4,349 25.37 3,636 21.77
Total deposits..................... $ 17,335 100.00% $17,145 100.00% $16,702 100.00%
========= ====== ======= ======== ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1996.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- --------- --------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
3.00 - 4.00%... $ 345 $ -- $ -- $ -- $ 345
4.01 - 5.00%... 5,811 1,279 861 -- 7,951
5.01 - 7.00%... 3,835 716 -- -- 4,551
7.01 and Over.. -- -- 32 -- 32
------ ------ --------- ------- -------
$9,991 $1,995 $893 $ -- $12,879
====== ====== ========= ======= =======
</TABLE>
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 December 31, 1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- ------------
(In thousands)
<S> <C>
Three months or less........... $ 214
Over three through six months.. 305
Over six through 12 months..... 329
Over 12 months................. 521
------
Total........................ $1,369
======
</TABLE>
62
<PAGE>
The following table sets forth the savings activities of the
Association for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
------------------ -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Opening balance........................................ $17,145 $16,702 $16,702 $17,137
Net increase (decrease) before interest credited....... 142 (87) 295 (582)
Interest credited...................................... 48 47 148 147
------- ------- ------- -------
Ending balance..................................... $17,335 $16,662 $17,145 $16,702
======= ======= ======= =======
Net increase (decrease)................................ $ 190 $ (40) $ 443 $ (435)
======= ======= ======= =======
Percent increase (decrease)............................ 1.11% (.24)% 2.65% (2.54)%
======= ======= ======= =======
</TABLE>
In the unlikely event the Association is liquidated after the
Conversion, depositors will be entitled to full payment of their deposit
accounts prior to any payment being made to the sole stockholder of the
Converted Association or the Association, which is the Company.
Borrowings. Savings deposits historically have been the primary
source of funds for the Association's lending, investments and general operating
activities. The Association is authorized, however, to use advances from the
FHLB of Topeka to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Topeka functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB System, the Association is required to
own stock in the FHLB of Topeka and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. The Association has a Blanket Agreement
for advances with the FHLB under which the Association may borrow up to 25% of
assets (approximately $5.1 million), subject to normal collateral and
underwriting requirements. Advances from the FHLB of Topeka are secured by the
Association's stock in the FHLB of Topeka and first mortgage loans.
As of December 31, 1996, the Association had no advances
outstanding.
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, the Association is permitted to
invest an amount equal to 2% of its assets in subsidiaries, with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city and community development purposes. Under such limitations, as of
December 31, 1996, the Association was authorized to invest up to approximately
$411,000 in the stock of or loans to subsidiaries, including the additional 1%
investment for community inner-city and community development purposes.
Institutions meeting their applicable minimum regulatory capital requirements
may invest up to 50% of their regulatory capital in conforming first mortgage
loans to subsidiaries in which they own 10% or more of the capital stock.
The Association does not have any subsidiaries.
63
<PAGE>
COMPETITION
The Association faces strong competition both in originating real
estate and consumer loans and in attracting deposits. The Association competes
for real estate and other loans principally on the basis of interest rates, the
types of loans it originates, the deposit products it offers and the quality of
services it provides to borrowers. The Association also competes by offering
products which are tailored to the local community. Its competition in
originating real estate loans comes primarily from other savings institutions,
commercial banks and mortgage bankers making loans secured by real estate
located in the Association's market area. Commercial banks, credit unions and
finance companies provide vigorous competition in consumer lending. Competition
may increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
The Association attracts its deposits through its sole office
primarily from the local community. Consequently, competition for deposits is
principally from other savings institutions, commercial banks and brokers in the
local community as well as from the corporate credit unions sponsored by the
large private employers in the Association's market area. The Association
competes for deposits and loans by offering what it believes to be a variety of
deposit accounts at competitive rates, convenient business hours, a commitment
to outstanding customer service and a well-trained staff. The Association
believes it has developed strong relationships with local realtors and the
community in general.
Management considers its market area for gathering deposits to be
Otero County in Colorado. The Association estimates that it competes with 16
banks, and 4 credit unions for deposits and loans. Based on data provided by a
private marketing firm, the Association estimates that at June 30, 1995, the
latest date for which information was available, it had 7.1% of deposits held by
all financial institutions in its market area.
OFFICES AND OTHER MATERIAL PROPERTIES
The following table sets forth information regarding the Association's
sole office at December 31, 1996.
<TABLE>
<CAPTION>
Book Value at
Year Owned or December 31, Approximate
Opened Leased 1996 Square Footage
------ -------- ------------- --------------
<S> <C> <C> <C> <C>
Main office 1975 Owned $48,000 3,000
</TABLE>
The book value of the Association's investment in premises and
equipment totaled approximately $98,000 at December 31, 1996. See Note 6 of
Notes to Financial Statements.
EMPLOYEES
As of December 31, 1996, the Association had five full-time and no
part-time employees, none of whom were represented by a collective bargaining
agreement. Management considers the Association's relationships with its
employees to be good.
LEGAL PROCEEDINGS
From time to time, the Association is a party to various legal
proceedings incident to its business. At December 31, 1996, there were no legal
proceedings to which the Company or the Association was a party, or to which any
of their property was subject, which were expected by management to result in a
material loss to the Company or the Association. There are no pending
regulatory proceedings to which the Company, the Association or its subsidiaries
is a party or to which any of their properties is subject which are currently
expected to result in a material loss.
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REGULATION
GENERAL
As a federally chartered savings association, the Association is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Association must comply with such regulatory requirements,
and the OTS periodically examines the Association for compliance with various
regulatory requirements. The FDIC also has the authority to conduct special
examinations. The Association must file reports with the OTS describing its
activities and financial condition and is also subject to certain reserve
requirements promulgated by the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or appear elsewhere herein.
REGULATION OF THE ASSOCIATION
Regulatory Capital Requirements. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). See " -- Prompt Corrective Regulatory Action." For
purposes of this regulation, Tier 1 capital has the same definition as core
capital, which is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationship. Both core and
tangible capital are further reduced by an amount equal to a savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks, other than subsidiaries engaged in activities
undertaken as agent for customers, or in mortgage banking activities and
subsidiary depository institutions or their holding companies. At December 31,
1996, the Association had no such investments.
Adjusted total assets are a savings association's total assets as
determined under GAAP, adjusted for certain goodwill amounts and increased by a
pro rated portion of the assets of subsidiaries in which the savings association
holds a minority interest, and which are not engaged in activities for which the
capital rules require deduction of its debt and equity investments. Adjusted
total assets are reduced by the amount of assets that have been deducted from
capital, the portion of the savings association's investments in subsidiaries
that must be netted against capital under the capital rules and, for purposes of
the core capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements, the savings association's high loan-to-value ratio land
loans and non-residential construction loans and equity investments other than
those deducted from core and tangible capital. At December
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31, 1996, the Association had no high ratio land or nonresidential construction
loans and had no equity investments for which OTS regulations require a
deduction from total capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset, and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one- to four-family first mortgages that
are not more than 90 days past due with loan-to-value ratios under 80% are
assigned a risk weight of 50%. Consumer and residential construction loans are
assigned a risk weight of 100%. Mortgage-backed securities issued, or fully
guaranteed as to principal and interest by the FHLMC, are assigned a 20% risk
weight. Cash and U.S. Government securities backed by the full faith and credit
of the U.S. Government are given a 0% risk weight.
The table below presents the Association's capital position relative
to its various regulatory capital requirements at December 31, 1996.
<TABLE>
<CAPTION>
Percent of
Amount Assets(1)
------ --------
(Dollars in thousands)
<S> <C> <C>
Tangible capital.......................... $2,664 13.10%
Tangible capital requirement.............. 305 1.50
------ -----
Excess (deficit)....................... $2,359 11.60%
====== =====
Core capital.............................. $2,664 13.10%
Core capital requirement.................. 610 3.00
------ -----
Excess (deficit)....................... $2,054 10.10%
====== =====
Risk-based capital........................ $2,724 35.31%
Risk-based capital requirement............ 617 8.00
------ -----
Excess (deficit)....................... $2,107 27.31%
====== =====
</TABLE>
________________________
(1) Based on adjusted total assets for purposes of the tangible capital
and core capital requirements and risk-weighted assets for purpose of
the risk-based capital requirement.
The OTS requires savings institutions with more than a "normal" level
of interest rate risk to maintain additional total capital. A savings
institution's interest rate risk is measured in terms of the sensitivity of its
"net portfolio value" to changes in interest rates. Net portfolio value is
defined, generally, as the present value of expected cash inflows from existing
assets and off-balance sheet contracts less the present value of expected cash
outflows from existing liabilities. A savings institution will be considered to
have a "normal" level of interest rate risk exposure if the decline in its net
portfolio value, after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline), is less than
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk is required to deduct
from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report, and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from
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filing the interest rate risk schedule with their Thrift Financial Reports.
However, the OTS will require any exempt savings institution that it determines
may have a high level of interest rate risk exposure to file such schedule on a
quarterly basis. The OTS has not yet implemented these requirements.
In addition to requiring generally applicable capital standards for
savings institutions, the OTS is authorized to establish the minimum level of
capital for a savings institution at such amount or at such ratio of capital-to-
assets as the OTS determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. The OTS may treat
the failure of any savings institution to maintain capital at or above such
level as an unsafe or unsound practice, and may issue a directive requiring any
savings institution which fails to maintain capital at or above the minimum
level required by the OTS to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution, or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days, unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter, beginning 270 days
after the date it became critically undercapitalized.
Under implementing regulations, the federal banking regulators,
including the OTS, generally measure a depository institution's capital adequacy
on the basis of the institution's total risk-based capital ratio (the ratio of
its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio
of its core capital to adjusted total assets). Under the regulations, a savings
institution that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-
based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or
greater. An "adequately capitalized" savings institution is a savings
institution that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-
based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater
(or 3.0% or greater if the savings institution has a composite 1 CAMEL rating).
An "undercapitalized institution" is a savings institution that has (i) a total
risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if
the institution has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as a savings
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institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of "tangible equity" to total
assets of less than 2.0%. Tangible equity is defined as core capital plus
cumulative perpetual preferred stock (and related surplus) less all intangibles
other than qualifying supervisory goodwill and certain purchased mortgage
servicing rights. The OTS may reclassify a well capitalized savings institution
as adequately capitalized and may require an adequately capitalized or
undercapitalized institution to comply with the supervisory actions applicable
to institutions in the next lower capital category (but may not reclassify a
significantly undercapitalized institution as critically under-capitalized) if
the OTS determines, after notice and an opportunity for a hearing, that the
savings institution is in an unsafe or unsound condition or that the institution
has received and not corrected a less-than-satisfactory rating for any CAMEL
rating category. At December 31, 1996 the Association was classified as "well
capitalized" under OTS Regulations, and Management of the Association believes
that the Converted Association will, immediately after the Conversion, also be
classified as "well capitalized."
Qualified Thrift Lender Test. A savings institution that does not
meet the Qualified Thrift Lender test ("QTL Test") must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a QTL, it must cease any activity, and not retain any investment
not permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. Qualified Thrift Investments consist of: (i) loans,
equity positions, or securities related to domestic, residential real estate or
manufactured housing, and educational, small business and credit card loans;
(ii) 50% of the dollar amount of residential mortgage loans subject to sale
under certain conditions but do not include any intangible assets. Subject to a
20% of portfolio assets limit, however, savings institutions are able to treat
as Qualified Thrift Investments 200% of their investments in loans to finance
"starter homes" and loans for construction, development or improvement of
housing and community service facilities or for financing small businesses in
"credit-needy" areas.
A savings institution must maintain its status as a QTL on a monthly
basis in nine out of every 12 months. A savings institution that fails to
maintain Qualified Thrift Lender status will be permitted to requalify once, and
if it fails the QTL Test a second time, it will become immediately subject to
all penalties as if all time limits on such penalties had expired. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB System. Upon failure to qualify as a
QTL for two years, a savings association must convert to a commercial bank. At
December 31, 1996, approximately 98.6% of the Association's assets were invested
in Qualified Thrift Investments.
Dividend Limitations. Under OTS regulations, the Association is not
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Association at the time
of its conversion to stock form. In addition, savings institution subsidiaries
of savings and loan holding companies are required to give the OTS 30 days'
prior notice of any proposed declaration of dividends to the holding company.
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Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Association. Under these regulations, a savings institution that,
immediately prior to, and on a pro forma basis after giving effect to a proposed
capital distribution, has total capital (as defined by OTS regulation) that is
equal to or greater than the amount of its fully phased-in capital requirements
(a "Tier 1 Association"), is generally permitted without OTS approval, after
notice, to make capital distributions during a calendar year in the amount equal
to the greater of (i) 75% of net income for the previous four quarters or (ii)
up to 100% of its net income to date during the calendar year plus an amount
that would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Association is an institution requiring more than normal supervision,
the Association is authorized to pay dividends, in accordance with the
provisions of the OTS regulations discussed above, as a Tier 1 Association.
Under the OTS' prompt corrective action regulations, the Association
is also prohibited from making any capital distributions if, after making the
distribution, the Association would have: (i) a total risk-based capital ratio
of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a leverage ratio of less than 4.0%. However, the OTS, after consultation
with the FDIC, may permit an otherwise prohibited stock repurchase if it is made
in connection with the issuance of additional shares in an equivalent amount,
and the repurchase will reduce the institution's financial obligations or
otherwise improve the institution's financial condition.
In addition to the foregoing, earnings of the Association appropriated
to bad debt reserves and deducted for Federal income tax purposes are not
available for payment of cash dividends or other distributions to stockholders
without payment of taxes at the then current tax rate by the Association on the
amount of earnings removed from the reserves for such distributions. See
"Taxation."
Safety and Soundness Standards. Under FDICIA, as amended by the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "CDRI
Act"), each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines went into effect on August
9, 1995. The guidelines require savings institutions to maintain internal
controls, information systems and audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings institutions should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the OTS determines that a
savings institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A savings institution must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
institution to regulatory sanctions. Management believes that the Association
already meets substantially all the standards adopted in the interagency
guidelines, and therefore does not believe that implementation of these
regulatory standards will materially affect the Association's operations.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July
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10, 1995, the federal banking agencies, including the OTS, issued proposed
guidelines relating to asset quality and earnings. Under the proposed
guidelines, a savings institution should maintain systems, commensurate with its
size and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets, as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings standards,
in the form proposed by the banking agencies, would not have a material effect
on the Association's operations.
Deposit Insurance. The Association is required to pay assessments,
based on a percentage of its insured deposits, to the FDIC for insurance of its
deposits by the FDIC through the SAIF. Under the Federal Deposit Insurance Act,
the FDIC is required to set semi-annual assessments for SAIF-insured
institutions at a level necessary to maintain the designated reserve ratio of
the SAIF at 1.25% of estimated insured deposits, or at a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances indicating a significant risk of substantial future losses
to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority, and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
For the past several semi-annual periods, institutions with SAIF-
assessable deposits, like the Association, have been required to pay higher
deposit insurance premiums than institutions with deposits insured by the BIF.
In order to recapitalize the SAIF and address the premium disparity, the
recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits, based on the amount determined by the FDIC to be necessary to increase
the reserve levels of the SAIF to the designated reserve ratio of 1.25% of
insured deposits. Institutions were assessed at the rate of 65.7 basis points
based on the amount of their SAIF-assessable deposits as of March 31, 1995. As a
result of the special assessment the Association incurred a pre-tax expense of
$106,000, during the year ended September 30, 1996.
The FDIC has proposed a rule that would lower the regular semi-annual
SAIF assessment rates by establishing a base assessment rate schedule ranging
from 4 to 31 basis points effective October 1, 1996. The rule widens the range
between the lowest and highest assessment rates among healthy and troubled
institutions with the intent of creating an incentive for savings institutions
to control risk-taking behavior. The rule also prevents the FDIC from collecting
more funds than needed to maintain the SAIF's capitalization at 1.25% of insured
deposits. Until December 31, 1999, however, SAIF-insured institutions will be
required to pay assessments to the FDIC at the rate of 6.44 basis points to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to finance takeovers
of insolvent thrifts. During this period, BIF members will be assessed for these
obligations at the rate of 1.3 basis points. After December 31, 1999, both BIF
and SAIF members will be assessed at the same rate for FICO payments.
SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. However, the FDIC may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator
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so long as deposit insurance premiums continue to be paid to the SAIF for
deposits attributable to the SAIF members, plus an adjustment for the annual
rate of growth of deposits in the surviving bank without regard to subsequent
acquisitions. Each depository institution participating in a SAIF-to-BIF
conversion transaction is required to pay an exit fee to SAIF equal to 0.90% of
the deposits transferred and an entrance fee to BIF based on the current reserve
ratio of the BIF. A savings institution is not prohibited from adopting a
commercial bank or savings bank charter if the resulting bank remains a SAIF
member.
Transactions with Affiliates. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus, and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate
(except for any affiliate which engages only in activities which are permissible
for savings and loan holding companies), or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate (except
for affiliates which are subsidiaries of the savings institution). Section 106
of the Bank Holding Company Act ("BHCA"), which also applies to the Association,
prohibits the Association from extending credit to or offering any other
services, or fixing or varying the consideration for such extension of credit or
service, on the condition that the customer obtain some additional service from
the institution or certain of its affiliates or not obtain services of a
competitor of the institution, subject to certain exceptions.
Loans to Directors, Executive Officers and Principal Stockholders.
Savings institutions are also subject to the restrictions contained in Section
22(h) of the Federal Reserve Act on loans to executive officers, directors and
principal stockholders. Under Section 22(h), loans to an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated entities of either, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the institution's loan
to one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus and an additional 10% of such capital and surplus for loans
fully secured by certain readily marketable collateral). Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
savings institution, and their respective affiliates, unless such loan is
approved in advance by a majority of the board of directors of the institution
with any "interested" director not participating in the voting. The Federal
Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board, pursuant to
Section 22(h), requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons. Section 22(h) also generally prohibits
a depository institution from paying the overdrafts of any of its executive
officers or directors. Section 22(g) of the Federal Reserve Act requires that
loans to executive officers of depository institutions not be made on terms more
favorable than those afforded to other borrowers, requires approval for such
extensions of credit by the board of directors of the institution, and imposes
reporting requirements for and additional restrictions on the type, amount and
terms of credits to such officers. In addition, Section 106 of the BHCA
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Liquidity Requirements. The Association is required to maintain
average daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
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certain mutual funds, and specified United States government, state or federal
agency obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short-
term borrowings. The Association is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average regulatory liquidity ratio of the Association for the
month of September 1996 was 40%.
Federal Home Loan Bank System. The Association is a member of the
FHLB, which consists of 12 Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Topeka, the Association is required to acquire and hold shares of
capital stock in the FHLB of Topeka in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home purchase contracts
and similar obligations at the beginning of each year, or 1/20 of its advances
from the FHLB of Topeka, whichever is greater. The Association was in compliance
with this requirement with investment in FHLB of Topeka stock at December 31,
1996, of $307,300. The FHLB of Topeka is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB of Topeka. As of December 31, 1996, the
Association no advances and other borrowings from the FHLB of Topeka. See
"Business of the Association -- Deposit Activities and Other Sources of Funds --
Borrowings."
Federal Reserve System. Pursuant to regulations of the Federal
Reserve Board, a thrift institution must maintain average daily reserves equal
to 3% on the first $49.3 million of transaction accounts, plus 10% on the
remainder. This percentage is subject to adjustment by the Federal Reserve
Board. Because required reserves must be maintained in the form of vault cash or
in a non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. As of December 31, 1996, the Association met its reserve
requirements.
REGULATION OF THE COMPANY
General. Following the Conversion, the Company will be a savings and
loan holding company within the meaning of the Home Owners' Loan Act, as amended
("HOLA"). As such, the Company will be registered with the OTS and subject to
OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Association will be
subject to certain restrictions in its dealings with the Company and affiliates
thereof. The Company also will be required to file certain reports with, and
otherwise comply with the rules and regulations of the SEC under the federal
securities laws.
Activities Restrictions. The Board of Directors of the Company
presently intends to operate the Company as a unitary savings and loan holding
company. There are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the Director of OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings association, the
Director of OTS may impose such restrictions as deemed necessary to address such
risk, including limiting: (i) payment of dividends by the savings institution,
(ii) transactions between the savings institution and its affiliates; and (iii)
any activities of the savings institution that might create a serious risk that
the liabilities of the holding company and its affiliates may be imposing on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL Test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a QTL within one year thereafter, register
as, and become subject to, the restrictions applicable to a bank holding
company. See " -- Regulation of the Association -- Qualified Thrift Lender
Test."
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If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Association,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Association or other subsidiary savings institutions) would thereafter be
subject to further restrictions. Among other things, no multiple savings and
loan holding company, or subsidiary thereof which is not a savings institution,
may commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity,
upon prior notice to, and no objection by the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies; or (vii) those activities authorized by the
Federal Reserve Board as permissible for savings and loan holding companies,
unless the Director of OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of OTS prior to being engaged in by a
multiple holding company.
Restrictions on Acquisitions. The HOLA generally prohibits savings
and loan holding companies from acquiring, without prior approval of the
Director of OTS, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof, or (ii) more than
5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the Director of
OTS, no director or officer of a savings and loan holding company or person
owning or controlling by proxy or otherwise more than 25% of such company's
stock, may also acquire control of any savings institution, other than a
subsidiary savings institution, or of any other savings and loan holding
company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
The OTS regulations permit federal associations to branch in any state
or states of the United States and its territories. Except in supervisory cases,
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal association may not establish an out-of-state
branch unless (i) the federal association qualifies as a QTL or as a "domestic
building and loan association" under (S)7701(a)(19) of the Code and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole as a QTL or for treatment as a domestic
building and loan association and (ii) such branch would not result in (a)
formation of a prohibited multi-state multiple savings and loan holding company
or (b) a violation of certain statutory restrictions on branching by savings
association subsidiaries of banking holding companies. Federal associations
generally may not establish new branches unless the association meets or exceeds
minimum regulatory capital requirements. The OTS will also consider the
association's record of compliance with the Community Reinvestment Act of 1977
in connection with any branch application.
Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings association. Pursuant to rules promulgated by
the Federal Reserve Board, owning, controlling or operating a savings
institution is a permissible activity for savings and loan holding companies, if
the savings institution engages only in deposit-taking activities and lending
and other activities that are permissible for bank holding companies. A bank
holding company that controls a savings institution may merge or consolidate the
assets and liabilities of the savings institution with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the Federal Reserve
Board. The resulting bank will be
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required to continue to pay assessments to the SAIF at the rates prescribed for
SAIF members on the deposits attributable to the merged savings institution plus
an annual growth increment. In addition, the transaction must comply with the
restrictions on interstate acquisitions of commercial banks under the BHCA.
Federal Securities Law. The Company has filed with the SEC a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), for the registration of the Common Stock to be issued in the
Conversion. Upon completion of the Conversion, the Common Stock will be
registered with the SEC under the Exchange Act and, under OTS regulations,
generally may not be deregistered for at least three years thereafter. The
Company will be subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the Exchange Act.
The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by
persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company will be subject
to the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
TAXATION
GENERAL
The Association files a consolidated federal income tax return based
on the fiscal year. After the Conversion, it is expected that the Company and
the Association, together with the Association's subsidiary, will file a
consolidated federal income tax return based on a fiscal year ending September
30. Consolidated returns have the effect of deferring gain or loss on
intercompany transactions and allowing companies included within the
consolidated return to offset income against losses under certain circumstances.
FEDERAL INCOME TAXATION
The Company and the Association will file a consolidated federal
income tax return.
Thrift institutions are subject to the provisions of the Code in the
same general manner as other corporations. Prior to recent legislation,
institutions such the Association which met certain definitional tests and other
conditions prescribed by the Code benefitted from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction, loans were
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience, however, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
could be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). Legislation recently signed by the
President repealed the percentage of taxable income method of calculating the
bad debt reserve. The Association historically has elected to use the
percentage method.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
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liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Association, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
The Association's federal corporate income tax returns have not been
audited in the last five years.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"),
enacted on August 10, 1993, the maximum federal corporate income tax rate was
increased from 34% to 35% for taxable income over $10.0 million, with a 3%
surtax imposed on taxable income over $15.0 million. Also under provisions of
RRA, a separate depreciation calculation requirement has been eliminated in the
determination of adjusted current earnings for purposes of determining
alternative minimum taxable income, rules relating to payment of estimated
corporate income taxes were revised, and certain acquired intangible assets such
as goodwill and customer-based intangibles were allowed a 15-year amortization
period. Beginning with tax years ending on or after January 1, 1993, RRA also
provides that securities dealers must use mark-to-market accounting and
generally reflect changes in value during the year or upon sale as taxable gains
or losses. The IRS has indicated that financial institutions which originate
and sell loans will be subject to the rule.
STATE INCOME TAXATION
The State of Delaware imposes no income or franchise taxes on savings
institutions. The State of Colorado taxes the Association's federal taxable
income, adjusted for interest income received directly from federal agencies, at
a 5% rate.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of the same individuals
who serve as directors or officers of the Association. Their biographical
information is set forth under "Management of the Association -- Directors."
The Board of Directors of the Company is divided into three classes. Directors
of the Company will serve for three year terms or until their successors are
elected and qualified, with approximately one-third of the directors being
elected at each annual meeting of stockholders, beginning with the first annual
meeting of stockholders following the Conversion.
The following individuals hold the offices in the Company set forth
below opposite their names.
Name Title
---- -----
Donald F. Gause Chairman of the Board of
Keith E. Waggoner President and Chief Executive Officer
Wayne W. Whittaker Vice President
Francis E. Clute Secretary and Treasurer
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors of the Company.
Since the formation of the Company, none of the executive officers,
directors or other personnel have received remuneration from the Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Company during the past five years is set
forth under "Management of the Association -- Directors." Executive officers
and directors of the Company will be compensated as described below under
"Management of the Association."
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MANAGEMENT OF THE ASSOCIATION
DIRECTORS
Because the Association is a mutual savings and loan association, its
members have elected its Board of Directors. Upon completion of the Conversion,
each director of the Association immediately prior to the Conversion will
continue to serve as directors of the Association. The term of each director is
three years, and approximately one-third of the members of the Board of
Directors are elected each year. The Conversion will not affect the classes or
terms of the existing directors. Because the Company will own all the issued
and outstanding capital stock of the Converted Association following the
Conversion, the Board of Directors of the Company will elect the directors of
the Converted Association. Following the Conversion, Mr. Gause, who currently
serves as President of the Association, will become Chairman of the Board of
Directors of the Converted Association. Mr. Waggoner, who currently serves as
Executive Vice President of the Association, will be elected a Director and
become President and Chief Executive Officer of the Converted Association. They
each will serve in these same capacities for the Company.
The following table sets forth certain information with respect to the
individuals who serve currently as members of the Association's Board of
Directors. There are no arrangements or understandings between the Association
and any director pursuant to which such person has been elected a director of
the Association, and no director is related to any other director or executive
officer by blood, marriage or adoption.
<TABLE>
<CAPTION>
AGE AT
DECEMBER 31,
NAME 1996 DIRECTOR SINCE TERM TO EXPIRE
- ---- ------ -------------- --------------
<S> <C> <C> <C>
Donald F. Gause 65 1972 2000
Wayne W. Whittaker 65 1981 1999
Francis E. Clute 59 1987 1999
Norman L. Bailey 59 1992 1998
William E. Burrell 69 1987 1999
Brian H. Hancock 51 1991 2000
R. Dean Jones 58 1989 1998
Keith E. Waggoner (1) 50 1997 2000
</TABLE>
_______________
(1) Following the Conversion, Mr. Waggoner, President and Chief Executive
Officer and Director of the Company, will be elected as President and
Chief Executive Officer and Director of the Converted Association and
the Company.
Presented below is certain information concerning the directors of the
Association. Unless otherwise stated, all directors have held the positions
indicated for at least the past five years.
DONALD F. GAUSE currently serves as a Director and President of the
Association. Mr. Gause was elected to the Board of Directors in 1972 and has
been President since 1990. Following the Conversion, Mr. Gause will become
Chairman of the Board of Directors of the Converted Association. He is owner of
Don's for Lad and Dad, Inc., a family owned and operated men's clothing
store.
WAYNE W. WHITTAKER has served as a Director and Vice President of the
Association since 1981 and has been a self-employed real estate and insurance
agent since 1953. He also serves as Corporate Secretary and Treasurer of Catlin
Canal Company, The Pisqah Reservoir and Ditch Company and Larkspur, Inc. Mr.
Whittaker's civic activities include being a block solicitor for the Leukemia
Society of America, Finance Chairman for the local Shrine Circus, active
membership in a local Methodist church, committee member for the Sunshine
District of Methodist
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Church Building Committee, Chairman of the Finance Committee of the Arkansas
Valley Board of Realtors and involvement with the Shrine Children's Clinic. He
is also a participant in civic parades in Rocky Ford, La Junta and Fowler,
Colorado.
FRANCIS E. CLUTE has served as a Director and Treasurer of the
Association since 1987. He is the owner of Edco Metal Works, a machine shop
specializing in heating and air conditioning. Mr. Clute's civic involvement
includes membership in the Rocky Ford Lion's Club, Elks Lodge and Chamber of
Commerce. He is also active with the Rocky Ford Zoning Board and School
District.
NORMAN L. BAILEY has served as a Director of the Association since
1992. He is currently serving as President of the La Junta Golf Club and La
Junta Capital.
WILLIAM E. BURRELL has served as a Director of the Association since
1987. He works as an Advisor to Burrell Seeds, Inc. and D.V. Burrell Seed
Growers Company and is active with the Salvation Army.
BRIAN H. HANCOCK has been a self-employed Real Estate and Insurance
Broker since 1969 and a Director of the Association since 1991. He is also a
member of the Board of Directors of the Rocky Ford Housing Authority Nava Manor
Complex.
R. DEAN JONES has been a member of the Board of Directors of the
Association since 1989 and the owner of Jones Motors, Inc. since 1986. His past
and current community involvement include being Chairman of the Board of the
Colorado Auto Dealers Association, President of La Junta Development, Inc.,
Trust Director of the Colorado Auto Dealers Insurance Trust, member of the Board
of the Buick Dealer Council, member of the Board of Pikes Peak Hill Climb, Inc.
and Director of the National Auto Dealer Association.
KEITH E. WAGGONER has been Executive Vice President of the Association
since 1985. His past and current civic activities include being President of
the Lion's Club, member of the Otero Junior College Advisory Board, President
and member of the La Junta Catholic Parish Counsel, President of the La Junta
Catholic Parish Finance Board and member of the Otero County Planning
Commission.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Association meets monthly and may have
additional special meetings. During the year ended September 30, 1996, the
Board met twelve times. No director attended fewer than 75% in the aggregate of
the total number of Board meetings held during the year ended September 30, 1996
and the total number of meetings held by committees on which he served during
such fiscal year. The Association's Board of Directors has standing
Compensation, Asset/Liability Management, Nominating and Loan Review Committees.
The Board of Directors' Audit Committee consists of the entire Board
of Directors. The Board, in its capacity as the Audit Committee, met one time
during the year ended September 30, 1996 to examine and approve the audit report
prepared by the independent auditors of the Association to review and recommend
the independent auditors to be engaged by the Association, to review the
internal audit function and internal accounting controls, and to review and
approve conflict of interest and audit policies. Following the Conversion, it is
expected that the Audit Committee will be comprised of all non-employee
directors will meet at least quarterly.
The Association's Nominating Committee consists of Directors R. Dean
Jones, Norman L. Bailey and Brian H. Hancock and is responsible for considering
potential nominees to the Board of Directors. During the year ended September
30, 1996, the Board of Directors met two times as a nominating committee.
Following the Conversion, it is expected that the Company's full Board of
Directors will act as a nominating committee for selecting the management
nominees for election as directors of the Company in accordance with the
Company's Bylaws. In its deliberations, the Board, functioning as a nominating
committee, considers the candidate's knowledge of the banking business and
involvement in community, business and civic affairs, and also considers whether
the candidate would provide for adequate representation of its market area.
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The Board of Directors' Compensation Committee consists of the full
Board of Directors. The Compensation Committee evaluates the compensation and
benefits of the directors, officers and employees, recommends changes, and
monitors and evaluates employee performance. All compensation decisions are made
by the full Board of Directors. The Compensation Committee met one time during
the fiscal year ended September 30, 1996.
EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation for
the last fiscal year awarded to or earned by the Chief Executive Officer. No
executive officer of the Company earned salary and bonus in fiscal year 1996
exceeding $100,000 for services rendered in all capacities to the Association.
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------
Other Annual All Other
Name Year Salary Bonus Compensation(1) Compensation
- ---- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Keith E. Waggoner 1996 $41,544 $13,249 $ -- $ --
Vice President and Chief
Executive Officer
</TABLE>
_________________
(1) Executive officers of the Association receive indirect compensation in
the form of certain perquisites and other personal benefits. The
amount of such benefits received by the named executive officers in
fiscal 1996 did not exceed 10% of each of the executive officer's
respective salary and bonus.
DIRECTOR COMPENSATION
The Association's directors receive fees of $400 per monthly meeting
attended. Through fiscal 1996 directors received a bonus directors' fee equal
to 6% of the net income of the Association (after employee profit sharing
expense and before taxes) up to $50,000, 8% of the net income of the Association
from $50,001 to $500,000 and 10% of the net income of the Association over
$500,000. Further, the three directors who are also officers each receive 16%
of the total pool for director profit sharing, and each of the other directors
receive 13%. This Plan has been terminated and will be replaced by the
Retirement Plan for Directors and Senior Officer described below. No fees are
paid for serving on committees of the Board of Directors. This fee includes any
Executive, Compensation or Lending Committee meeting. During fiscal year 1996,
the Association's directors' fees totaled $36,000.
CERTAIN BENEFIT PLANS AND AGREEMENTS
In connection with the Conversion, the Company's and the Association's
Boards of Directors have approved certain stock incentive plans, an employment
agreement, and a cash-based incentive compensation plan. In addition, the
Association has an existing Retirement Plan for Directors and Senior Officer
which will remain in effect after the Conversion.
Basis for Awards of Benefits and Compensation. The Company's and the
Association's Boards of Directors have evaluated and approved the terms of the
employment agreement and other benefits described below. In its review of the
benefits and compensation of the executive officers and the terms of the
employment agreement, the Boards of Directors considered a number of factors,
including the experience, tenure and ability of the executive officers, their
performance for the Association during their tenure and the various legal and
regulatory requirements regarding the levels of compensation which may be paid
to employees of savings associations.
Stock Option Plan. The Board of Directors of the Company intends to
submit the Option Plan for approval to stockholders at a meeting which is
expected to be held not earlier than six months following completion of the
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Conversion, but may be held more than one year following completion of the
Conversion. No options shall be awarded under the Option Plan unless stockholder
approval is obtained.
The purpose of the Option Plan is to provide additional incentive to
directors and employees by facilitating their purchase of Common Stock. The
Option Plan will have a term of 10 years from the date of its approval by the
Company's stockholders, after which no awards may be made, unless the plan is
earlier terminated by the Board of Directors of the Company. Pursuant to the
Option Plan, a number of shares equal to 10% of the shares of Common Stock that
are issued in the Conversion (32,000 shares at the midpoint of the Estimated
Valuation Range) would be reserved for future issuance by the Company, in the
form of newly issued shares or treasury shares or shares held in a grantor
trust, upon exercise of stock options ("Options") or stock appreciation rights
("SARs"). Options and SARs are collectively referred to herein as "Awards." If
Awards should expire, become unexercisable or be forfeited for any reason
without having been exercised or having become vested in full, the shares of
Common Stock subject to such Awards would be available for the grant of
additional Awards under the Option Plan, unless the Option Plan shall have been
terminated.
It is expected that the Option Plan will be administered by a
committee (the "Option Committee") of at least two directors of the Company who
(i) are designated by the Board of Directors and (ii) are Non-employee Directors
within the meaning of the federal securities laws. It is expected that the
Option Committee initially will consist of directors Bailey, Jones, and
Whittaker. The Option Committee will select the employees to whom Awards are to
be granted, the number of shares to be subject to such Awards, and the terms and
conditions of such Awards (provided that any discretion exercised by the Option
Committee must be consistent with the terms of the Option Plan). Awards will be
available for grants to directors and key employees of the Company and any
subsidiaries. Consistent with applicable regulations, if the Option Plan is
implemented within one year following completion of the Conversion, no employee
will receive Awards covering more than 25% of the shares reserved for issuance
under the Option Plan, and non-employee directors will not receive awards
individually exceeding 5% of the shares available under the MRP or 30% in the
aggregate. It is expected that upon the implementation of the Option Plan, Mr.
Waggoner will receive an Award with respect to 25% of the shares reserved under
the Option Plan (8,000 shares at the midpoint of the Estimated Valuation Range)
and each director who is not an employee but is a director on the effective date
will receive an Award with respect to the lesser of (i) 5% of the shares
reserved under the Option Plan, and (ii) 30% of the shares reserved under the
Option Plan divided by the number of directors eligible to receive an Award on
the effective date. The initial grant of Options under the Option Plan is
expected to occur on the date the Option Plan receives stockholder approval.
It is intended that Options granted under the Option Plan will
constitute both incentive stock options (Options that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Code and that do not result in tax deductions to the Company
unless participants fail to comply with Section 422 of the Code) ("ISOs"), and
Options that do not so qualify ("Non-ISOs"). The exercise price for Options may
not be less than 100% of the fair market value of the shares on the date of the
grant. The Option Plan permits the Option Committee to impose transfer
restrictions, such as a right of first refusal, on the Common Stock that
optionees may purchase. Awards may be transferred to family members or trusts
under specified circumstances, but may not otherwise be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution.
No Option shall be exercisable after the expiration of ten years from
the date it is granted; provided, however, that in the case of any employee who
owns more than 10% of the outstanding Common Stock at the time an ISO is
granted, the option price for the ISO shall not be less than 110% of the fair
market value of the shares on the date of the grant, and the ISO shall not be
exercisable after the expiration of five years from the date it is granted. If
the Option Plan is implemented within one year after completion of the
Conversion, Options are expected to become exercisable at the rate of 20% per
year, beginning one year from the date of grant. If an optionee dies or
terminates service due to disability while serving as an employee or non-
employee director, all unvested Options will become 100% vested and immediately
exercisable. If the Option Plan is implemented more than one year after the
completion of the Conversion, (i) Options may become exercisable according to a
different schedule and (ii) the Options may also accelerate to 100% upon an
optionee's retirement or termination of service in connection with a change in
control. Upon a participant's exercise of an Option, the Company may, if
provided
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by the Committee in the underlying Option agreement, pay to the participant a
cash amount up to but not exceeding the amount of dividends, if any, declared on
the underlying shares between the date of grant and the date of exercise of the
Option. An otherwise unexpired Option shall, unless otherwise determined by the
Option Committee, cease to be exercisable upon (i) an employee's termination of
employment for "just cause" (as defined in the Option Plan), (ii) the date one
year after an employee terminates service for a reason other than just cause,
death, or disability, or (iii) the date two years after termination of such
service due to the employee's death. Options granted to non-employee directors
will automatically expire one year after termination of service on the Board of
Directors (two years in the event of death).
An SAR may be granted in tandem with all or any part of any Option or
without any relationship to any Option. Whether or not an SAR is granted in
tandem with an Option, exercise of the SAR will entitle the optionee to receive,
as the Option Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common Stock subject to
the SAR at the time of its exercise over the aggregate exercise price of the
shares subject to the SAR was granted. Payment to the optionee may be made in
cash or shares of Common Stock, as determined by the Option Committee.
The Company will receive no monetary consideration for the granting of
Awards under the Option Plan, and will receive no monetary consideration other
than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option exercise price may be paid in cash or Common
Stock or a combination of cash and Common Stock. Upon an optionee's exercise of
any Option, the Company intends to pay the optionee a cash amount equal to any
dividends declared on the underlying shares between the date of grant and the
date of exercise of the Option. The exercise of Options and SARs will be
subject to such terms and conditions established by the Option Committee as are
set forth in a written agreement between the Option Committee and the optionee
(to be entered into at the time an Award is granted). In the event that the
fair market value per share of the Common Stock falls below the option price of
previously granted Options or SARs, the Option Committee will have the
authority, with the consent of the optionee, to cancel outstanding Options or
SARs and to reissue new Options or SARs at the then current fair market price
per share of the Common Stock.
At any time following consummation of the Conversion, the Association
or the Company may contribute sufficient funds to a grantor trust to purchase,
and such trust may purchase, a number of shares of Common Stock equal to 10% of
the shares issued in the Conversion. Such shares would be held by the trust for
issuance to option holders upon the exercise of options in the event the Option
Plan is implemented. Whether such shares are purchased, and the timing of such
purchases, will depend on market and other conditions and the alternative uses
of capital available to the Company.
Employee Stock Ownership Plan. In connection with the Conversion, the
Company's Board of Directors intends to adopt an employee stock ownership plan
("ESOP"), effective as of October 1, 1996. Employees of the Company and its
subsidiaries who have attained age 21 and completed one year of service will be
eligible to participate in the ESOP. The Company will submit an application to
the IRS for a letter of determination as to the tax-qualified status of the
ESOP. Although no assurances can be given, the Company expects the ESOP to
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by the Company or the
Association in cash or shares of Common Stock. The ESOP intends to borrow funds
from the Company in an amount sufficient to purchase 8% of the Common Stock
issued in the Conversion (25,000 shares at the midpoint of the Estimated
Valuation Range). This loan will be secured by the shares of Common Stock
purchased and earnings thereon. Shares purchased with such loan proceeds will
be held in a suspense account for allocation among participants as the loan is
repaid. The Company expects to contribute sufficient funds to the ESOP to repay
such loan over a ten-year period, plus such other amounts as the Company's Board
of Directors may determine in its discretion.
Contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of their annual wages
subject to federal income tax withholding, plus any amounts withheld under a
plan qualified under Sections 125 or 401(k) of the Code and sponsored by the
Company or the Association.
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Participants must be employed at least 500 hours in a plan year in order to
receive an allocation. Each participant's vested interest under the ESOP is
determined according to the following schedule: 0% for less than three years of
service with the Company or the Association; 100% for three or more years of
service. For vesting purposes, a year of service means any plan year in which an
employee completes at least 1,000 hours of service (whether before or after the
ESOP's October 1, 1996 effective date). Vesting accelerates to 100% upon a
participant's attainment of age 65, death or disability or a change in control.
Forfeitures will be reallocated to participants on the same basis as other
contributions. Benefits are payable upon a participant's retirement, death,
disability or separation from service and will be paid in a lump sum in whole
shares of Common Stock (with cash paid in lieu of fractional shares). Benefits
paid to a participant in Common Stock that is not publicly traded on an
established securities market will be subject both to a right of first refusal
by the Company and to a put option by the participant. Dividends paid on
allocated shares are expected to be paid to participants, and dividends on
unallocated shares are expected to be used to repay the ESOP loan.
It is expected that the Company will administer the ESOP and that
Directors Burrell, Clute, and Hancock will be appointed as trustees of the ESOP
(the "ESOP Trustees"). The ESOP Trustees must vote all allocated shares held in
the ESOP in accordance with the instructions of the participants. Unallocated
shares and allocated shares for which no timely direction is received will be
voted by the ESOP Trustees in the same proportion as the participant-directed
voting of allocated shares.
Management Recognition Plan. The Company's Board of Directors
intends to submit the MRP for approval to stockholders at a meeting of the
Company's stockholders, which is expected to be held not earlier than six months
following completion of the Conversion. The purpose of the MRP is to enable the
Company and the Association to retain personnel of experience and ability in key
positions of responsibility. Those eligible to receive benefits under the MRP
will be such directors and key employees as are selected by a committee the
Company's Board of Directors (the "MRP Committee"). It is expected that the MRP
Committee will initially consist of Directors Bailey, Jones, and Whittaker. The
Company's directors are expected to act by majority as trustees of the trust
associated with the MRP (the "MRP Trust"). The trustees of the MRP Trust (the
"MRP Trustees") will have the responsibility to hold and invest all funds
contributed to the MRP Trust. Shares held in the MRP Trust will be voted by the
MRP Trustees in the same proportion as the trustee of the Company's ESOP trust
votes Common Stock held therein, and will be distributed as the award vests.
At any time following consummation of the Conversion, the Association
or the Company will contribute sufficient funds to the MRP Trust so that the MRP
Trust can purchase a number of shares of Common Stock equal to up to a 4% of the
number of shares of Common Stock issued in the Conversion (12,800 shares at the
midpoint of the Estimated Valuation Range). Whether such shares purchased will
be purchased in the open market or newly issued by the Company, and the timing
of such purchases, will depend on market and other conditions and the
alternative uses of capital available to the Company. The compensation expense
for the Company for MRP awards will equal the fair market value of the Common
Stock on the date of the grant pro rated over the years during which vesting
occurs. The shares awarded pursuant to the MRP will be in the form of awards
which may be transferred to family members or trusts under specified
circumstances, but may not otherwise be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent and distribution. If the MRP is implemented within one year following
completion of the Conversion, the MRP awards will be payable over a period
specified by the Board of Directors, which shall not be faster than 20% per
year, beginning one year from the date of the award. Participants in the MRP may
elect to defer all or a percentage of their MRP awards that would have otherwise
been transferred to the participants upon the vesting of said awards. Dividends
on unvested shares will be held in the MRP trust for payment as vesting occurs.
All shares subject to an MRP award held by a participant whose service with the
Company or the Association terminates due to death or disability, shall be
deemed 100% vested as of the participant's last day of service with the
Association or Company. If the MRP is implemented more than one year after the
closing of the Conversion, Awards may become vested according to a different
schedule, and it is expected that the awards will also become 100% vested upon a
participant's retirement or termination of service with the Association or the
Company in connection with a change in control of the Association or the
Company. If a participant terminates employment for reasons other than death or
disability (or retirement or a change in control, if applicable), he or she
forfeits all rights to the allocated shares under restriction.
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The Company's Board of Directors can terminate the MRP at any time,
and, if it does so, any shares not allocated will revert to the Company. If the
MRP is implemented within one year following consummation of the Conversion, no
employee will receive MRP awards covering more than 25% of the shares reserved
for issuance under the MRP, and non-employee directors will not receive awards
individually exceeding 5% of the shares available under the MRP or 30% in the
aggregate. It is expected that upon the implementation of the MRP, Mr. Waggoner
will receive an Award with respect to 25% of the shares reserved under the MRP
(3,200 shares at the midpoint of the Estimated Valuation Range) and each
director who is not an employee but is a director on the effective date shall
receive an Award with respect to the lesser of (i) 5% of the shares reserved
under the MRP, and (ii) 30% of the shares reserved under the MRP divided by the
number of directors eligible to receive an Award on the effective date. The
initial grant of awards under the MRP is expected to occur on the date the MRP
receives stockholder approval. No awards shall be made prior to stockholder
approval of the MRP.
Retirement Plan for Directors and Senior Officer. The Association's
Board of Directors has adopted the Rocky Ford Federal Savings and Loan
Association Retirement Plan for Directors and Senior Officer (the "Retirement
Plan") effective November 13, 1996 (the "Effective Date"), for the Association's
senior officer as of the plan's effective date and its directors (i) who are
members of the Association's Board of Directors (the "Board") at some time on or
after the plan's effective date, and (ii) who are not employees on the date of
being both nominated and elected (or re-elected) to the Board. Directors who
become participants will remain participants even if they later become employees
of the Association.
On the Effective Date, a Retirement Plan bookkeeping account was
established by the Association in the name of each participant, and each
participant who was a director on the Effective Date had his account credited
with an amount equal to the product of (i) $1,840 ($2,723 for director Gause),
and (ii) his full years of service as a director prior to the Effective Date. On
each September 30 following the Effective Date, each participant who is a
director (but not a senior officer) on such date shall have his or her account
credited with an amount equal to the product of $1,840 ($2,723 for director
Gause) and the safe performance factor. The safe performance factor is
determined based on the Association's actual performance as compared to budgeted
goals for return on average assets, non-performing assets, and CAMEL rating,
provided that the safe performance factor may not exceed 1.2. Also on the
Effective Date, the Retirement Plan account of Mr. Waggoner, the senior officer,
was credited with an amount equal to $4,000 for each full year of his service
with the Association prior to such date. On the September 30 occurring during
each of the next eleven years following the Effective Date, Mr. Waggoner's
account will be credited an additional amount equal to $20,669 times the safe
performance factor, provided he is an employed by the Association on such date.
Amounts credited to accounts of participants on the Effective Date became 50%
vested on the Effective Date, with the remainder vesting on March 31, 1997.
Amounts credited to participants' accounts after the Effective Date will be
fully vested at all times. Until distributed in accordance with the terms of
the Retirement Plan, each participant's account will be credited with a rate of
return on any amounts previously credited. Prior to the Conversion, this rate
of return equals the highest rate of interest paid by the Association on
certificates of deposit having a term of one year. After the Conversion that
rate of return will equal the dividend-adjusted rate of return on the Company's
common stock.
In the event of Mr. Waggoner's disability or death, his account
will be credited with an amount equal to the difference (if any) between (i) 50%
of the present value of all benefits which would have been credited to his
account if he had otherwise remained employed by the Association to age 62, and
(ii) the benefits which are actually credited to his account at the time of his
termination. If his employment terminates in connection with or following a
change in control, his account will be credited with an amount equal to the
difference (if any) between (i) 100% of the present value of all benefits which
would have been credited to his account if he had otherwise remained employed by
the Association to age 62, and (ii) the benefits which are actually credited to
his account at the time of his termination, subject to applicable "golden
parachute" limitations under (S)280G of the Internal Revenue Code. "Change in
control" is defined the same as under the Employment Agreement described below.
Participants' accounts under the Retirement Plan will be paid, in
cash, in ten substantially equal annual installments, beginning during the first
quarter of the calendar year which next follows the calendar year in which the
participant ceases to be a director or senior officer (whichever shall first
occur). Notwithstanding the foregoing,
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a participant may elect to receive Retirement Plan benefits in a lump sum or
over a period shorter than ten years. In the event of a participants' death, the
balance of his Retirement Plan account will be paid in a lump sum (unless the
Participant elects a distribution period up to ten years) to his designated
beneficiary, or if none, his estate.
Any benefits accrued under the Retirement Plan will be paid from the
Association's general assets. The Association has established a trust in order
to hold assets with which to pay benefits. Trust assets will be subject to the
claims of the Association's general creditors. In the event a participant
prevails over the Association in a legal dispute as to the terms or
interpretation of the Retirement Plan, he or she will be reimbursed for his or
her legal and other expenses.
Incentive Compensation Plan. The Association's Board of Directors
intends to adopt the Incentive Compensation Plan, effective October 1, 1996. The
Incentive Compensation Plan is administered by a committee (the "Incentive
Compensation Committee") which is expected to consist of non-employee directors
Bailey, Jones, and Whittaker. Under the plan, employees will receive annual cash
bonus awards from a bonus pool determined under a performance-based formula. The
bonus pool will equal the multiple of (i) a dollar amount set by the Incentive
Compensation Committee for the fiscal year ($30,000 for fiscal year ending
September 30, 1997), times (ii) the ROAA factor, times (iii) the NPA factor,
times (iv) the CAMEL factor. The ROAA factor equals the ratio of the
Association's actual return on average assets to budgeted return on average
assets. The NPA factor will equal 1.0 as long as the ratio of the Association's
non-performing assets and real-estate-owned to its total loans and real-estate-
owned ("NPA Ratio") is less than or equal to 1%, and will be reduced ratably to
0 for NPA Ratios equalling or exceeding 2%. The CAMEL Factor will equal 1.2 for
a CAMEL rating of 1, 1.0 for a CAMEL rating of 2, and 0 for CAMEL ratings of 3
or higher. In determining performance for a fiscal year, the Incentive
Compensation Committee will have the discretion to take into account or
disregard extraordinary financial events. Mr. Waggoner is expected to receive
approximately 50% of the annual bonus pool, with the remaining 50% divided pro
rata among the Association's remaining employees based on compensation. The
Incentive Compensation Committee will have the authority to make discretionary
allocations of the bonus pool where they deem it appropriate and necessary.
The Incentive Compensation Plan has an indefinite term, and the
Association has the right at any time to terminate or amend the Incentive
Compensation Plan for any reason; provided, that no amendment or termination
may, without the consent of the participant or, if applicable, the participant's
beneficiary, adversely affect such participant's or beneficiary's rights with
respect to benefits accrued as of the date of such amendment or termination.
Employment Agreement. The Company and the Association intend to enter
into employment agreements (the "Employment Agreements") under which Keith E.
Waggoner (the "Employee") would serve as President of the Association and
President of the Company. In such capacities, the Employee is responsible for
overseeing all operations of the Association and the Company, and for
implementing the policies adopted by the Boards of Directors. Such Boards
believe that the Employment Agreements assure fair treatment of the Employee in
his career with the Company and the Association by assuring him of some
financial security.
The Employment Agreements will become effective upon their execution
and will provide for a term of three years, with an annual base salary equal to
the Employee's existing base salary rate in effect on the effective date. On
each anniversary date of the commencement of the Employment Agreements, the term
of the Employee's employment may be extended for an additional one-year period
beyond the then effective expiration date, upon a determination by the Board of
Directors that the performance of the Employee has met the required performance
standards and that such Employment Agreements should be extended. The Employment
Agreements provide the Employee with a salary review by the Board of Directors
not less often than annually, as well as with inclusion in any discretionary
bonus plans, retirement and medical plans, customary fringe benefits, vacation
and sick leave. The Employment Agreements shall terminate upon the Employee's
death, may terminate upon the Employee's disability and are terminable by the
Association for "just cause" (as defined in the Employment Agreements). In the
event of termination for just cause, no severance benefits are available. If the
Company or the Association terminates the Employee without just cause, the
Employee will be entitled to a continuation of his salary and benefits from the
date of termination through the remaining term of the Employment Agreements plus
an additional 12 month's salary and, at the Employee's election, either
continued participation in benefit plans which the Employee would have been
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eligible to participate in through the Employment Agreements' expiration date or
the cash equivalent thereof. If the Employment Agreements are terminated due to
the Employee's "disability" (as defined in the Employment Agreements), the
Employee will be entitled to a continuation of his salary and benefits through
the date of such termination, including any period prior to the establishment of
the Employee's disability. In the event of the Employee's death during the term
of the Employment Agreements, his estate will be entitled to receive his salary
through the last day of the calendar month in which the Employee's death
occurred. The Employee is able to voluntarily terminate his Employment
Agreements by providing 90 days' written notice to the Boards of Directors of
the Association and the Company, in which case the Employee is entitled to
receive only his compensation, vested rights, and benefits up to the date of
termination.
In the event of (i) the Employee's involuntary termination of
employment other than for "just cause" during the period beginning six months
before a change in control and ending on the later of the second anniversary of
the change in control or the expiration date of the Employment Agreements (the
"Protected Period"), (ii) the Employee's voluntary termination within 90 days of
the occurrence of certain specified events occurring during the Protected Period
which have not been consented to by the Employee, or (iii) the Employee's
voluntary termination of employment for any reason within the 30-day period
beginning on the date of the change in control, the Employee will be paid within
10 days of such termination (or the date of the change in control, whichever is
later) an amount equal to the difference between (i) 2.99 times his "base
amount," as defined in Section 280G(b)(3) of the Internal Revenue Code, and (ii)
the sum of any other parachute payments, as defined under Section 280G(b)(2) of
the Internal Revenue Code, that the Employee receives on account of the change
in control. A "change in control" is deemed to occur where (i) as a result of,
or in connection with, any initial public offering, tender offer or exchange
offer, merger or other business combination, sale of assets or contested
election, any combination of the foregoing transactions, or any similar
transaction, the persons who were directors of the Association before such
transaction cease to constitute a majority of the Board of Directors of the
Association or any successor to the Association; (ii) the Association transfers
substantially all of its assets to another corporation which is not an affiliate
of the Association; (iii) the Association sells substantially all of the assets
of an affiliate which accounted for 50% or more of the controlled group's assets
immediately prior to such sale; (iv) any "person" including a "group" is or
becomes the "beneficial owner", directly or indirectly, of securities of the
Association representing twenty-five percent (25%) or more of the combined
voting power of the Association's outstanding securities (with the terms in
quotation marks having the meaning set forth under the federal securities laws);
or (v) the Association is merged or consolidated with another corporation and,
as a result of the merger or consolidation, less than seventy percent (70%) of
the outstanding voting securities of the surviving or resulting corporation is
owned in the aggregate by the former stockholders of the Association. The
Employment Agreement with the Association provides that within 10 business days
of a change in control, the Association shall fund, or cause to be funded, a
trust in the amount of 2.99 times the Employee's base amount, that will be used
to pay the Employee amounts owed to him. The aggregate payment that would be
made to Mr. Waggoner assuming his termination of employment under the foregoing
circumstances at December 31, 1996 would have been approximately $165,000. These
provisions may have an anti-takeover effect by making it more expensive for a
potential acquiror to obtain control of the Company. For more information, see
"Certain Anti-Takeover Provisions in the Certificate of Incorporation and
Bylaws -- Additional Anti-Takeover Provisions." In the event that the Employee
prevails over the Company and the Association, or obtains a written settlement,
in a legal dispute as to the Employment Agreement, he will be reimbursed for his
legal and other expenses.
TRANSACTIONS WITH MANAGEMENT
The Association offers loans to its directors and officers. These
loans currently are made in the ordinary course of business with the same
collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and to not involve more than the normal risk
of collectibility or present other unfavorable features. Under current law, the
Association's loans to directors and executive officers are required to be made
on substantially the same terms, including interest rates, as those prevailing
for comparable transactions and must not involve more than the normal risk of
repayment or present other unfavorable features. Furthermore, all loans to such
persons must be approved in advance by a disinterested majority of the Board of
Directors. At December 31, 1996, the Association had $89,700 in loans
outstanding to directors and executive officers, which is 3.2% of pro forma
stockholders equity at the midpoint of the Estimated Valuation Range. None of
these loans had favorable terms.
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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.
APPROVAL BY THE OTS, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN.
GENERAL
On January 14, 1997, the Board of Directors of the Association
unanimously adopted, subject to approval by the OTS and the members of the
Association, the Plan, pursuant to which the Association would convert from a
federal mutual savings and loan association to a federal capital stock savings
and loan association as a wholly owned subsidiary of the Company. The OTS has
approved the Plan, subject to its approval by the members of the Association at
the Special Meeting called for that purpose to be held on ____________, 1997.
The Conversion will be accomplished through the amendment of the
Association's existing Federal Mutual Charter and Bylaws to read in the form of
a Federal Stock Charter and Bylaws to authorize the issuance of capital stock by
the Converted Association, the issuance of all the Converted Association's
capital stock to be outstanding upon consummation of the Conversion to the
Company and the offer and sale of the Common Stock of the Company. Upon
issuance of the Converted Association's shares of capital stock to the Company,
the Converted Association will be a wholly owned subsidiary of the Company.
The Company has received approval from the OTS to become the holding
company of the Converted Association subject to the satisfaction of certain
conditions and to acquire all of the common stock of the Converted Association
to be issued in the Conversion in exchange for at least 50% of the net proceeds
from the sale of Common Stock in the Conversion. The Conversion will be
effected only upon completion of the sale of all of the shares of Common Stock
to be issued by the Company pursuant to the Plan.
The aggregate purchase price of the Common Stock to be issued in the
Conversion will be within the Estimated Valuation Range of between $2,720,000
and $3,680,000, which may be increased to $4,232,000, based upon an independent
appraisal of the estimated pro forma market value of the Common Stock prepared
by Ferguson. All shares of the Common Stock to be issued and sold in the
Conversion will be sold at the same price. The independent appraisal will be
updated, if necessary, and the final price of the shares of the Common Stock
will be determined at the completion of the Subscription and Community
Offerings. Ferguson is experienced in the valuation and appraisal of financial
institutions. For additional information, see " -- Stock Pricing and Number of
Shares to be Issued."
The following is a brief summary of material aspects of the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan. A copy of the Plan is available for inspection at the
office of the Association and at the office of the OTS. The Plan is also filed
as an exhibit to the Registration Statement of which this Prospectus is a part,
copies of which may be obtained from the SEC. See "Additional Information."
OFFERING OF COMMON STOCK
Under the Plan, the Company is offering shares of the Common Stock
first to the Association's Eligible Account Holders, second to the ESOP, third
to Supplemental Eligible Account Holders and fourth to its Other Members who are
not Eligible Account Holders or Supplemental Eligible Account Holders in the
Subscription Offering. Subscription Rights received in any of the foregoing
categories will be subordinated to the Subscription Rights received by those in
a prior category, with the exception that any shares of Common Stock sold in
excess of the maximum of the Estimated Valuation Range may first be sold to the
ESOP. To the extent shares remain available for purchase after the Subscription
Offering, the Company may offer any such remaining shares to the general public
in the Community Offering. In the Community Offering, preference will be given
to natural persons and trusts of natural persons who are permanent residents of
the Local Community. The term "resident" as used in
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relation to the preference afforded natural persons in the Local Community means
any natural person who occupies a dwelling within the Local Community, has an
intention to remain within the Local Community for a period of time (manifested
by establishing a physical, ongoing, nontransitory presence within the Local
Community) and continues to reside in the Local Community at the time of the
Subscription and Community Offerings. The Association may utilize deposit or
loan records or such other evidence provided to it to make the determination
whether a person is residing in the Local Community. To the extent the person is
a corporation or other business entity, the principal place of business or
headquarters shall be within the Local Community. To the extent the person is a
personal benefit plan, the circumstance of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
In all cases, however, such determination shall be in the sole discretion of the
Association. The occurrence of the Community Offering is subject to the
availability of shares of the Common Stock for purchase after satisfaction of
all subscriptions in the Subscription Offering. Additionally, all purchases in
the Community Offering are subject to the maximum and minimum purchase
limitations set forth in the Plan and the right of the Company to reject any
such orders, in whole or in part.
As part of the Community Offering, the Plan provides that, if
feasible, all shares of Common Stock not purchased in the Subscription and
Community Offerings, if any, may be offered for sale to the general public in a
Syndicated Community Offering through selected dealers to be formed and managed
by Trident Securities. See " -- Syndicated Community Offering."
If the Community Offering and Syndicated Community Offering are
determined not to be feasible, the Association will immediately consult with the
OTS to determine the most viable alternative available to effect the completion
of the Conversion. Should no viable alternative exist, the Association may
terminate the Conversion with the concurrence of OTS. The Plan provides that
the Conversion must be completed within 24 months after the date of the approval
of the Plan by the members of the Association. In the event that the Conversion
is not effected, the Association will remain a federal mutual savings and loan
association, all subscription funds will be promptly returned to subscribers
with interest earned thereon and all withdrawal authorizations will be
cancelled. The completion of the Conversion is subject to market conditions and
other factors beyond the Association's control. No assurance can be given as to
the length of time after approval of the Plan at the Special Meeting that will
be required to complete the sale of the Common Stock to be offered in the
Conversion. If delays are experienced, significant changes may occur in the
estimated pro forma market value of the Company and the Converted Association
upon consummation of the Conversion, together with corresponding changes in the
offering price and the net proceeds realized by the Association from the sale of
the Common Stock. The Association would also incur substantial additional
printing, legal and accounting expenses in completing the Conversion. In the
event the Conversion is terminated, the Association would be required to charge
all Conversion-related expenses against current income.
BUSINESS PURPOSES
The Association's Board of Directors has formed the Company to serve
upon consummation of the Conversion as a holding company with the Converted
Association as its subsidiary. The portion of the net proceeds from the sale of
the Common Stock in the Conversion to be distributed to the Converted
Association by the Company will substantially increase the Converted
Association's capital position which will in turn increase the amount of funds
available for lending and investment, provide a "cushion" to compensate for the
Association's negative interest rate risk position, and provide greater
resources to support both current operations and future expansion by the
Association, although there are no current agreements or understandings for such
expansion. The holding company structure will provide greater flexibility than
the Association alone would have for diversification of business activities and
geographic expansion. Management believes that this increased capital and
operating flexibility will enable the Association to compete more effectively
with other types of financial services organizations. In addition, the
Conversion will also enhance the future access of the Company and the
Association to the capital markets.
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The potential impact of Conversion upon the Association's capital base
is significant. The Association had total equity in accordance with generally
accepted accounting principles of $2.9 million, or 13.92% of assets, at December
31, 1996. Assuming approximately $2.85 million (based on the sale of 320,000
shares of Common Stock at the midpoint of the Estimated Valuation Range) of net
proceeds are realized from the sale of the Common Stock (see "Pro Forma Data"),
and after deducting amounts necessary to fund the ESOP and MRP, the Company's
consolidated stockholders' equity would have been approximately $5.3 million as
of December 31, 1996. The Converted Association's ratio of tangible capital to
adjusted total assets would increase to 17.86% after the Conversion. See
"Historical and Pro Forma Regulatory Capital Compliance." The investment of the
net proceeds from the sale of the Common Stock will provide the Converted
Association with additional income to further increase its capital position.
The additional capital may also assist the Converted Association in offering new
programs and expanded services to its customers.
After completion of the Conversion, the unissued Common Stock and
preferred stock authorized by the Company's Certificate of Incorporation will
permit the Company, subject to market conditions, to raise additional equity
capital through further sales of securities and to issue securities in
connection with possible acquisitions. At the present time, the Company has no
plans with respect to additional offerings of securities, other than the
issuance of additional shares under the MRP or Option Plan, if implemented.
Following completion of Conversion, the Company also will be able to use stock-
related incentive programs to attract and retain executive and other personnel
for itself and its subsidiaries. See "Management of the Association -- Certain
Benefit Plans and Agreements."
EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE
ASSOCIATION
General. Each depositor in a mutual savings institution such as the
Association has both a deposit account and a pro rata interest in the retained
earnings of that institution based upon the balance in his or her deposit
account. However, this interest is tied to the depositor's account and has no
tangible market value separate from such deposit account. Any other depositor
who opens a deposit account obtains a pro rata interest in the retained earnings
of the institution without any additional payment beyond the amount of the
deposit. A depositor who reduces or closes his or her account receives a
portion or all of the balance in the account but nothing for his or her
ownership interest, which is lost to the extent that the balance in the account
is reduced.
Consequently, depositors normally do not have a way to realize the
value of their ownership, which has realizable value only in the unlikely event
that the mutual institution is liquidated. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual retained
earnings after other claims are paid.
Upon consummation of the Conversion, permanent nonwithdrawable capital
stock will be created to represent the ownership of the institution. The stock
is separate and apart from deposit accounts and is not and cannot be insured by
the FDIC. Transferable certificates will be issued to evidence ownership of the
stock, which will enable the stock to be sold or traded, if a purchaser is
available, with no effect on any account held in the Association. Under the
Plan, all of the capital stock of the Converted Association will be acquired by
the Company in exchange for a portion of the net proceeds from the sale of the
Common Stock in the Conversion. The Common Stock will represent an ownership
interest in the Company and will be issued upon consummation of the Conversion
to persons who elect to participate in the Conversion by purchasing the shares
being offered.
Continuity. During the Conversion process, the normal business of the
Association of accepting deposits and making loans will continue without
interruption. The Converted Association will continue to be subject to
regulation by the OTS and the FDIC, and FDIC insurance of accounts will continue
without interruption. After the Conversion, the Converted Association will
continue to provide services for depositors and borrowers under current policies
and by its present management and staff.
The Board of Directors serving the Association at the time of the
Conversion will serve as the Board of Directors of the Converted Association
after the Conversion, with the addition of Chief Executive Officer Keith
Waggoner. Following the Conversion, the Board of Directors of the Company will
consist of the individuals serving
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on the Board of Directors of the Association. All officers of the Association at
the time of the Conversion will retain their positions with the Converted
Association after the Conversion.
Voting Rights. Upon the completion of the Conversion, depositor and
borrower members as such will have no voting rights in the Converted Association
or the Company and, therefore, will not be able to elect directors of the
Converted Association or the Company or to control their affairs. Currently
these rights are accorded to depositors of the Association. Subsequent to the
Conversion, voting rights will be vested exclusively in the stockholders of the
Company which, in turn, will own all of the stock of the Converted Association.
Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Company, subject to the provisions of the
Company's Certificate of Incorporation.
After the Association Conversion, holders of Savings Accounts in and
obligors on loans of the Converted Association will not have voting rights in
the Association. Exclusive voting rights with respect to the Company shall be
vested in the holders of the Common Stock, holders of Savings Accounts in and
obligors on loans of the Converted Association and the Association will not have
any voting rights in the Company except and to the extent that such persons
become stockholders of the Company, and the Company will have exclusive voting
rights with respect to the Converted Association's capital stock.
Deposit Accounts and Loans. THE ASSOCIATION'S DEPOSIT ACCOUNTS, THE
BALANCES OF INDIVIDUAL ACCOUNTS AND EXISTING FEDERAL DEPOSIT INSURANCE COVERAGE
WILL NOT BE AFFECTED BY THE CONVERSION. Furthermore, the Conversion will not
affect the loan accounts, the balances of these accounts and the obligations of
the borrowers under their individual contractual arrangements with the
Association.
Tax Effects. The Association has received an opinion from its special
counsel, Housley Kantarian & Bronstein, P.C., Washington, D.C., as to the
material federal income tax consequences of the Conversion to the Association,
and as to the generally applicable material federal income tax consequences of
the Conversion to the Association's account holders and to persons who purchase
Common Stock in the Conversion. The opinion provides that the Conversion will
constitute a reorganization for federal income tax purposes under Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("Code"). Among
other things, the opinion also provides that: (i) no gain or loss will be
recognized by the Association in its mutual or stock form by reason of the
Conversion; (ii) no gain or loss will be recognized by its account holders upon
the issuance to them of accounts in the Converted Association in stock form
immediately after the Conversion, in the same dollar amounts and on the same
terms and conditions as their accounts at the Association immediately prior to
the Conversion; (iii) the tax basis of each account holder's interest in the
liquidation account will be equal to the value, if any, of that interest; (iv)
the tax basis of the Common Stock purchased in the Conversion will be equal to
the amount paid therefor increased, in the case of Common Stock acquired
pursuant to the exercise of Subscription Rights, by the fair market value, if
any, of the Subscription Rights exercised; (v) the holding period for the Common
Stock purchased in the Conversion will commence upon the exercise of such
holder's Subscription Rights and otherwise on the day following the date of such
purchase; and (vi) gain or loss will be recognized to account holders upon the
receipt of liquidation rights or the receipt or exercise of Subscription Rights
in the Conversion, to the extent such liquidation rights and Subscription Rights
are deemed to have value, as discussed below.
The opinion of Housley Kantarian & Bronstein, P.C., is based in part
upon, and subject to the continuing validity in all material respects through
the date of the Conversion of, various representations of the Association and
upon certain assumptions and qualifications, including that the Conversion is
consummated in the manner and according to the terms provided in the Plan. Such
opinion is also based upon the Code, regulations now in effect or proposed
thereunder, current administrative rulings and practice and judicial authority,
all of which are subject to change and such change may be made with retroactive
effect. Unlike private letter rulings received from the Internal Revenue
Service ("IRS"), an opinion is not binding upon the IRS and there can be no
assurance that the IRS will not take a position contrary to the positions
reflected in such opinion, or that such opinion will be upheld by the courts if
challenged by the IRS.
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Housley Kantarian & Bronstein, P.C. has advised the Association that
an interest in a liquidation account has been treated by the IRS, in a series of
private letter rulings which do not constitute formal precedent, as having
nominal, if any, fair market value and therefore it is likely that the interests
in the liquidation account established by the Association as part of the
Conversion will similarly be treated as having nominal, if any, fair market
value. Accordingly, it is likely that such depositors of the Association who
receive an interest in such liquidation account established by the Association
pursuant to the Conversion will not recognize any gain or loss upon such
receipt.
Housley Kantarian & Bronstein, P.C. has further advised the
Association that the federal income tax treatment of the receipt of Subscription
Rights pursuant to the Conversion is uncertain, and recent private letter
rulings issued by the IRS have been in conflict. For instance, the IRS adopted
the position in one private ruling that Subscription Rights will be deemed to
have been received to the extent of the minimum pro rata distribution of such
rights, together with the rights actually exercised in excess of such pro rata
distribution, and with gain recognized to the extent of the combined fair market
value of the pro rata distribution of Subscription Rights plus the Subscription
Rights actually exercised. Persons who do not exercise their Subscription
Rights under this analysis would recognize gain upon receipt of rights equal to
the fair market value of such rights, regardless of exercise, and would
recognize a corresponding loss upon the expiration of unexercised rights that
may be available to offset the previously recognized gain. Under another IRS
private ruling, Subscription Rights were deemed to have been received only to
the extent actually exercised. This private ruling required that gain be
recognized only if the holder of such rights exercised such rights, and that no
loss be recognized if such rights were allowed to expire unexercised. There is
no authority that clearly resolves this conflict among these private rulings,
which may not be relied upon for precedential effect. However, based upon
express provisions of the Code and in the absence of contrary authoritative
guidance, Housley Kantarian & Bronstein, P.C. has provided in its opinion that
gain will be recognized upon the receipt rather than the exercise of
Subscription Rights. Further, also based upon a published IRS ruling and
consistent with recognition of gain upon receipt rather than exercise of the
Subscription Rights, Housley Kantarian & Bronstein, P.C. has provided in its
opinion that the subsequent exercise of the Subscription Rights will not give
rise to gain or loss. Regardless of the position eventually adopted by the IRS,
the tax consequences of the receipt of the Subscription Rights will depend, in
part, upon their valuation for federal income tax purposes.
If the Subscription Rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders and other eligible members who exercise their
Subscription Rights, even though such persons would not have received any cash
from which to pay taxes on such taxable income. The Association could also
recognize a gain on the distribution of such Subscription Rights in an amount
equal to their aggregate value. In the opinion of Ferguson & Company, whose
opinion is not binding upon the IRS, the Subscription Rights do not have any
value, based on the fact that such rights are acquired by the recipients without
cost, are non-transferable and of short duration and afford the recipients the
right only to purchase shares of the Common Stock at a price equal to its
estimated fair market value, which will be the same price as the price paid by
purchasers in the Community Offering for unsubscribed shares of Common Stock.
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are encouraged to consult with their own tax advisors as to the tax
consequences in the event that the Subscription Rights are deemed to have a fair
market value. Because the fair market value, if any, of the Subscription Rights
issued in the Conversion depends primarily upon the existence of certain facts
rather than the resolution of legal issues, Housley Kantarian & Bronstein, P.C.,
has neither adopted the opinion of Ferguson & Company, as its own nor
incorporated such opinion of Ferguson & Company in its opinion issued in
connection with Conversion.
The Association has also received the opinion of Grimsley, White &
Company that no gain or loss will be recognized as a result of the Conversion
for purposes of Colorado income tax laws.
THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH MAY
BE RELEVANT TO EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ACCOUNT HOLDER AND
OTHER MEMBER ENTITLED TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH
AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS,
INSURANCE COMPANIES AND ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL
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ELIGIBLE ACCOUNT HOLDERS AND OTHER MEMBERS WHO ARE NOT CITIZENS OR RESIDENTS OF
THE UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH
ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER AND OTHER MEMBER
IS URGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF
SUCH FEDERAL AND STATE INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR
FACTS AND CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION
RIGHTS, AND ALSO AS TO ANY OTHER TAX CONSEQUENCES ARISING OUT OF THE CONVERSION.
Liquidation Account. In the unlikely event of a complete liquidation
of the Association in its present mutual form, each holder of a deposit account
in the Association would receive his pro rata share of any assets of the
Association remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). His pro
rata share of such remaining assets would be the same proportion of such assets
as the value of his deposit account was to the total of the value of all deposit
accounts in the Association at the time of liquidation.
After the Conversion, each deposit account holder on a complete
liquidation would have a claim of the same general priority as the claims of all
other general creditors of the Association. Therefore, except as described
below, a claim of such account holder would be solely in the amount of the
balance in the related deposit account plus accrued interest, and the account
holder would not have any interest in the value of the Association above that
amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the net worth of the Association as of the date of its latest statement of
financial condition contained in the final Prospectus. Each Eligible Account
Holder (a person with a deposit account in the Association on December 31, 1995)
and each Supplemental Eligible Account Holder (a person with a qualifying
deposit in the Association on _________, 199__) would be entitled, on a complete
liquidation of the Converted Association after completion of the Conversion, to
an interest in the liquidation account. Each Eligible Account Holder would have
an initial interest in such liquidation account for each deposit account held in
the Association on December 31, 1995 and each Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
qualifying deposit held in the Association on ________, 199__. The interest as
to each qualifying deposit account would be in the same proportion of the total
liquidation account as the balance of such qualifying deposit account was to the
balance in all deposit accounts of Eligible Account Holders and Supplemental
Eligible Account Holders on such respective date. However, if the amount in the
qualifying deposit account on any annual closing date (September 30) of the
Association subsequent to the relevant eligibility date is less than the amount
in such account on the relevant eligibility date, or any subsequent closing
date, then the Eligible Account Holder's or Supplemental Eligible Account
Holder's interest in the liquidation account would be reduced from time to time
by an amount proportionate to any such reductions, and such interest would cease
to exist if he or she ceases to maintain an account at the Converted Association
that has the same Social Security number as appeared on his or her account(s) at
the relevant eligibility date. The interest in the liquidation account would
never be increased, notwithstanding any increase in the related deposit account
after the Conversion.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were satisfied would
be distributed to the entity or persons holding the Converted Association's
capital stock at that time.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with an FDIC-insured institution in which the Converted Association
is not the surviving insured institution would not be considered to be a
"liquidation" under which distribution of the liquidation account could be made.
In such a transaction, the liquidation account would be assumed by the surviving
institution.
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The creation and maintenance of the liquidation account will not
restrict the use or application of any of the capital accounts of the Converted
Association, except that the Converted Association may not declare or pay a cash
dividend on, or repurchase any of, its capital stock if the effect of such
dividend or repurchase would be to cause its retained earnings to be reduced
below the aggregate amount then required for the liquidation account.
SUBSCRIPTION OFFERING
Nontransferable Subscription Rights to subscribe for shares of the
Common Stock have been issued to all persons entitled to subscribe for stock in
the Subscription Offering at no cost to such persons. The amount of the Common
Stock which these parties may subscribe for will be determined, in part, by the
total stock to be issued, and the availability of stock for purchase under the
categories set forth in the Plan.
Preference categories have been established for the allocation of the
Common Stock to the extent that shares are available. These categories are as
follows:
Subscription Category No. 1 is reserved for the Association's
Eligible Account Holders, (i.e., qualifying depositors of the
Association on December 31, 1995, and those depositors who had
accounts (which totaled $50.00 or more upon being closed) which were
closed by the Association (for reasons other than at the request of
the depositor) during calendar year 1994), who will each receive
nontransferable Subscription Rights to subscribe for Common Stock in
the Subscription Offering. Pursuant to the Plan, an Eligible Account
Holder may purchase Common Stock in the Conversion in an amount equal
to the greater of (i) $125,000 of the Common Stock, (ii) one-tenth of
one percent of the total offering of shares of Common Stock, or (iii)
15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of the Qualifying
Deposit of the Eligible Account Holder and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders in
the Converted Association in each case on the Eligibility Record Date
(i.e., December 31, 1995). The Plan further provides that no person
(together with associates and persons acting in concert therewith) may
purchase in the aggregate more than $125,000 of the aggregate value of
shares of Common Stock offered in the Conversion. See "-- Limitations
on Purchases of Shares." If the exercise of Subscription Rights in
this category results in an oversubscription, shares shall be
allocated among subscribing Eligible Account Holders so as to permit
each such Eligible Account Holder, to the extent possible, to purchase
a number of shares sufficient to make his total allocation equal 100
shares or the amount subscribed for, whichever is less. Any shares not
so allocated shall be allocated among the subscribing Eligible Account
Holders on an equitable basis related to the amounts of their
respective qualifying deposits, as compared to the total qualifying
deposits of all subscribing Eligible Account Holders. TO ENSURE A
PROPER ALLOCATION OF COMMON STOCK, EACH ELIGIBLE ACCOUNT HOLDER MUST
LIST ON HIS STOCK ORDER FORM ALL ACCOUNTS IN WHICH HE HAS AN OWNERSHIP
INTEREST (OR, FOR THOSE PERSONS WHO HAD ACCOUNTS WHICH WERE CLOSED BY
THE ASSOCIATION IN 1994 (OTHER THAN AT THE REQUEST OF THE DEPOSITOR,
PLEASE LIST THE ACCOUNT(S) WHICH WERE CLOSED)). FAILURE TO LIST ALL
SUCH QUALIFYING DEPOSIT ACCOUNTS MAY RESULT IN THE INABILITY OF THE
COMPANY OR THE ASSOCIATION TO FILL ALL OR PART OF A SUBSCRIPTION
ORDER. NEITHER THE COMPANY, THE ASSOCIATION NOR ANY OF THEIR AGENTS
SHALL BE RESPONSIBLE FOR ORDERS ON WHICH ALL QUALIFYING DEPOSIT
ACCOUNTS HAVE NOT BEEN FULLY AND ACCURATELY DISCLOSED. A qualifying
deposit is the amount (required to be at least $50.00) contained in a
deposit account in the Association on (i) December 31, 1995, or (ii)
on the date the account was closed in the case of accounts which were
closed by the Association (for reasons other than at the request of
the depositor) during calendar year 1994. Subscription Rights received
by directors and officers of the Association in this category based on
their increased deposits in the Association in the one-year period
preceding December 31, 1995 are subordinated to the Subscription
Rights of other Eligible Account Holders.
Subscription Category No. 2 is reserved for the Association's
tax-qualified employee stock benefit plans, i.e., the ESOP, which
shall receive nontransferable Subscription Rights to purchase in the
aggregate up to 10% of the shares issued in the Conversion and which
is expected to purchase 8% of the Common
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Stock offered in the Conversion. Any shares of Common Stock sold in
excess of the maximum of the Estimated Valuation Range may be first
sold to the ESOP.
Subscription Category No. 3 is reserved for the Association's
Supplemental Eligible Account Holders, i.e., qualifying depositors of
the Association on the last day of the calendar quarter preceding OTS
approval of the Plan (_________, 199__) who will each receive
nontransferable Subscription Rights to subscribe for Common Stock in
the Subscription Offering. Pursuant to the Plan, a Supplemental
Eligible Account Holder may purchase Common Stock in the Conversion in
an amount equal to the greater of (i) $125,000 of the Common Stock,
(ii) one-tenth of one percent of the total offering of shares of
Common Stock, or (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Supplemental Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits
of all Supplemental Eligible Account Holders in the Converted
Association in each case on the Supplemental Eligibility Record Date
(i.e., ________, 199__). The Plan further provides that no person
(together with associates and persons acting in concert therewith) may
purchase in the aggregate more than $125,000 of the aggregate value of
shares of Common Stock offered in the Conversion. See " -- Limitations
on Purchases of Shares." If the exercise of Subscription Rights in
this category results in an oversubscription, shares shall be
allocated among subscribing Supplemental Eligible Account Holders, so
as to permit each such Supplemental Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his
total allocation equal 100 shares or the amount subscribed for,
whichever is less, and any shares not so allocated shall be allocated
among the subscribing Supplemental Eligible Account Holders on an
equitable basis related to the amounts of their respective qualifying
deposits, as compared to the total qualifying deposits of all
subscribing Supplemental Eligible Account Holders. TO ENSURE A PROPER
ALLOCATION OF COMMON STOCK, EACH SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER
MUST LIST ON HIS STOCK ORDER FORM ALL ACCOUNTS IN WHICH HE HAS AN
OWNERSHIP INTEREST. FAILURE TO LIST ALL SUCH DEPOSIT ACCOUNTS MAY
RESULT IN THE INABILITY OF THE COMPANY OR THE ASSOCIATION TO FILL ALL
OR PART OF A SUBSCRIPTION ORDER. NEITHER THE COMPANY, THE ASSOCIATION
NOR ANY OF THEIR AGENTS SHALL BE RESPONSIBLE FOR ORDERS ON WHICH ALL
QUALIFYING DEPOSIT ACCOUNTS HAVE NOT BEEN FULLY AND ACCURATELY
DISCLOSED. A qualifying deposit is the amount (required to be at least
$50.00) contained in a deposit account in the Association on ________,
199__. Subscription Rights received by directors and officers of the
Association in this category based on their increased deposits in the
Association in the one-year period preceding ________, 199__ are
subordinated to the Subscription Rights of other Supplemental Eligible
Account Holders. Subscriptions in this Category No. 3 will be filled
only to the extent that there are sufficient shares of Common Stock
remaining after satisfaction of subscriptions by Category Nos. 1 and
2.
Subscription Category No. 4 is reserved for Other Members, i.e.,
certain depositors and borrowers who are members of the Association as
of the Voting Record Date entitled to vote at the Special Meeting but
who are not otherwise Eligible Account Holders or Supplemental
Eligible Account Holders. To the extent then available following
subscriptions by Eligible Account Holders, tax-qualified employee
stock benefit plans and Supplemental Eligible Account Holders, Other
Members will receive, without payment therefor, nontransferable
Subscription Rights to subscribe for Common Stock in the Subscription
Offering up to $125,000 of the Common Stock. See "-- Limitations on
Purchases of Shares." In the event that Other Members subscribe for a
number of shares which, when added to the shares subscribed for by
Eligible Account Holders, tax-qualified employee stock benefit plans
and Supplemental Eligible Account Holders, is in excess of the total
number of shares offered in the Conversion, the subscriptions of such
Other Members will be allocated pro rata among subscribing Other
Members on an equitable basis as determined by the Board of
Directors.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for the Common Stock pursuant to the Plan reside. However, no person will be
offered or allowed to purchase any Common Stock under the Plan if he resides in
a foreign country or in a state of the United States with respect to which any
or all of the following apply: (i) a small number of persons
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otherwise eligible to subscribe for shares under the Plan reside in such state
or foreign country; (ii) the granting of Subscription Rights or the offer or
sale of shares of Common Stock to such persons would require the Company or the
Association or their employees to register, under the securities laws of such
state, as a broker, dealer, salesman or agent or to register or otherwise
qualify its securities for sale in such state or foreign country; and (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of Subscription
Rights to any such person.
COMMUNITY OFFERING
To the extent shares remain available for purchase after the
Subscription Offering, the Company may offer any such remaining shares of the
Common Stock to members of the general public to whom the Company delivers a
copy of this Prospectus and a Stock Order Form in the Community Offering. The
occurrence of the Community Offering is subject to the availability of shares of
Common Stock for purchase after satisfaction of all orders received in the
Subscription Offering. THE COMMUNITY OFFERING, IF ANY, MAY COMMENCE WITHOUT
NOTICE AT ANY TIME AFTER THE COMMENCEMENT OF THE SUBSCRIPTION OFFERING AND MAY
TERMINATE AT ANY TIME WITHOUT NOTICE, BUT MAY NOT TERMINATE LATER THAN
__________, 1997. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE COMMUNITY
OFFERING, IF ANY, IS SUBJECT TO THE ABSOLUTE RIGHT OF THE COMPANY AND THE
ASSOCIATION TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART. THE COMPANY
PRESENTLY INTENDS TO TERMINATE THE COMMUNITY OFFERING, IF ANY, AS SOON AS IT HAS
RECEIVED ORDERS FOR SUFFICIENT SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, there will be no Community Offering. In the event an
insufficient number of shares are available to fill orders in the Community
Offering, the available shares will be allocated by the Company in its
discretion that a preference shall be given to natural persons and trusts of
natural persons who are permanent residents of the Local Community. Orders
received in the Community Offering shall be allocated with 100 share (or lesser)
orders filled first, and remaining orders filled pro-rata, based on the size of
the order, until all orders have been filled, with a preference given to
permanent residents of the Local Community. If the Community Offering extends
beyond 45 days following the expiration of the Subscription Offering,
subscribers will have the right to increase, decrease or rescind subscriptions
for stock previously submitted. Purchasers in the Community Offering, together
with their associates and groups acting in concert, are each eligible to
purchase up to $125,000 of the Common Stock issued in the Conversion.
Except as noted below, cash and checks received in the Community
Offering will be placed in segregated savings accounts (each insured by the FDIC
up to the applicable $100,000 limit) established specifically for this purpose.
Interest will be paid on orders made by check, in cash or by money order at the
Association's passbook rate from the date the payment is received by the Company
until the consummation of the Conversion. In the event that the Conversion is
not consummated for any reason, all funds submitted pursuant to the Community
Offering will be promptly refunded with interest as described above.
SYNDICATED COMMUNITY OFFERING
As part of the Community Offering, all shares of Common Stock not
purchased in the Subscription and Community Offerings, if any, may be offered
for sale to the general public in a Syndicated Community Offering through
selected dealers to be formed and managed by Trident Securities. The Syndicated
Community Offering, if any, will be conducted to achieve the widest distribution
of Common Stock subject to the Company and the Association having the right to
reject orders in whole or in part in their sole discretion in the Syndicated
Community Offering. Neither Trident Securities nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the Common Stock in
the Syndicated Community Offering. Common Stock sold in the Syndicated Community
Offering will be sold at the same price as in the Subscription and Community
Offerings.
Individual purchasers in the Syndicated Community Offering may
purchase up to $125,000 of the Common Stock in the Conversion when aggregated
with any associate or group of persons acting in concert. The Association shall
be responsible for the payment of selling commissions to other NASD firms and
licensed brokers participating in the Syndicated Community Offering. Other firms
may participate under selected dealers agreements,
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and Trident Securities and such selected dealers may receive fees which are not
expected to exceed 4.5% of the amount of the stock sold by the selected dealers
in the Syndicated Community Offering. In addition, Trident would receive a fee
of 1.0% for managing the Syndicated Community Offering.
During the Syndicated Community Offering, selected dealers may only
solicit indications of interest from their customers to place orders with the
Company as of a certain date ("Order Date") for the purchase of shares of common
Stock. When and if Trident Securities and the Company believe that enough
indications and orders have been received in the Offerings to consummate the
Conversion, Trident Securities will request, as of the Order Date, selected
dealers to submit orders to purchase shares for which they have received
indications of interest from their customers. Selected dealers will send
confirmations of the orders to such customers on the next business day after the
Order Date. Selected dealers may debit the accounts of their customers on a date
which will be three business days from the Order Date ("Settlement Date").
Customers who authorize selected dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Settlement Date. On the Settlement Date, selected dealers will remit funds to
the account that the Company established for each selected dealer. After payment
has been received by the Company from selected dealers, funds will earn interest
at the Association's passbook savings rate until the consummation of the
Conversion. In the event the Conversion is not consummated as described above,
funds with interest will be returned promptly to the selected dealers, who, in
turn, will promptly credit its customers' brokerage account.
The Syndicated Community Offering, if any, will terminate no more than
45 days following the completion of the Subscription Offering, unless extended
by the Company with the approval of the OTS. The Syndicated Community Offering
may run concurrently with the Subscription and Community Offerings or subsequent
to such offerings.
SUBSCRIPTIONS FOR STOCK IN SUBSCRIPTION AND COMMUNITY OFFERINGS
Expiration Date. The Subscription Offering will expire at 12:00 Noon,
local time, on __________, 1997 unless extended by the Board of Directors of the
Association for up to an additional 45 days, to no later than __________, 1997.
Such date and time are referred to herein as the "Expiration Date."
Subscription rights not exercised prior to the Expiration Date will be void.
The Community Offering, if any, may terminate at any time without notice, but
may not terminate later than __________, 1997.
Orders will not be executed by the Company until at least the minimum
number of shares of Common Stock offered hereby have been subscribed for or
sold. If all shares of Common Stock have not been subscribed for or sold within
45 days of the end of the Subscription Offering (unless such period is extended
with consent of the OTS), all funds delivered to the Company pursuant to the
Subscription Offering will be promptly returned to the subscribers with interest
and all charges to savings accounts will be rescinded.
Use of Stock Order Forms and Certification Forms. Rights to subscribe
may only be exercised by completion of Stock Order Forms and certification
forms. Any person receiving a Stock Order Form who desires to subscribe for
shares of stock must do so prior to the Expiration Date by delivering (by mail
or in person) to the office of the Association a properly executed and completed
Stock Order Form and certification form, together with full payment for all
shares for which the subscription is made. All checks or money orders must be
made payable to "Rocky Ford Financial, Inc." The Stock Order Form and
certification form must be received by the Expiration Date. All subscription
rights under the Plan will expire on the Expiration Date, whether or not the
Company has been able to locate each person entitled to such subscription
rights. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED.
Each subscription right may be exercised only by the person to whom it
is issued and only for his or her own account. THE SUBSCRIPTION RIGHTS GRANTED
UNDER THE PLAN ARE NONTRANSFERABLE; PERSONS WHO ATTEMPT TO TRANSFER THEIR
SUBSCRIPTION RIGHTS MAY LOSE THE RIGHT TO SUBSCRIBE FOR STOCK IN THE CONVERSION
AND MAY BE SUBJECT TO OTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS. Each
person subscribing for shares is required to
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represent to the Company that he or she is purchasing such shares for his or her
own account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares.
In the event Stock Order Forms (i) are not delivered and are returned
to the Company by the United States Postal Service or the Company is unable to
locate the addressee, or (ii) are not returned or are received after the
Expiration Date, or (iii) are defectively completed or executed, or (iv) are not
accompanied by the full required payment for the shares subscribed for
(including instances where a savings account or certificate balance from which
withdrawal is authorized is insufficient to fund the amount of such required
payment), the subscription rights of the person to whom such rights have been
granted will lapse as though such person failed to return the completed Stock
Order Form within the time period specified. However, the Company or the
Association may, but will not be required to, waive any irregularity on any
Stock Order Form or require the submission of corrected Stock Order Forms or the
remittance of full payment for subscribed shares by such date as the Company or
the Association may specify. The interpretation by the Company and the
Association of the terms and conditions of the Plan and of the Stock Order Form
will be final.
Payment for Shares. Payment for all subscribed shares of Common Stock
will be required to accompany all completed Stock Order Forms for subscriptions
to be valid. Payment for subscribed shares may be made (i) in cash, if delivered
in person, (ii) by check or money order, or (iii) by authorization of withdrawal
from deposit accounts maintained with the Association. Appropriate means by
which such withdrawals may be authorized are provided in the Stock Order Form.
Once such a withdrawal has been authorized, none of the designated withdrawal
amount may be used by a subscriber for any purpose other than to purchase stock
for which subscription has been made while the Plan remains in effect. In the
case of payments authorized to be made through withdrawal from deposit accounts,
all sums authorized for withdrawal will continue to earn interest at the
contract rate until the date of consummation of the sale. In the case of
payments made in cash or by check or money order such funds will be placed in a
segregated savings account established for each subscriber specifically for this
purpose (each insured by the FDIC up to the applicable $100,000 limit) and
interest will be paid at the Association's passbook rate from the date payment
is received until the Conversion is completed or terminated. Interest penalties
for early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares; however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the Association's passbook rate subsequent to the
withdrawal. An executed Stock Order Form, once received by the Company, may not
be modified, amended or rescinded without the consent of the Company, unless the
Conversion is not completed within 45 days of the termination of the
Subscription Offering. If an extension of the period of time to complete the
Conversion is approved by the OTS, subscribers will be resolicited and must
affirmatively reconfirm their orders prior to the expiration of the
resolicitation offering, or their subscription funds will be promptly refunded.
Subscribers may also modify or cancel their subscriptions. Interest will be paid
on such funds at the Association's passbook rate during the 45-day period and
any approved extension period. Wired funds will not be accepted for the payment
for shares of Common Stock.
Owners of self-directed IRAs or other self-directed tax-qualified
retirement plans, may use the assets of such IRAs or plans to purchase shares of
Common Stock in the Subscription and Community Offerings, provided that such
IRAs or plans are not maintained at the Association. Persons with IRAs or plans
maintained at the Association must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Subscription and Community Offerings. Depositors interested in using funds in
an Association IRA or plan to purchase Common Stock should contact the
Association's Stock Information Center at (719) 254-____ as soon as possible but
no later than seven days prior to closing of the offering period, so that the
necessary forms may be forwarded for execution and returned at least one week
prior to the Expiration Date of the Subscription Offering.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but may pay for such shares upon consummation of the
Subscription and Community Offerings, if all shares are sold, or upon
consummation of any subsequent offering, if shares remain to be sold in such an
offering.
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Shares Purchased. Certificates representing shares of the Common Stock
will be delivered to subscribers as soon as practicable after closing of the
Conversion.
PLAN OF DISTRIBUTION AND MARKETING AGENT
Officers of the Association are available at the Association's office to
provide offering materials to prospective investors, to answer their questions
(but only to the extent such information is derived from this Prospectus) and to
receive completed Stock Order Forms and certification forms from prospective
investors interested in subscribing for shares of the Common Stock. None of the
Association's directors, officers or employees will receive any commissions or
other compensation for their efforts in connection with sales of shares of the
Common Stock. ALTHOUGH INFORMATION REGARDING THE STOCK OFFERING IS AVAILABLE AT
THE ASSOCIATION'S OFFICE, AN INVESTMENT IN THE COMMON STOCK IS NOT A DEPOSIT,
AND THE COMMON STOCK IS NOT FEDERALLY INSURED.
The directors, officers and employees of the Association who will be
involved in selling stock are expected to be exempt from the requirement to
register with the SEC as broker-dealers within the meaning of Rule 3a4-1 under
the Exchange Act. Such persons will qualify under the safe harbor provisions of
that rule on the basis of paragraphs (a)(4)(ii) and/or (iii), i.e., management
of the Association expects that such persons either (x) will perform substantial
duties for the Company in its business, will not otherwise be broker-dealers and
are not expected to participate in another offering in the next twelve months or
(y) will limit their activities to preparing written communications, responding
to customer inquiries and/or performing ministerial/clerical functions.
The Association and the Company have engaged Trident Securities as
financial advisor to provide sales assistance in connection with the
Subscription and Community Offerings of the Common Stock. The services of
Trident Securities will include, but are not limited to, (i) training and
educating the Association's employees who will be performing certain ministerial
functions in the Subscription and Community Offerings regarding the mechanics
and regulatory requirements of the stock sales process and the solicitation of
proxies from members, (ii) providing employees to manage the Stock Information
Center, assisting Association customers and interested stock purchasers and
keeping records of orders for shares of Common Stock, and (iii) supervising the
Association's sales efforts, including preparation of marketing materials. For
all its services rendered in the Conversion, Trident Securities will receive a
commission equal to 2.35% of the aggregate dollar amount of Common Stock sold to
residents of Colorado, and 1.50% of the aggregate dollar amount of Common Stock
sold to non-residents of Colorado, excluding any shares of stock sold to the
Association's directors, executive officers, and the ESOP. Additionally,
commissions will be excluded on shares sold to "associates" (as defined in the
Plan) of the Association's directors and executive officers. In addition, all
commissions shall be based on the amount of stock sold; however, no fees shall
be assessed on shares sold above the midpoint of the final Estimated Valuation
Range. In the event Common Stock is sold by other NASD member firms under
selected dealer's agreements, the aggregate commissions to be received by
Trident Securities and selected dealers are not expected to exceed 4.5% of the
amount of Common Stock sold by such selected dealers. Trident Securities will
also be reimbursed for its reasonable out-of-pocket expenses in an amount not to
exceed $11,000 and its legal fees in an amount not to exceed $26,500. The
Company and the Association have agreed to indemnify Trident Securities for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Ferguson, which is experienced in the evaluation and appraisal of savings
institutions involved in the conversion process, has been retained by the
Association to prepare an appraisal of the estimated pro forma market value of
the Common Stock to be sold pursuant to the Conversion. Prior to the
Conversion, the Association did not have any business relationship with
Ferguson. Ferguson will receive a fixed fee of $25,000 for its appraisal and
other services, and reimbursement for related expenses up to $5,000. The
Association has agreed to indemnify Ferguson under certain circumstances against
any losses, damages, expenses or liability arising out of the Association's
engagement of Ferguson for the appraisal.
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Ferguson has determined as of December 13, 1996 that the estimated pro
forma market value of the stock to be issued by the Company in the Conversion
was $3,200,000. In determining the reasonableness and adequacy of the appraisal
submitted by Ferguson, the Boards of Directors of the Association and the
Company reviewed with Ferguson the methodology and the appropriateness of
assumptions used by Ferguson in preparing the appraisal. The Company, in
consultation with Trident Securities, has determined to offer the shares in the
Conversion at the Purchase Price of $10.00 per share. The price per share was
determined based on a number of factors, including the market price per share of
the stock of other financial institutions. Regulations administered by the OTS
require, however, that the appraiser establish a range of value for the stock of
approximately 15% on either side of the estimated value to allow for
fluctuations in the aggregate value of the stock due to changes in the market
and other factors from the time of commencement of the Subscription Offering
until completion of the Community Offering. Accordingly, Ferguson has
established a range of value of from $2,720,000 to $3,680,000 for the
Conversion. Ferguson will either confirm the continuing validity of its
appraisal or provide an updated appraisal immediately prior to the completion of
the Conversion.
Should it be determined at the close of the offering that the aggregate pro
forma market value of the Common Stock is higher or lower than $3,200,000, but
is nonetheless within the Estimated Valuation Range or within 15% of the maximum
of such range, the Company will make an appropriate adjustment by raising or
lowering by no more than 15% the total number of shares being offered (within a
range from 272,000 shares to 368,000 shares). Unless permitted by the Company
or otherwise required by the OTS, no resolicitation of subscribers and other
purchasers will be made because of any such change in the number of shares to be
issued unless the aggregate purchase price of the Common Stock sold in the
Conversion is below the minimum of the Estimated Valuation Range or is more than
$4,232,000 (i.e., 15% above the maximum of the Estimated Valuation Range). If
the aggregate purchase price falls outside the range of from $2,720,000 to
$4,232,000, subscribers and other purchasers will be resolicited and given the
opportunity to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation, or their subscription funds will be promptly refunded with
interest at the Association's passbook rate. Subscribers will also be given the
opportunity to increase, decrease or rescind their orders. Any change in the
Estimated Valuation Range must be approved by the OTS. THE ESTABLISHMENT OF ANY
NEW PRICE RANGE MAY BE EFFECTED WITHOUT A RESOLICITATION OF VOTES FROM THE
ASSOCIATION'S MEMBERS TO APPROVE THE CONVERSION.
THE APPRAISAL IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE COMMON
STOCK. IN PREPARING THE VALUATION, FERGUSON HAS RELIED UPON AND ASSUMED THE
ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL INFORMATION PROVIDED BY
THE ASSOCIATION AND THE COMPANY. FERGUSON DID NOT INDEPENDENTLY VERIFY THE
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE ASSOCIATION AND THE
COMPANY, NOR DID FERGUSON VALUE INDEPENDENTLY THE ASSETS AND LIABILITIES OF THE
ASSOCIATION AND THE COMPANY. THE VALUATION CONSIDERS THE ASSOCIATION AND THE
COMPANY ONLY AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF
THE LIQUIDATION VALUE OF THE ASSOCIATION AND THE COMPANY. MOREOVER, BECAUSE
SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER
OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE
CAN BE GIVEN THAT PERSONS PURCHASING THE COMMON STOCK WILL THEREAFTER BE ABLE TO
SELL SUCH SHARES AT PRICES EQUAL TO OR ABOVE THE PRICE OR PRICES PAID FOR IT.
COPIES OF THE APPRAISAL REPORT OF FERGUSON SETTING FORTH THE METHOD AND
ASSUMPTIONS FOR SUCH APPRAISAL ARE ON FILE AND AVAILABLE FOR INSPECTION AT THE
OFFICES SET FORTH IN "ADDITIONAL INFORMATION" AND AT THE OFFICE OF THE
ASSOCIATION. FURTHER, ANY SUBSEQUENT UPDATED APPRAISAL ALSO WILL BE FILED WITH
THE SEC AND WILL BE AVAILABLE FOR INSPECTION.
LIMITATIONS ON PURCHASE OF SHARES
Purchases of shares of Common Stock are subject to limitations as set forth
in the Plan. All shares are offered to persons subscribing in the Subscription
Offering, and shares are only offered to persons in the Community Offering and
Syndicated Community Offering, if any, to the extent available after filling
subscriptions in the Subscription Offering.
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Within the Subscription Offering, the maximum purchases by subscribers are
limited under the Plan. Eligible Account Holders may only subscribe up to an
amount equal to the greater (i) $125,000 of the Common Stock, (ii) one-tenth of
one percent of the total offering of shares of Common Stock, or (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Qualifying Deposit of the Eligible Account Holder
and the denominator is the total amount of Qualifying Deposits of all Eligible
Account Holders in the Converted Association in each case on the Eligibility
Record Date (i.e., December 31, 1995). Supplemental Eligible Account Holders
may only subscribe up to an amount equal to the greater of (i) $125,000 of the
Common Stock, (ii) one-tenth of one percent of the total offering of shares of
Common Stock, or (iii) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the Qualifying
Deposit of the Supplemental Eligible Account Holder and the denominator is the
total amount of Qualifying Deposits of all Supplemental Eligible Account Holders
in the Converted Association in each case on the Supplemental Eligibility Record
Date (i.e., ________, 199__). The Plan further provides that no person
(together with associates and persons acting in concert therewith) may purchase
in the aggregate more than $125,000 of the aggregate value of shares of Common
Stock offered in the Conversion.
The Plan provides for certain additional limitations to be placed upon the
purchase of shares by eligible subscribers and others in the Conversion. Each
subscriber must subscribe for a minimum of 25 shares. The ESOP may purchase up
to an aggregate of 10% of the shares of the Common Stock to be issued in the
Conversion and is expected to purchase 8% of such shares. No person, including
associates (as defined below) of and persons acting in concert (as defined
below) with such person (other than the ESOP), may purchase in the Subscription
or Community Offerings more than $125,000 of the Common Stock. Shares purchased
by the ESOP and attributable to a participant thereunder shall not be aggregated
with shares purchased by such participant or any other purchaser of Common Stock
in the Conversion. Officers and directors and their associates may not
purchase, in the aggregate, more than 35% of the shares to be issued in the
Conversion. For purposes of the Plan, the directors of the Company and the
Association are not deemed to be associates or a group acting in concert solely
by reason of their Board membership.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the
Association's members, purchase limitations may be increased or decreased at the
sole discretion of the Company and the Association at any time. If such amount
is increased, subscribers for the maximum amount will be given the opportunity
to increase their subscriptions up to the then applicable limit, subject to the
rights and preferences of any person who has priority Subscription Rights. In
the event that the purchase limitation is decreased after commencement of the
Subscription and Community Offerings, the orders of any person who subscribed
for the maximum number of shares of Common Stock shall be decreased by the
minimum amount necessary so that such person shall be in compliance with the
then maximum number of shares permitted to be subscribed for by such person.
The term "acting in concert" is defined in the Plan to mean (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal, whether or not pursuant to an express agreement, or (ii)
a combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. The
Company and the Association may presume that certain persons are acting in
concert based upon, among other things, joint account relationships and the fact
that such persons have filed joint Schedules 13D with the SEC with respect to
other companies. The term "associate" of a person is defined in the Plan to
mean: (i) any corporation or organization (other than the Association, the
Company, or a majority-owned subsidiary of the Association or the Company) of
which such person is an officer or partner or is directly or indirectly the
beneficial owner of 10% or more of any equity securities; (ii) any trust or
other estate in which such person has a substantial beneficial interest or as to
which such person serves as a trustee or in a similar fiduciary capacity,
provided, however, such term shall not include any employee stock benefit plan
of the Association in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity; and (iii) any relative
or spouse of such person, or any relative of such spouse, who either has the
same home as such person or who is a director of the Association
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or the Company or any of their subsidiaries. Directors are not treated as
associates solely because of their Board membership.
Each person purchasing Common Stock in the Conversion shall be deemed to
confirm that such purchase does not conflict with the purchase limitations under
the Plan or otherwise imposed by law, rule or regulation. In the event that
such purchase limitations are violated by any person (including any associate or
group of persons affiliated or otherwise acting in concert with such person),
the Company shall have the right to purchase from such person at the aggregate
purchase price all shares acquired by such person in excess of such purchase
limitations or, if such excess shares have been sold by such person, to receive
the difference between the aggregate purchase price paid for such excess shares
and the price at which such excess shares were sold by such person. This right
of the Company to purchase such excess shares shall be assignable by the
Company. In addition, persons who violate the purchase limitations may be
subject to sanctions and penalties imposed by the OTS.
Stock purchased pursuant to the Conversion will be freely transferable,
except for shares purchased by directors and officers of the Association and the
Company. See "-- Limitations on Resales by Management."
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with Subscription Rights and to certain reporting
requirements upon purchase of such securities.
Depending upon market conditions, the Boards of Directors of the Company
and the Association, with the approval of the OTS, may increase or decrease any
of the above purchase limitations. In the event of such an increase or
decrease, no further approval of members of the Association would be required.
OTS regulations authorize a plan of conversion to provide a minimum purchase
limitation of a percentage as low as 1% and a maximum purchase limitation of a
percentage not to exceed 10%, provided that orders for shares exceeding 5% of
the shares being offered in the Conversion shall not exceed in the aggregate 10%
of the shares being offered in the Conversion.
REGULATORY RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK
Current federal regulations prohibit any person from making an offer,
announcing an intent to make an offer, entering into any other arrangement to
purchase Common Stock or acquiring Common Stock or Subscription Rights in the
Company from another person prior to completion of the Conversion. Further, no
person may make an offer or announcement of an offer to purchase shares or
actually acquire shares in the Company for a period of three years from the date
of the completion of the Conversion, if, upon the completion of such offer or
acquisition, that person would become the beneficial owner of more than 10% of
the Company's outstanding stock, without the prior written approval of the OTS.
The OTS has defined the word "person" to include any individual, group acting in
concert, corporation, partnership, association, joint stock company, trust,
unincorporated organization or similar company, a syndicate or any group formed
for the purpose of acquiring, holding or disposing of securities of an insured
institution. However, offers made exclusively to the Company or underwriters or
members of a selling group acting on behalf of the Company for resale to the
general public are excepted. The regulations also provide civil penalties for
willful violation or assistance of any such violation of the regulation by any
person connected with the management of the Company following the Conversion.
Moreover, when any person, directly or indirectly, acquires beneficial ownership
of more than 10% of the Company's capital stock following the Conversion within
such three-year period without the prior approval of the OTS, the Company's
Common Stock beneficially owned by such person in excess of 10% shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matter submitted to the
stockholders for a vote. The Certificate of Incorporation of the Company
include a similar 10% beneficial ownership limitation. See "Certain Anti-
Takeover Provisions in the Certificate of Incorporation and Bylaws."
In addition to the foregoing restrictions, any person or group of persons
acting in concert who propose to acquire 10% or more of the Company's
outstanding shares will be presumed under OTS regulations, to be acquiring
control of the Company and will be required to submit prior notice to the OTS
under the Change in Control Act.
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RESTRICTIONS ON REPURCHASE OF STOCK
Subject to the exceptions described herein, for a period of three years
following the Conversion, the Company may not repurchase any of its stock from
any person, except (i) repurchases on a pro rata basis pursuant to an offer,
approved by the OTS, made to all stockholders, and (ii) repurchases of
qualifying shares of a director. However, upon 10 days' written notification to
the OTS Regional Director for the Converted Association and the Chief Counsel of
the Business Transactions Division of the OTS, if the Regional Director and
Chief Counsel do not object, the Company may make open market repurchases of its
outstanding Common Stock, provided that: (i) no repurchases may occur in the
first year following the Conversion without OTS approval; (ii) in the second and
third years after the Conversion, repurchases must be part of an open-market
program that does not allow for the repurchase of more than 5% of the Company's
outstanding Common Stock during a 12-month (a waiver may be obtained from the
OTS which would allow for additional purchases); (iii) the repurchases would not
cause the Converted Association to become "undercapitalized" (as defined for
regulatory purposes); (iv) the repurchases would not materially adversely affect
the Converted Association's financial condition; and (v) there is a valid
business purpose for the repurchases. The Company may not repurchase any of its
stock if the effect thereof would cause the Converted Association's regulatory
capital to be reduced below the amount required for the liquidation account.
Regulatory dividend limitations may provide further restrictions on stock
repurchases.
LIMITATIONS ON RESALES BY MANAGEMENT
Shares of the Common Stock purchased by directors or officers of the
Company and the Association in the Conversion will be subject to the restriction
that such shares may not be sold for a period of one year following completion
of the Conversion, except in the event of the death of the original purchaser or
in any exchange of such shares in connection with a merger or acquisition of the
Company approved by the OTS. Accordingly, shares of the Common Stock issued by
the Company to directors and officers shall bear a legend giving appropriate
notice of the restriction imposed upon it and, in addition, the Company will
give appropriate instructions to the transfer agent for the Common Stock with
respect to the applicable restriction for transfer of any restricted stock. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted stock shall be subject to the same
restrictions. Shares acquired otherwise than in the Conversion, such as under
the Company's Option Plan, would not be subject to such restrictions. To the
extent directors and officers are deemed affiliates of the Company, all shares
of the Common Stock acquired by such directors and officers will be subject to
certain resale restrictions and may be resold pursuant to Rule 144 under the
Securities Act. See "Regulation -- Regulation of the Company Following the
Conversion -- Federal Securities Law."
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Association will be final. The Plan provides that the Association's Board of
Directors shall have the sole discretion to interpret and apply the provisions
of the Plan to particular facts and circumstances and to make all determinations
necessary or desirable to implement such provisions, including but not limited
to matters with respect to giving preference in the Community Offering to
natural persons and trusts of natural persons who are permanent residents of the
Local Community, and any and all interpretations, applications and
determinations made by the Board of Directors in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Association and its members and
subscribers in the Subscription and Community Offerings, subject to the
authority of the OTS.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended by a two-thirds vote of the
Board of Directors at any time prior to submission of the Plan and proxy
materials to the Association's members. After submission of the Plan and proxy
materials to the members, the Plan may be amended by a two-thirds vote of the
Board of Directors at any time prior to the Special Meeting and at any time
following the Special Meeting with the concurrence of the OTS. In its
discretion, the Board of Directors may generally modify or terminate the Plan
upon the order of the regulatory authorities without resoliciting proxies or
otherwise obtaining approval of the amended Plan by members at another Special
Meeting. However,
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any modification of the Plan that results in a material change in the terms of
the Conversion would require such a resolicitation of proxies and another
meeting of members.
The Plan further provides that in the event that mandatory new
regulations pertaining to conversions are adopted by the OTS or any successor
agency prior to completion of the Conversion, the Plan will be amended to
conform to such regulations without a resolicitation of proxies or another
Special Meeting. In the event that such new conversion regulations contain
optional provisions, the Plan may be amended to utilize such optional provisions
at the discretion of the Board of Directors without a resolicitation of proxies
or another Special Meeting. By adoption of the Plan, the Association's members
will be deemed to have authorized amendment of the Plan under the circumstances
described above.
CONDITIONS AND TERMINATION
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total outstanding votes of
the members of the Association and the sale of all shares of the Common Stock
within 24 months following approval of the Plan by the members. If these
conditions are not satisfied, the Plan will be terminated, and the Association
will continue its business in the mutual form of organization. The Plan may be
terminated by the Board of Directors at any time prior to the Special Meeting
and, with the approval of the OTS, by the Board of Directors at any time
thereafter.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE ASSOCIATION
CONVERSION REGULATIONS
OTS regulations prohibit a person from making an offer, announcing an
intent to make an offer or other arrangement to purchase stock, or acquiring
stock or subscription rights in the Association or the Company from another
person prior to completion of the Conversion. Further, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the Association or the Company for a period of three years from the
date of the completion of the Conversion if, upon the completion of such offer
or acquisition, that person would become the beneficial owner of more than 10%
of the stock of the Association or the Company without the prior written
approval of the Director of the OTS. For purposes of the regulations, "person"
is defined to include any individual, group acting in concert, corporation,
partnership, association, joint stock company, trust, unincorporated
organization or similar company, a syndicate or any other group formed for the
purpose of acquiring, holding or disposing of securities of the Association or
the Company. Offers made exclusively to the Association or the Company,
however, or underwriters or members of a selling group acting on the
Association's or Company's behalf for resale to the general public, are
excepted.
CHANGE IN ASSOCIATION CONTROL ACT AND SAVINGS AND LOAN HOLDING COMPANY
PROVISIONS OF HOME OWNERS' LOAN ACT
Federal laws and regulations contain a number of provisions which
affect the acquisition of insured institutions such as the Association,
including a savings and loan holding company such as the Company. The Change in
Bank Control Act provides that no person, acting directly or indirectly or
through or in concert with one or more persons, may acquire control of a savings
association unless the OTS has been given 60 days' prior written notice and the
OTS does not issue a notice disapproving the proposed acquisition. In addition,
certain provisions of the Home Owners Loan Act provide that no company may
acquire control of a thrift without the prior approval of the OTS. Any company
that acquires such control becomes a "savings and loan holding company" subject
to registration, examination and regulation by the OTS.
Pursuant to applicable regulations, control of a savings association
is conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of a savings
association or the ability to control the election of a majority of the
directors of an institution. Moreover, control
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is presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or more than 25% of any class of
stock, of a savings association, where one or more enumerated "control factors"
are also present in the acquisition. The OTS may prohibit an acquisition of
control if it finds, among other things, that (i) the acquisition would result
in a monopoly or substantially lessen competition, (ii) the financial condition
of the acquiring person might jeopardize the financial stability of the savings
association, or (iii) the competence, experience, or integrity of the acquiring
person indicates that it would not be in the interest of the depositors or the
public to permit the acquisition of control by such person. The foregoing
restrictions do not apply to the acquisition of the Company's capital stock by
one or more tax-qualified employee stock benefit plans, provided that the plan
or plans do not have beneficial ownership in the aggregate of more than 25% of
any class of equity security.
DELAWARE GENERAL CORPORATION LAW
The DGCL contains a statute designed to provide Delaware corporations
with additional protection against hostile takeovers. The takeover statute,
which is codified in Section 203 of the DGCL, among other things, prohibits the
Company from engaging in certain business combinations (including a merger) with
a person who is the beneficial owner of 15% or more of the Company's outstanding
voting stock (an Interested Stockholder) during the three-year period following
the date such person became an Interested Stockholder. This restriction does
not apply if (1) before such person became an Interested Stockholder, the Board
of Directors approved the transaction in which the Interested Stockholder
becomes an Interested Stockholder or approved the business combination; or (2)
upon consummation of the transaction which resulted in the stockholder's
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the Company outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding, those shares owned by (i) persons who are directors and also
officers and (ii) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (3) on or subsequent to
such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock which is not owned by the Interested Stockholder. The Company may
exempt itself from the requirements of the statute by adopting an amendment to
its Certificate of Incorporation. At the present time, the Board of Directors
does not intend to propose any such amendment.
CERTAIN ANTI-TAKEOVER PROVISIONS
IN THE CERTIFICATE OF INCORPORATION AND BYLAWS
While the Boards of Directors of the Association and the Company are
not aware of any effort that might be made to obtain control of the Company
after Conversion, the Board of Directors, as discussed below, believes that it
is appropriate to include certain provisions as part of the Company's
Certificate of Incorporation to protect the interests of the Company and its
stockholders from hostile takeovers which the Board of Directors might conclude
are not in the best interests of the Association, the Company or the Company's
stockholders. These provisions may have the effect of discouraging a future
takeover attempt which is not approved by the Board of Directors but which
individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult.
The following discussion is a general summary of the material
provisions of the Certificate of Incorporation and Bylaws of the Company which
may be deemed to have such an "anti-takeover" effect. The description of these
provisions is necessarily general and reference should be made in each case to
the Certificate of Incorporation and Bylaws of the Company. For information
regarding how to obtain a copy of these documents without charge, see
"Additional Information."
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BOARD OF DIRECTORS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws will impede changes in control of the Board of Directors of the Company.
The Certificate of Incorporation provides that the Board of Directors is to be
divided into three classes, as nearly equal in number as possible, which shall
be elected for staggered three-year terms.
The Company's Certificate of Incorporation provides that a director
may be removed only for cause by the affirmative vote of the holders of at least
80% of the outstanding shares entitled to vote and that the size of the Board of
Directors may be changed only by a vote of two-thirds of the directors then in
office. The Certificate of Incorporation further provides that any vacancy
occurring in the Board of Directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a two-thirds vote of the directors then in office.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS
The Company's Certificate of Incorporation requires the approval of
the holders of (i) at least 80% of the Company's outstanding shares of voting
stock, and (ii) at least a majority of the Company's outstanding shares of
voting stock, not including shares held by a "Related Person," to approve
certain "Business Combinations" as defined therein, and related transactions.
Under DGCL, absent this provision, Business Combinations, including mergers,
consolidations and sales of substantially all of the assets of the Company must,
subject to certain exceptions, be approved by the vote of the holders of a
majority of the outstanding shares of the Common Stock. For a discussion of an
exception to the majority approval requirement under Delaware law, see "Certain
Restrictions on Acquisition of the Company and the Association -- Delaware
General Corporation Law." The increased voting requirements in the Company's
Certificate of Incorporation apply in connection with business combinations
involving a "Related Person," except in cases where the proposed transaction has
been approved in advance by two-thirds of those members of the Company's Board
of Directors who are unaffiliated with the Related Person and who were directors
prior to the time when the Related Person became a Related Person (the
"Continuing Directors"). The term "Related Person" is defined to include any
individual, corporation, partnership or other entity which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of the Company. A "Business Combination" is defined to include (i)
any merger or consolidation of the Company with or into any Related Person; (ii)
any sale, lease exchange, mortgage, transfer, or other disposition of all or a
substantial part of the assets of the Company or of a subsidiary to any Related
Person (the term "substantial part" is defined to include more than 25% of the
Company's total assets); (iii) any merger or consolidation of a Related Person
with or into the Company or a subsidiary of the Company; (iv) any sale, lease,
exchange, transfer or other disposition of all or any substantial part of the
assets of a Related Person to the Company or a subsidiary of the Company; (v)
the issuance of any securities of the Company or a subsidiary of the Company to
a Related Person; (vi) the acquisition by the Company of any securities of the
Related Person; (vii) any reclassification of the Common Stock, or any
recapitalization involving the Common Stock; and (viii) any agreement, contract
or other arrangement providing for any of the above transactions.
LIMITATIONS ON CALL OF MEETINGS OF STOCKHOLDERS
The Company's Certificate of Incorporation provides that special
meetings of stockholders may only be called by the Company's Board of Directors
or an appropriate committee appointed by the Board of Directors. Stockholders
are not authorized to call a special meeting, and stockholder action may be
taken only at a special or annual meeting of stockholders and not by written
consent.
ABSENCE OF CUMULATIVE VOTING
The Company's Certificate of Incorporation provides that there shall
not be cumulative voting by stockholders for the election of the Company's
directors. The absence of cumulative voting rights effectively means that the
holders of a majority of the shares voted at a meeting of stockholders may, if
they so choose, elect all
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directors of the Company to be selected at that meeting, thus precluding
minority stockholder representation on the Company's Board of Directors.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES
The 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 acquire the beneficial ownership of more than 10% of any class of
equity security of the Company, unless such offer or acquisition shall have been
approved in advance by a two-thirds vote of the Company's Continuing Directors.
This provision does not apply to any employee stock benefit plan of the Company.
In addition, during such five-year period, no shares beneficially owned in
violation of the foregoing percentage limitation, as determined by the Company's
Board of Directors, shall be entitled to vote in connection with any matter
submitted to stockholders for a vote. Additionally, the 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 Company beyond five
years after the Conversion of the Association. Specifically, the Certificate of
Incorporation provides that if, at any time after five years from the
Association's conversion to stock form, any person acquires the beneficial
ownership of more than 10% of any class of equity security of the Company, then,
with respect to each vote in excess of 10%, such person shall be entitled to
cast only one-hundredth of one vote. An exception from the restriction is
provided if the acquisition of more than 10% of the securities received the
prior approval by a two-thirds vote of the Company's Continuing Directors.
Under the Company's 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 Company's Common Stock in a proxy
contest.
BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN OFFER BY
ANOTHER PARTY
The Certificate of Incorporation of the Company permits the Board of
Directors, in evaluating a Business Combination or a tender or exchange offer,
to consider, in addition to the adequacy of the amount to be paid in connection
with any such transaction, certain specified factors and any other factors the
Board deems relevant, including (i) the social and economic effects of the
transaction on the Company and its subsidiaries, employees, depositors, loan and
other customers, creditors and other elements of the communities in which the
Company and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring party or parties;
and (iii) the competence, experience and integrity of the acquiring party or
parties and its or their management. By having the standards in the Certificate
of Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose any proposed business combination, tender or exchange offer
if the Board concludes that the transaction would not be in the best interest of
the Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
up to 1,000,000 shares of preferred stock, which conceivably would represent an
additional class of stock required to approve any proposed acquisition. The
Company is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the designations, powers, preferences and relative
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights. Issuance of the preferred stock could adversely affect the relative
voting rights of holders of the Common Stock. In the event of a proposed
merger, tender offer or other attempt to gain control of the Company that the
Board of Directors does not approve, it might be possible for the Board of
Directors to authorize the issuance of a series of preferred stock with rights
and preferences that would impede the completion of such a transaction. An
effect of the possible issuance of preferred stock, therefore, may be to deter a
future takeover attempt. The Board of Directors has no present plans or
understandings for the issuance of any preferred stock and does not intend to
issue any preferred stock except on terms which the Board of Directors deems to
be
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in the best interests of the Company and its stockholders. This preferred
stock, none of which has been issued by the Company, together with authorized
but unissued shares of Common Stock (the Certificate of Incorporation authorizes
the issuance of up to 3,000,000 shares of Common Stock), also could represent
additional capital required to be purchased by the acquiror.
PROCEDURES FOR STOCKHOLDER NOMINATIONS
The Company's Certificate of Incorporation provides that any
stockholder desiring to make a nomination for the election of directors or a
proposal for new business at a meeting of stockholders must submit written
notice to the Secretary of the Company not less than 30 or more than 60 days in
advance of the meeting. "New business" within the meaning of this provision
will be interpreted by the Company to exclude shareholder proposals which have
been included in the Company's proxy solicitation materials pursuant to Rule
14a-8 under the Exchange Act.
AMENDMENT OF BYLAWS
The Company's Certificate of Incorporation provides that the Company's
Bylaws may be amended either by a two-thirds vote of the Company's Board of
Directors or by the affirmative vote of the holders of not less than 80% of the
outstanding shares of the Company's stock entitled to vote generally in the
election of directors, after giving effect to any limits on voting rights.
Absent this provision, Delaware law provides that a corporation's bylaws may be
amended by the holders of a majority of a corporation's outstanding capital
stock. The Company's Bylaws contain numerous provisions concerning the
Company's governance, such as fixing the number of directors and determining the
number of directors constituting a quorum. By reducing the ability of a
potential corporate raider to make changes in the Company's Bylaws and to reduce
the authority of the Board of Directors or impede its ability to manage the
Company, this provision could have the effect of discouraging a tender offer or
other takeover attempt where the ability to make fundamental changes through
bylaw amendments is an important element of the takeover strategy of the
acquiror.
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Company's Certificate of Incorporation provides that specified
provisions contained in the Certificate of Incorporation may not be repealed or
amended except upon the affirmative vote of not less than 80% of the outstanding
shares of the Company's stock entitled to vote generally in the election of
directors, after giving effect to any limits on voting rights. This requirement
exceeds the majority vote of the outstanding stock that would otherwise be
required by Delaware law for the repeal or amendment of a certificate provision.
The specific provisions are those (i) governing the calling of special meetings,
the absence of cumulative voting rights and the requirement that stockholder
action be taken only at annual or special meetings, (ii) requiring written
notice to the Company of nominations for the election of directors and new
business proposals, (iii) governing the number of the Company's Board of
Directors, the filling of vacancies on the Board of Directors and classification
of the Board of Directors, (iv) providing the mechanism for removing directors,
(v) limiting the acquisition of more than 10% of the capital stock of the
Company or the Association (except, with the prior approval of the Continuing
Directors of the Company), (vi) governing the requirement for the approval of
certain Business Combinations involving a "Related Person," (vii) regarding the
consideration of certain nonmonetary factors in the event of an offer by another
party, (viii) providing for the indemnification of directors, officers,
employees and agents of the Company, (ix) pertaining to the elimination of the
liability of the directors to the Company and its stockholders for monetary
damages, with certain exceptions, for breach of fiduciary duty, and (x)
governing the required stockholder vote for amending the Certificate of
Incorporation or Bylaws of the Company. This provision is intended to prevent
the holders of less than 80% of the outstanding stock of the Company from
circumventing any of the foregoing provisions by amending the Certificate of
Incorporation to delete or modify one of such provisions. This provision would
enable the holders of more than 20% of the Company's voting stock to prevent
amendments to the Company's Certificate of Incorporation or Bylaws, even if such
amendments were favored by the holders of a majority of the voting stock.
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BENEFIT PLANS
In addition to the provisions of the Company's Certificate of
Incorporation and Bylaws described above, certain benefit plans of the Company
and the Association adopted in connection with the Conversion contain provisions
which also may discourage hostile takeover attempts which the Boards of
Directors of the Company and the Association might conclude are not in the best
interests of the Company, the Association or the Company's stockholders. For a
description of the benefit plans and the provisions of such plans relating to
changes in control of the Company or the Association, see "Management of the
Association -- Certain Benefit Plans and Agreements."
THE PURPOSE OF AND ANTI-TAKEOVER EFFECT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Boards of Directors of the Company and the Association believe
that the provisions described above reduce the Company's vulnerability to
takeover attempts and certain other transactions which have not been negotiated
with and approved by its Board of Directors. These provisions will also assist
the Company and the Association in the orderly deployment of the net proceeds of
the Conversion into productive assets during the initial period after the
Conversion. The Boards of Directors of the Company and the Association believe
these provisions are in the best interests of the Association and of the Company
and its stockholders. In the judgment of the Boards of Directors of the Company
and the Association, the Company's Board is in the best position to consider all
relevant factors and to negotiate for what is in the best interests of the
stockholders and the Company's other constituents. Accordingly, the Boards of
Directors of the Company and the Association believe that it is in the best
interests of the Company and its stockholders to encourage potential acquirors
to negotiate directly with the Company's Board of Directors and that these
provisions will encourage such negotiations and discourage nonnegotiated
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at prices reflective of the true value of the Company and which is
in the best interests of all stockholders.
Attempts to acquire control of financial institutions and their
holding companies have recently become increasingly common. Takeover attempts
which have not been negotiated with and approved by the Board of Directors
present to stockholders the risk of a takeover on terms which may be less
favorable than might otherwise be available. A transaction which is negotiated
and approved by the Board of Directors, on the other hand, can be carefully
planned and undertaken at an opportune time in order to obtain maximum value for
the Company and stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business
and management of a corporation and cause great expense. Although a tender
offer or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders.
Despite the belief of the Association and the Company as to the
benefits to stockholders of these provisions of the Company's 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
Company's Board, but pursuant to which the 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 Company's Board of Directors and management more difficult and may tend
to stabilize the Company's stock price, thus limiting gains which might
otherwise be reflected in price increases due to a potential merger or
acquisition. The Board of Directors, however, has concluded that the potential
benefits of these provisions outweigh the possible disadvantages. Pursuant to
applicable regulations, at any annual or special meeting of its stockholders
after the Conversion, the Company may adopt additional Certificate of
Incorporation provisions regarding the acquisition of its equity securities that
would be permitted to a Delaware corporation.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 3,000,000 shares of Common Stock,
par value $0.01 per share, and 1,000,000 shares of serial preferred stock, par
value $0.01 per share. The Company currently expects to issue between 272,000
and 368,000 shares, subject to adjustment, of the Common Stock and no shares of
serial preferred stock in the Conversion. The Company has reserved for future
issuance under the Option Plan an amount of authorized but unissued shares of
Common Stock equal to 10% of the shares to be issued in the Conversion. THE
CAPITAL STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL, WILL NOT BE
AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC OR ANY
---
OTHER FEDERAL OR STATE GOVERNMENTAL AGENCY.
COMMON STOCK
Voting Rights. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of
shares of the Common Stock will be entitled to one vote for each share held of
record on all matters submitted to a vote of holders of shares of the Common
Stock. For information regarding a possible reduction in voting rights, see
"Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws
- -- Restrictions on Acquisitions of Securities."
Dividends. The Company may, from time to time, declare dividends to
the holders of the Common Stock, who will be entitled to share equally in any
such dividends. For information as to cash dividends, see "Dividend Policy,"
"Regulation -- Dividend Restrictions," and "Taxation."
Liquidation. In the event of any liquidation, dissolution or winding
up of the Converted Association, the Company, as holder of all of the
Association's capital stock, would be entitled to receive all assets of the
Converted Association after payment of all debts and liabilities of the
Converted Association and after distribution of the balance in the liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders.
In the event of a liquidation, dissolution or winding up of the Company, each
holder of shares of the Common Stock would be entitled to receive, after payment
of all debts and liabilities of the Company, a pro rata portion of all assets of
the Company available for distribution to holders of the Common Stock. If any
serial preferred stock is issued, the holders thereof may have a priority in
liquidation or dissolution over the holders of the Common Stock.
Restrictions on Acquisition of the Common Stock. For information
regarding limitations on acquisition of shares of the Common Stock, see "Certain
Restrictions on Acquisition of the Company, the Converted Association and the
Association," "Certain Anti-Takeover Provisions in the Certificate of
Incorporation and Bylaws" and "The Conversion -- Regulatory Restrictions on
Acquisition of the Common Stock."
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. The Common Stock is not subject to call for redemption,
and the outstanding shares of the Common Stock, when issued and upon receipt by
the Company of the full purchase price therefor, will be fully paid and
nonassessable.
Transfer Agent and Registrar. The transfer agent and registrar for
the Common Stock will be Illinois Stock Transfer Company.
SERIAL PREFERRED STOCK
None of the 1,000,000 authorized shares of serial preferred stock of
the Company will be issued in the Conversion. After the Conversion is
completed, the Board of Directors of the Company will be authorized to issue
serial preferred stock and to fix and state voting powers, designations,
preferences or other special rights of such
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shares and the qualifications, limitations and restrictions thereof. The serial
preferred stock may rank prior to the Common Stock as to dividend rights or
liquidation preferences, or both, and may have full or limited voting rights.
The Board of Directors has no present intention to issue any of the serial
preferred stock. Should the Board of Directors of the Company subsequently issue
serial preferred stock, no holder of any such stock shall have any preemptive
right to subscribe for or purchase any stock or any other securities of the
Company other than such, if any, as the Board of Directors, in its sole
discretion, may determine and at such price or prices and upon such other terms
as the Board of Directors, in its sole discretion, may fix.
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to
the Exchange Act upon the completion of the Conversion and will not deregister
said shares for a period of at least three years following the completion of the
Conversion. Upon such registration, the proxy and tender offer rules, insider
trading reporting and restrictions, annual and periodic reporting and other
requirements of the Exchange Act will be applicable. The Company intends to
have a September 30 fiscal year end.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the Company
by Housley Kantarian & Bronstein, P.C., Washington, D.C., which has consented to
the references herein to its opinion. Certain legal matters will be passed upon
for Trident Securities by Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C.
TAX OPINIONS
The federal income tax consequences of the Conversion will be passed
upon by Housley Kantarian & Bronstein, P.C., Washington, D.C., which has
consented to the references herein to its opinion. The Colorado income tax
consequences of the Conversion will be opined upon by Grimsley, White & Company,
which has consented to the references herein to its opinion.
EXPERTS
The financial statements of Rocky Ford Federal Savings and Loan
Association at September 30, 1996 and 1995 and for the two years then ended have
been included herein and elsewhere in the registration statement and the
Association's application for conversion in reliance upon the report of
Grimsley, White & Company, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
Ferguson has consented to the publication herein of the summary of its
letter to the Association setting forth its opinion as to the estimated pro
forma aggregate market value of the Common Stock to be issued in the Conversion
and the value of Subscription Rights to purchase the Common Stock and to the use
of its name and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement with
respect to the Common Stock offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies
may be obtained at prescribed rates from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains an
internet address ("Web site") that contains reports, proxy and information
statements and other information regarding registrants, including the Company,
that file electronically with the SEC. The address for this Web site is
"http://www.sec.gov."
The Association has filed with the OTS an Application for Conversion.
This document omits certain information contained in such application. The
Application for Conversion can be inspected, without charge, at the offices of
the OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at the office of the
OTS Regional Director, Midwest Regional Office, at 122 West John Carpenter
Freeway, Irving, Texas 75039.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Independent Auditors' Report F-1
Statements of Financial Condition as of
December 31, 1996 (Unaudited) and September 30, 1996
and 1995 F-2
Statements of Income for the Three Months Ended
December 31, 1996 (Unaudited) and 1995 (Unaudited)
and for the Years Ended September 30, 1996 and 1995 33
Statements of Equity for the Three Months Ended
December 31, 1996 (Unaudited) and 1995 (Unaudited),
and for the Years Ended September 30, 1996 and 1995 F-3
Statements of Cash Flows for the Three Months Ended
December 31, 1996 (Unaudited) and 1995 (Unaudited)
and for the Years Ended September 30, 1996 and 1995 F-4
Notes to Financial Statements F-5
</TABLE>
Schedules - All schedules are omitted because the required information is not
applicable or is presented in the financial statements or accompanying notes.
All financial statements of Rocky Ford Financial, Inc. have been omitted
because Rocky Ford Financial, Inc. has not yet issued any stock, has no assets
and no liabilities and has not conducted any business other than of an
organizational nature.
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[LETTERHEAD OF GRIMSLEY, WHITE & COMPANY]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Rocky Ford Federal Savings and
Loan Association
Rocky Ford, Colorado
We have audited the accompanying statements of financial condition of Rocky Ford
Federal Savings and Loan Association as of September 30, 1996 and 1995, and the
related statements of income, equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Association's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rocky Ford Federal Savings and
Loan Association as of September 30, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective October 1, 1994,
the Association changed its method of accounting for investment and mortgage-
backed securities.
/s/ Grimsley, White & Company
GRIMSLEY, WHITE & COMPANY
November 15, 1996 Except for Note 15 as to which
the date is January 14, 1997
F-1
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS (Unaudited)
December 31, September 30,
1996 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash and cash equivalents
Interest - bearing $ 1,900,000 $ 2,000,000 $ 1,100,000
Non - interest bearing 178,362 221,416 160,363
Certificates of deposit 1,797,000 1,897,000 2,583,000
Securities available for sale 627,300 584,700 444,788
Securities held to maturity 3,095,415 3,116,767 4,073,168
Loans receivable - net 12,596,225 12,286,909 10,984,236
Accrued interest receivable 127,330 125,018 158,868
Real estate held for investment - net - - 17,430
Premises and equipment 98,322 98,672 87,546
Prepaids 115,578 57,611 43,327
----------------- ----------------- -----------------
TOTAL ASSETS $ 20,535,532 $ 20,388,093 $ 19,652,726
================= ================= =================
LIABILITIES AND EQUITY
Deposits $ 17,335,263 $ 17,144,638 $ 16,702,125
Advances from borrowers for taxes and insurance 53,749 41,778 49,290
Accounts payable and accrued expenses 59,672 273,217 191,241
Current income tax payable - - 6,182
Deferred income taxes 228,249 150,200 128,400
Deferred income - - 2,191
----------------- ----------------- -----------------
TOTAL LIABILITIES 17,676,933 17,609,833 17,079,429
----------------- ----------------- -----------------
Commitments and contingencies
Retained earnings - substantially restricted 2,664,166 2,607,578 2,479,036
Net unrealized gain on securities available for sale,
net of tax $114,250, $100,300 and $55,400 194,433 170,682 94,261
----------------- ----------------- -----------------
TOTAL EQUITY 2,858,599 2,778,260 2,573,297
----------------- ----------------- -----------------
TOTAL LIABILITIES AND EQUITY $ 20,535,532 $ 20,388,093 $ 19,652,726
================= ================= =================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN
ON
SECURITIES
RETAINED AVAILABLE-
EARNINGS FOR-SALE TOTAL
------------- ---------------- -----------
<S> <C> <C> <C>
BALANCES OCTOBER 1, 1994 $2,192,048 $ - $2,192,048
Recognition of net unrealized gain on securities
available-for-sale, net of taxes of $50,800,
due to adoption of FASB 155 - 86,500 86,500
Net income for the year 286,988 - 286,988
Change in net unrealized gain on securities
available-for-sale, net of taxes of $4,600 - 7,761 7,761
------------- ---------------- -----------
BALANCES SEPTEMBER 30, 1995 2,479,036 94,261 2,573,297
Net income for the year 128,542 - 128,542
Change in net unrealized gain on securities
available-for-sale, net of taxes of $44,900 - 76,421 76,421
------------- ---------------- -----------
BALANCES SEPTEMBER 30, 1996 2,607,578 170,682 2,778,260
Net income for the three months ended -
December 31,1996 (unaudited) 56,588 56,588
Change in net unrealized gain on securities
available-for-sale,net of taxes of $13,950 (unaudited) - 23,751 23,751
------------- ---------------- -----------
BALANCES, DECEMBER 31, 1996 (unaudited) $2,664,166 $194,433 $2,858,599
============= ================ ===========
</TABLE>
See Notes To Financial Statements
F-3
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Three months ended Years ended
December 31, September 30,
1996 1995 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $56,588 $46,006 $128,542 $286,988
----------- ---------- ---------- ----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of:
Deferred loan origination fees (4,418) (3,314) (16,803) (13,026)
Discounts on investments - (4,997) (16,965) (28,112)
Stock dividend received from FHLB (4,900) (4,600) (18,600) -
Provision for loan losses and losses on real estate - - - (68,407)
(Gain) loss on foreclosed real estate - - (1,966) (10,214)
Depreciation 4,980 4,908 21,341 14,983
Change in assets and liabilities
Accrued interest receivable (2,312) 34,122 33,850 (9,237)
Prepaids (57,967) 38,097 (14,284) (17,973)
Accounts payable and accrued expenses (213,545) (72,913) 81,976 27,712
Current income taxes - 1,109 (6,182) 5,781
Deferred income - (2,191) (2,191) (735)
Deferred income taxes 64,100 3,627 (23,091) (2,500)
----------- ---------- ---------- ----------
TOTAL ADJUSTMENTS (214,062) (6,152) 37,085 (101,728)
----------- ---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES (157,474) 39,854 165,627 185,260
----------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in certificates of deposit 100,000 - 686,000 197,000
Loan originations and principal payments on loans (304,898) (203,106) (1,329,596) (514,412)
Proceeds from maturities of investment securities - 1,400,000 2,800,000 900,000
Purchase of securities available for sale - - (584,269) -
Purchase of mortgage-backed securities - (1,074,269) (1,488,125) -
Principal payments on mortgage-backed securities 21,352 51,687 245,760 195,502
Capital purchases (4,630) (20,488) (32,468) (29,668)
Proceeds from sale of foreclosed real estate - - 63,123 38,685
----------- ---------- ---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES (188,176) 153,824 360,425 787,107
----------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 190,625 (40,132) 442,513 (435,017)
Net change in mortgage escrow funds 11,971 13,204 (7,512) (15)
----------- ---------- ---------- ----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 202,596 (26,928) 435,001 (435,032)
----------- ---------- ---------- ----------
NET INCREASE IN CASH (143,054) 166,750 961,053 537,335
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,221,416 1,260,363 1,260,363 723,028
----------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,078,362 $1,427,113 $2,221,416 $1,260,363
=========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid for:
Taxes $ - $ - $ 148,188 $ 137,619
Interest 47,857 46,800 103,319 132,391
Non cash transactions
FHLB stock dividend received 4,900 4,600 18,600
</TABLE>
See Notes To Financial Statements
F-4
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE-1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Rocky Ford Federal Savings and Loan Association (the Association) is
a federally chartered mutual association which conducts its operations in
Southeastern Colorado. The Association provides a variety of financial
services to the area it serves. Its primary deposit products are
certificates of deposit and its primary lending products are real estate
mortgages.
The following items comprise the significant accounting policies which
the Association follows in preparing and presenting its financial
statements.
The statement of financial condition as of December 31, 1996 and the
related statements of income, equity and cash flows for the three months
ended December 31, 1996 and the related statements of income and cash
flows for the three months ended December 31, 1995 are unaudited and
have been prepared in accordance with the requirements for a presentation
of interim financial statements and are in accordance with generally
accepted accounting principles. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, that are
necessary for fair presentations of the interim periods, have been
reflected.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
Cash equivalents consist of overnight deposits and funds due from banks.
For purposes of the statements of cash flows, the Association considers
all highly liquid debt instruments with original maturities, when
purchased, of three months or less to be cash equivalents.
Certificates of Deposit
The Association maintains certificates of deposit with financial
institutions across the United States. It is the policy of the
Association to limit deposits to insurable accounts.
Securities Held-to-Maturity
Mortgage-backed securities and related debt investments for which the
Association has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of
discounts which are recognized in interest income using the interest
method over the period to maturity.
Securities Available-for-Sale
Securities available-for-sale consist of equity securities, not
classified as trading securities, which are carried at fair value.
Unrealized holding gains and losses, net of tax, on securities available-
for-sale are reported as a net amount in a separate component of equity
until realized.
F-5
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE-1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Gains and losses on the sale of securities available-for-sale are
determined using the specific-identification method.
Declines in the fair value of individual held-to-maturity and available-
for-sale securities below their cost, that are other than temporary,
would result in write-downs of the individual securities to their fair
value. Should the Association incur write-downs, they will be included in
earnings as realized losses.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
Federal Home Loan Bank (FHLB) stock is an equity interest in the FHLB of
Topeka. The Association, as a member of the FHLB, is required to maintain
an investment in the capital stock of the FHLB. The stock is classified
as available-for-sale, but is carried at cost, as its cost is assumed to
equal its market value. The FHLB declares cash and stock dividends. The
stock dividends are recognized as income due to the fact they are
redeemable at par value ($100 per share) from the FHLBs or another member
institution.
Loans Receivable
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan-origination fees and
discounts.
Loan origination and commitment fees, as well as certain direct
origination costs, are deferred and amortized as a yield adjustment over
the contractual lives of the related loans using the interest method.
Amortization of deferred loan fees is discontinued when a loan is placed
on nonaccrual status.
Loans are placed on nonaccrual status when the principal and interest is
delinquent for 90 days or more. Uncollectible interest on these loans is
charged off, or an allowance is established, based on management's
periodic evaluation, by a charge to interest income equal to all interest
previously accrued. Income is subsequently recognized only to the extent
that cash payments are received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the loan
portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, specific impaired loans,
and economic conditions. The allowance is increased by a provision for
loan losses, which is charged to expense, and reduced by charge-offs, net
of recoveries. Such provisions are based on management's estimate of net
realizable value or fair value of the collateral, as applicable. These
estimates are susceptible to economic changes that could result in a
material adjustment to results of operations in the near term. Recovery
of the carrying value of such loans is dependent, to a great extent, on
the economic, operational, and other conditions that may be beyond the
Association's control.
F-6
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE-1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Held for Investment and Foreclosed Real Estate
Direct investments in real estate properties held for investment are
carried at lower of cost, including cost of improvements and amenities
subsequent to acquisition, or net realizable value
Foreclosed real estate held for sale is carried at the lower of fair
value minus estimated costs to sell or cost (the fair value of the
foreclosed asset at the time of foreclosure). Costs of holding foreclosed
property are charged to expense in the current period, except for
significant property improvements, which are capitalized to the extent
that carrying value does not exceed estimated fair market value.
Income Taxes
The Association recognizes income taxes under SFAS No. 109 Accounting for
Income Taxes. Under the provisions of SFAS No. 109, deferred tax assets
and liabilities are recorded based on the differences between the
financial statement and the tax basis of assets and liabilities and the
tax rates which will be in effect when these differences are expected to
reverse. If appropriate, deferred tax assets are reduced by a valuation
allowance which reflects the extent to which such assets will be
realized.
Premises and Equipment
Land is carried at cost. Building, furniture, fixtures, and equipment
are carried at cost, less accumulated depreciation. Building, furniture,
fixtures, and equipment are depreciated using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Building 30 years
Furniture, Fixtures, Equipment 5-15 years
Automobile 7 years
</TABLE>
Fair Values of Financial Instruments
The following methods and assumptions were used by the Association in
estimating fair values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and short-
term instruments approximate fair values.
Available-for-sale and held-to-maturity securities. Fair values for
securities, excluding restricted equity securities, are based on quoted
market prices. The carrying values of restricted equity securities
approximate fair values.
Loans receivable. Fair values for mortgage loans is estimated using
discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values, where applicable.
Deposit liabilities. The carrying amounts of passbook savings and money-
market accounts approximate their fair values at the reporting date.
Fair values for fixed-rate CDs are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
F-7
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -2 INVESTMENT SECURITIES
The Association adopted Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity
Securities", effective October 1, 1994. The Association's investments
in marketable equity securities have been held for an indefinite
period and have historically been reported at the lower of cost or
market. Application of FASB No. 115 resulted in the recognition of
unrealized holding gains of $94,261, net of related tax effect, which
was reported in the equity section of the statement of financial
condition.
Securities are classified in three categories and accounted for as
follows: debt securities that the Association has the positive intent
and ability to hold to maturity are classified as held-to-maturity and
are measured at amortized cost; debt and equity securities bought and
held principally for the purpose of selling in the near term are
classified as trading securities and are measured at fair value, with
unrealized gains and losses included in earnings; debt and equity
securities not classified as either held-to-maturity or trading
securities are deemed available-for-sale and are measured at fair-
value, with unrealized gains and losses, net of applicable taxes,
reported in a separate component of equity.
Held-to-Maturity Securities
The amortized cost and estimated fair value of held-to-maturity
securities at December 31, 1996 and September 30, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1996 (Unaudited)
Mortgage-backed................ $2,595,415 $81,625 $(11,956) $2,665,084
---------- ------- -------- ----------
U.S. Agencies.................. 500,000 0 (10,312) 489,688
---------- ------- -------- ----------
$3,095,415 $81,625 $(22,268) $3,154,772
========== ======= ======== ==========
September 30, 1996
Mortgage-backed................ $2,616,767 $67,099 $(23,161) $2,660,705
U.S. Agencies.................. 500,000 0 (11,406) 488,594
---------- ------- -------- ----------
$3,116,767 $67,099 $(34,567) $3,149,299
========== ======= ======== ==========
September 30, 1995
Mortgage-backed................ $1,373,500 $89,900 $ 0 $1,463,400
U.S. Agencies.................. 2,699,668 0 (23,252) 2,676,416
---------- ------- -------- ----------
$4,073,168 $89,900 $(23,252) $4,139,816
========== ======= ======== ==========
</TABLE>
F-8
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -2 INVESTMENT SECURITIES (Continued)
Available-for-Sale Securities
The amortized cost and estimated fair value of available-for-sale
securities are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1996 (Unaudited)
Equity securities
FHLB stock $307,300 $ 0 $ 0 $307,300
FHLMC 11,327 308,673 0 320,000
-------- -------- --------- --------
$318,627 $308,673 $ 0 $627,300
======== ======== ========= ========
September 30, 1996
Equity securities
FHLB stock $302,400 $ 0 $ 0 $302,400
FHLMC stock 11,327 270,973 0 282,300
-------- -------- --------- --------
$313,727 $270,973 $ 0 $584,700
======== ======== ========= ========
September 30, 1995
Equity securities
FHLB stock $283,800 $ 0 $ 0 $283,800
FHLMC stock 11,327 149,661 0 160,988
-------- -------- --------- --------
$295,127 $149,661 $ 0 $444,788
======== ======== ========= ========
</TABLE>
The amortized cost of debt securities at December 31 and September 30,
1996, by contractual maturity, are shown below. The Association's debt
securities held-to-maturity are mortgage-backed securities whose
expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
Held-to-Maturity Debt Securities 1996 1996
-------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less................ $ 30,945 $ 30,645
Due after one year through five years.. 653,267 651,791
Due from five to ten years............. 280,349 277,674
Due after ten years.................... 2,130,854 2,156,657
---------- ----------
Total Held-to-Maturity Securities $3,095,415 $3,116,767
========== ==========
</TABLE>
GNMA Certificates with a carrying amount of $230,462, $231,259 and
$254,263 at December 31, 1996 (unaudited) and September 30, 1996 and
1995, respectively, were pledged to secure public deposits.
F-9
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -3 LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1996 1996 1995
------------- ----------- ------------
<S> <C> <C> <C>
First mortgage loans
(principally conventional):
Principal balances:
Secured by one-to-four-family
residences $12,368,441 $12,056,769 $10,743,215
Secured by other properties 165,105 173,626 122,914
------------- ----------- ------------
12,533,546 12,230,395 10,866,129
Less:
Net deferred loan origination fees (56,824) (61,242) (72,526)
------------- ----------- ------------
Total first mortgage loans 12,476,722 12,169,153 10,793,603
------------- ----------- ------------
Second mortgage and share loans
Principal balances:
Second mortgage 71,159 75,487 171,298
Share 108,344 102,269 79,335
------------- ----------- ------------
Total second mortgages
and share loans 179,503 177,756 250,633
------------- ----------- ------------
Less: Allowance for loan losses (60,000) (60,000) (60,000)
------------- ----------- ------------
$12,596,225 $12,286,909 $10,984,236
============= =========== ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
1996 1995 1996 1995
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period $60,000 $60,000 $ 60,000 $ 128,407
Provision (recovery) charged to income 0 0 0 (68,407)
Charge-offs and recoveries, net 0 0 0 0
------- ------- ----------- ------------
Balance at end of period $60,000 $60,000 $ 60,000 $ 60,000
======= ======= =========== ============
</TABLE>
Nonaccrual loans for which interest has been reserved totaled $0 at
December 31, 1996 (unaudited) and September 30, 1996 and 1995,
respectively. Interest income in the amount of $0 has been reserved at
December 31, 1996 (unaudited) and September 30, 1996 and 1995.
As of December 31, 1996 (unaudited) and September 30, 1996 the
Association had outstanding firm commitments to originate loans of
approximately $124,000 and $909,300.
F-10
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -4 ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) September 30,
December 31, 1996 1996 1995
------------------ -------- --------
<S> <C> <C> <C>
Certificates of deposit $ 5,615 $ 5,325 $ 14,715
Investment securities 5,937 11,875 49,141
Mortgaged-backed securities 17,996 18,144 10,442
Loans receivable 97,782 89,674 84,570
-------- -------- --------
$127,330 $125,018 $158,868
======== ======== ========
</TABLE>
NOTE -5 REAL ESTATE HELD FOR INVESTMENTS
The Association holds land which could be used for development
purposes. The following is a summary of real estate held for
investment, as of September 30, 1995
<TABLE>
<S> <C>
Land $21,265
Provision for losses (3,835)
-------
$17,430
=======
</TABLE>
Activity in the allowance for losses for real estate foreclosed and
held for investment for the years ended September 30 is as follows:
<TABLE>
<S> <C>
Balance at September 30, 1994 $ 18,800
Charge-offs, net of recoveries (14,965)
---------
Balance at September 30, 1995 3,835
Recoveries (3,835)
---------
Balance at September 30, 1996 $ 0
=========
</TABLE>
NOTE -6 PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) September 30,
December 31, 1996 1996 1995
----------------- --------- ---------
<S> <C> <C> <C>
Land $ 10,000 $ 10,000 $ 10,000
Buildings 119,666 119,666 107,686
Furniture and fixtures 105,564 100,934 119,571
Automobile 34,963 34,963 26,194
--------- --------- ---------
270,193 265,563 263,451
Less accumulated depreciation (171,871) (166,891) (175,905)
--------- --------- ---------
$ 98,322 $ 98,672 $ 87,546
========= ========= =========
</TABLE>
F-11
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -6 PREMISES AND EQUIPMENT (Continued)
Depreciation expense charged to operations for the three months ended
December 31, 1996 and 1995 was $4,980 (unaudited) and $4,908
(unaudited), respectively. Depreciation for the years ended September
30, 1996 and 1995 was $21,341 and $14,983, respectively.
NOTE -7 DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 RATE AT September 30,
------------------------------ -----------------------------------------------------
(UNAUDITED) September 30 1996 1995
------------------------------ -----------------------------------------------------
RATE AMOUNT PERCENT 1996 AMOUNT PERCENT AMOUNT PERCENT
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market 3.70 $ 3,398,342 19.60 4.15 $ 3,270,990 19.08 $ 2,557,273 15.31
Passbook savings 2.85 1,057,496 6.10 3.30 1,077,717 6.29 1,078,678 6.46
------------------- -------------------------------------------------
4,455,827 25.70 4,348,707 25.36 3,635,951 21.77
------------------- -------------------------------------------------
Certificates of
Deposit 3.00 - 4.00 320,600 1.85 3.00 - 4.00 423,765 2.47 966,984 5.79
4.01 - 5.00 5,594,012 32.27 4.01 - 5.00 4,565,453 26.63 3,467,694 20.76
5.01 - 6.00 5,937,019 34.25 5.01 - 6.00 7,745,816 45.18 7,887,894 47.23
6.01 - 7.00 995,754 5.74 6.01 - 7.00 - - 685,384 4.10
7.01 - 8.00 32,051 0.18 7.01 - 8.00 60,897 0.36 52,218 0.35
------------------- -------------------------------------------------
12,879,436 74.30 12,795,931 74.64 13,066,174 78.23
------------------- -------------------------------------------------
$17,335,263 100.00 $17,144,638 100.00 $16,702,125 100.00
=================== =================================================
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with
a minimum denomination of $100,000 was approximately $1,370,000 at
December 31, 1996 (unaudited) and $1,512,000 and $800,850 at September
30, 1996 and 1995.
Deposits in excess of $100,000 are not insured by the Savings
Association Insurance Fund (SAIF)
At December 31, 1996 (unaudited), scheduled maturities of certificates
of deposits are as follows:
<TABLE>
<CAPTION>
Rate 1997 1998 1999
--------------- ---------- ---------- --------
<S> <C> <C> <C>
3.00% - 4.00% $ 344,821 $ 0 $ 0
4.01% - 5.00% 5,810,903 0 0
5.01% - 6.00% 3,835,653 1,278,491 861,281
6.01% - 7.00% 0 716,236 0
7.01% - 8.00% 0 0 32,051
---------- ---------- --------
$9,991,377 $1,994,727 $893,332
========== ========== ========
</TABLE>
F-12
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -7 DEPOSITS (Continued)
At September 30, 1996, scheduled maturities of certificates of
deposits are as follows:
<TABLE>
<CAPTION>
Rate 1997 1998 1999
------------ ---------- ---------- ----------
<S> <C> <C> <C>
3% - 4% $ 413,261 $ 10,504 $ 0
4% - 5% 4,565,452 0 0
5% - 6% 4,751,111 2,194,662 800,044
6% - 7% 0 0 0
7% - 8% 25,000 0 35,897
---------- ---------- --------
$9,754,824 $2,205,166 $835,941
========== ========== ========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
1996 1995 1996 1995
------------------- -------------------
<S> <C> <C> <C> <C>
Money market and
Passbook savings $ 38,264 $ 33,755 $143,611 $146,770
Certificates of deposit 168,632 174,925 676,820 587,059
-------- -------- -------- --------
$206,896 $208,680 $820,431 $733,829
======== ======== ======== ========
</TABLE>
NOTE -8 INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
1996 1995 1996 1995
--------------------- --------------------
<S> <C> <C> <C> <C>
Current Expense (Benefit) $(38,800) $24,227 $ 81,475 $120,235
Deferred 64,100 3,600 (23,100) (2,500)
-------- ------- -------- --------
$ 25,300 $27,827 $ 58,375 $117,735
======== ======= ======== ========
Effective tax rate 31% 37% 31% 29%
</TABLE>
Retained earnings at December 31, (unaudited) and September 30, 1996
include earnings of approximately $452,000, representing bad debt
deductions for which no provision for federal income taxes has been
made. If, in the future, this portion of retained earnings is used for
any purpose other than to absorb bad debt losses, federal income taxes
will be imposed at the then applicable rates.
F-13
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -8 INCOME TAXES (Continued)
The provisions for federal income taxes differ from that computed at
the statutory corporate tax rate of 34 percent as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
1996 1995 1996 1995
------------------- ---------------------
<S> <C> <C> <C> <C>
Tax at statutory rate $27,842 $25,103 $63,552 $137,606
Change Resulting From
Bad debt reduction (recovery) based
on percentage of income - net of tax 0 0 0 (23,258)
Other (2,542) 2,724 (5,177) 3,387
------- ------- ------- --------
$25,300 $27,827 $58,375 $117,735
======= ======= ======= ========
</TABLE>
Temporary differences between the financial statement carrying amounts
and tax basis of assets and liabilities that gave rise to significant
portions of the deferred tax liability relates to the following:
<TABLE>
<CAPTION>
(Unaudited) September 30,
December 31, 1996 1996 1995
------------------ -----------------------
<S> <C> <C> <C>
Accrued interest on loans $ 36,200 $ 33,200 $ 31,300
Deferred compensation (7,000) (30,400) (32,100)
Deferred loan fees (21,000) (22,700) (26,800)
FHLB stock dividend 41,500 39,700 32,800
Bad debt deduction 69,300 69,300 67,800
Unrealized gain on
securities available-for-sale 114,249 100,300 55,400
SAIF special assessment 0 (39,200) 0
Other (5,000) 0 0
-------- -------- --------
$228,249 $150,200 $128,400
======== ======== ========
</TABLE>
The deferred tax expense results from timing differences in the
recognition of income and expense for tax and financial purposes. The
sources and tax effects of these temporary and timing differences are
as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
1996 1995 1996 1995
------------------ --------------------
<S> <C> <C> <C> <C>
Accrued interest on loans $ 3,000 $ 0 $ 1,900 $ 2,100
Deferred directors fees 23,400 2,700 1,700 (3,800)
Deferred loan fees recognized 1,700 (900) 4,100 (4,500)
FHLB stock dividend 1,800 1,800 6,900 0
Bad debt deduction 0 0 1,500 3,700
SAIF special assessment 39,200 0 (39,200) 0
Enterprise zone credits (5,000) 0 0 0
------- ------ -------- -------
$64,100 $3,600 $(23,100) $(2,500)
======= ====== ======== =======
</TABLE>
F-14
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -9 CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain actions by regulators that,
if undertaken, could have a direct material effect on the
Association's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Association must meet specific guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and
ratios as outlined below. Management believes, as of December 31, and
September 30, 1996, the Association meet all capital adequacy
requirements to which it is subject.
As of December 31, 1995, the most recent notification from Office of
Thrift Supervision categorized the Association as well capitalized
under the regulatory framework for prompt corrective action. To be
well capitalized the Association must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios. There are no
conditions or events since that notification that management believes
have changed the institution's category.
The Association's actual capital amounts and required for adequacy
purposes is as follows:
<TABLE>
<CAPTION>
Actual Required
Amount Ratio Amount Ratio
---------- ------- -------- -------
<S> <C> <C> <C> <C>
As of December 31,
1996 (unaudited)
Total Capital
(to Risk Weighted Assets) $2,724,166 35.31% $617,241 8.00%
Tier I Capital
(to Risk-Weighted Assets) 2,664,166 34.53 231,466 3.00
Tier I Capital
(to Average Assets) 2,664,166 13.10 305,115 1.50
As of September 30, 1996
Total Capital
(to Risk-Weighted Assets) 2,667,578 35.31 604,333 8.00
Tier I Capital
(to Risk-Weighted Assets) 2,607,578 34.52 226,625 3.00
Tier I Capital
(to Average Assets) 2,607,578 12.95 301,980 1.50
</TABLE>
F-15
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -9 CAPITAL REQUIREMENTS (Continued)
The Association's management believes that, under the current
regulations, the Association will continue to meet its minimum capital
requirements in the coming year. However, events beyond the control of
the Association, such as increased interest rates or a downturn in the
economy in the Association's operating area, could adversely affect
future minimum capital requirements.
NOTE -10 OTHER NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
1996 1995 1996 1995
------------------- -------------------
<S> <C> <C> <C> <C>
Advertising $ 1,989 $ 3,133 $12,215 $11,603
Communication, postage
and office supplies 6,718 4,820 19,960 22,871
Insurance 1,455 1,478 5,874 7,423
Professional services 859 288 14,374 14,006
Travel and entertainment 2,463 1,419 25,216 11,946
Dues and subscriptions 1,721 2,035 4,930 2,607
Contributions 10,000 0 0 30
Other 4,172 2,457 4,453 4,376
------- ------- ------- -------
$29,377 $15,630 $87,022 $74,862
======= ======= ======= =======
</TABLE>
NOTE -11 SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Association's business activity is with customers located
within the state of Colorado, principally southeastern Colorado. The
Association does not have a high concentration of deposits or loans
with one individual or entity.
NOTE -12 RELATED PARTY TRANSACTIONS
Loans to related parties include loans made to directors, executive
officers, and their associates as defined. The aggregate dollar amount
of loans was $163,969, $167,298 and $83,610 at December 31, 1996
(unaudited) and September 30, 1996 and 1995, respectively. New loans
of $102,200 were made and repayments totaled $18,512 for the year
ended September 30, 1996. For the three months ended December 31, 1996
(unaudited) no new loans were made and repayments totaled $3,329.
Purchases from directors for the three months ended December 31, 1996
and 1995 amounted to $ 0 and for the years ended September 30, 1996
and 1995 amounted to $30,343 and $9,547, respectively.
As of December 31, 1996 (unaudited) and September 30, 1996
approximately $865,000 and $850,000 of directors and employees
accounts were included in deposits.
F-16
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -13 FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Association's financial instruments
are as follows:
<TABLE>
<CAPTION>
(Unaudited)
December 31, 1996 September 30, 1996
CARRYING FAIR CARRYING FAIR
Financial Assets: AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,078,362 $ 2,078,000 $ 2,221,416 $ 2,221,416
Certificates of deposit........ 1,797,000 1,797,000 1,897,000 1,897,000
Securities available-for-sale.. 627,300 627,300 584,700 584,700
Securities held-to-maturity.... 3,095,415 3,176,000 3,116,767 3,149,299
Loans receivable - net......... 12,596,525 12,992,000 12,286,909 12,591,000
Financial liabilities:
Deposits....................... 17,335,263 17,341,000 17,144,638 17,115,000
</TABLE>
NOTE-14 IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for ESOP. The Accounting Standards Division of the American
Institute of Certified Public Accountants approved Statement of
Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," which is effective for fiscal years beginning after
December 15, 1993. SOP 93-6 changed, among other things, the measure of
compensation recorded by employers from the cost of ESOP shares to the
fair value of ESOP shares. To the extent that the fair value of the
Common Stock held by the ESOP that are committed to be released
directly to compensate employees, differs from the cost of such shares,
compensation expenses and a related charge or credit to additional
paid-in capital will be reported in the Association's financial
statements. The adoption of the ESOP by the Association and the
application of SOP 93-6 is likely to result in fluctuations in
compensation expense as a result of changes in the fair value of the
common stock. However, any such compensation expense fluctuations will
result in an offsetting adjustment to paid-in capital, and therefore,
total capital will not be affected.
Accounting by Creditors for Impairment of a Loan and Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures. The Association adopted on October 1, 1995 Statements of
Financial Accounting Standards Nos. 118 and 114. SFAS No. 114 requires
that certain impaired loans be measured based on the present value of
expected future cash flows discounted at each loan's original effective
interest rate. As a practical expedient, impairment may be measured
based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance. The Association
had previously measured the allowance for loan losses using methods
similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional provision to the allowance for loan
losses was required as of October 1. 1995. Based on the Association's
loan portfolio composition, which primarily consists of one-to-four
family residential mortgages, which are exempt from SFAS No. 114 when
evaluated collectively for impairment as is done by the Association,
the Association had no loans designated as impaired under the
provisions of SFAS No. 114 at October 1, 1995.
F-17
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE-14 IMPACT OF NEW ACCOUNTING STANDARDS(Continued)
Disclosure of Derivative Financial Instruments. In October, 1994, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 119
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." This statement addresses the disclosure of
derivative financial instruments including the face amount, nature and
terms. For derivatives held for trading, disclosure of average and
period end fair values and disaggregated gains and losses is required.
For derivatives held for purposes other than trading, disclosure of
objectives, strategies, policies on reporting and income recognition
method is required. This statement is effective for financial
statements for fiscal years ending after December 15, 1995. Currently
the Association does not own any derivative financial instruments and
therefore SFAS No. 119 should not have any impact on the financial
statements.
Impairment of Long-Lived Assets. In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." This statement establishes accounting standards for the
impairment of long-lived assets and certain identifiable intangibles,
and goodwill related to those assets to be held and used and for long-
lived assets and certain identifiable intangibles to be disposed of.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows
expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the
asset, an impairment loss is recognized. Otherwise, an impairment loss
is not recognized. Measurement of an impairment loss for long-lived
assets and identifiable intangibles that an entity expects to hold and
use should be based on the fair value of the assets. This statement is
effective for financial statements for fiscal years beginning after
December 15, 1995. The impact on the financial statements for
implementation of the statement is not expected to be material.
Mortgage Servings Rights. In May 1995, the Financial Accounting
Standards Board issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." This Statement amends SFAS No. 65, Accounting for Certain
Mortgage Banking Activities" to require that a mortgage banking
enterprise recognize as separate assets, rights to service mortgage
loans for others, however those servicing rights are acquired. The
total cost of the mortgage loans to be sold should be allocated between
the mortgage servicing rights and the loans based on their relative
fair values if it is practicable to estimate those fair values. If not,
the entire cost should be allocated to the mortgage loans. This
statement applies prospectively in fiscal years beginning after
December 15, 1995. The impact on the financial statements for
implementation of the Statement is not expected to be material based on
the Association's current operating activities.
Accounting for Stock-Based Compensation. In October, 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation to Employees." This Statement encourages
entities to adopt the fair value based method of accounting for
employee stock options or other stock compensation plans. However, it
allows an entity to measure compensation cost for those plans using the
intrinsic value
F-18
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE-14 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the fair value based
method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess of the quoted market price of the stock
at the grant date over the amount an employee must pay to acquire the
stock. Most fixed stock option plans--the most common type of stock
compensation plan--have no intrinsic value at grant date and under
Opinion No. 25 no compensation cost is recognized for them.
Compensation cost is recognized for other types of stock based
compensation plans under Opinion No. 25, including plans with variable,
usually performance-based features. This Statement requires that an
employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the method
used to account for them. This Statement is effective for transactions
entered into in fiscal years that begin after December 15, 1995. The
Association will adopt the Statement on the date the Association
converts from a federal mutual to a federal stock savings and loan
association. The Association has not determined which method it will
use to account for the options at this time and has not estimated the
effect of adoption on the Association's financial condition or results
of operations.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June, 1996, the Financial Accounting
Standards Board issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities",
which superseded FASB NO. 122. FASB No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of
financial components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996,
and is to be applied prospectively. Earlier or retroactive application
is not permitted. The Association will adopt the provisions of the
Standard on January 1, 1997. Based on the Association's current
operating activities, management does not believe that the adoption of
this statement will have a material impact on the Association's
financial condition or results of operations.
NOTE -15 PLAN OF CONVERSION
On January 14, 1997, the Board of Directors of Rocky Ford Federal
Savings and Loan Association adopted a Plan of Conversion whereby the
Association would convert from a mutual savings institution to a stock
savings and loan pursuant to the Rules and Regulations of the OTS. The
Plan includes, as part of the conversion, the concurrent formation of a
holding company. The Plan provides that non-transferable subscription
rights to purchase Holding Company Conversion Stock will be offered
first to Eligible Account Holders of record as of the Eligibility
Record Date, then to the Association's Tax-Qualified Employee Plan,
then to Supplemental Eligible Account Holders of record as of the
Supplemental Eligibility Record Date, then to other members, and then
to directors, officers and employees. Concurrently with, at any time
during, or promptly after the Subscription Offering, and on a lowest
priority basis, and opportunity to subscribe may also be offered to the
general public in a Direct Community Offering. The price of the Holding
F-19
<PAGE>
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -15 PLAN OF CONVERSION (Continued)
Company Conversion Stock will be based upon an independent appraisal of
the Association and will reflect its estimated pro forma market value,
as converted. It is the desire of the Board of Directors of the
Association to attract new capital to the Association in order to
increase its capital, support future savings growth and increase the
amount of funds available for residential and other mortgage lending.
The Converted Association is also expected to benefit from its
management and other personnel having a stock ownership in its
business, since stock ownership is viewed as an effective performance
incentive and a means of attracting, retaining and compensating
management and other personnel. No change will be made in the Board of
Directors or management as a result of the Conversion. Upon consumption
of the conversion, the Association will issue all of its outstanding
capital stock to the holding company in exchange for at least 50% of
the net proceeds from the sale of the common stock.
The costs of issuing the common stock will be deferred and deducted
from the sale proceeds. If the offering is unsuccessful for any reason,
the deferred costs will be charged to operations. At December 31, 1996,
the Association had incurred $34,590 of such costs.
For the purpose of granting eligible members of the Association a
priority in the event of future liquidation, the Association will, at
the time of conversion, establish a liquidation account equal to its
regulatory capital as of the date of the latest balance sheet used in
the final conversion offering circular. In the event (and only in such
event) of future liquidation of the converted Association, an eligible
savings account holder who continues to maintain a savings account
shall be entitled to receive a distribution form the liquidation
account, in the proportionate amount of the then-current adjusted
balance of the savings deposits then held, before any distributions may
be made with respect to capital stock.
Present regulations provide that the Association may not declare or pay
a cash dividend on or repurchased any of its capital stock if the
result thereof would be to reduce the regulatory capital of the
Association below the amount required for the liquidation account or
the regulatory capital requirement. Further, any dividend declared or
paid on or repurchase of, the Association's capital stock shall be in
compliance with the rules and regulations of the Office of Thrift
Supervision, or other applicable regulations.
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 information shall not be relied upon as having been authorized by the
Company, the Association or Trident Securities, Inc. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful.
Neither the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company or the Association since any of the dates as of which
information is furnished herein or since the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY..................................................
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA..........
RISK FACTORS........................................................
ROCKY FORD FINANCIAL, INC...........................................
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION.....................
USE OF PROCEEDS.....................................................
DIVIDEND POLICY.....................................................
MARKET FOR THE COMMON STOCK.........................................
CAPITALIZATION......................................................
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE..............
PRO FORMA DATA......................................................
PROPOSED MANAGEMENT PURCHASES.......................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................
BUSINESS OF THE COMPANY.............................................
BUSINESS OF THE ASSOCIATION.........................................
TAXATION............................................................
MANAGEMENT OF THE COMPANY...........................................
MANAGEMENT OF THE ASSOCIATION.......................................
THE CONVERSION......................................................
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE ASSOCIATION...............................................
CERTAIN ANTI-TAKEOVER PROVISIONS....................................
IN THE CERTIFICATE OF INCORPORATION AND BYLAWS......................
DESCRIPTION OF CAPITAL STOCK........................................
REGISTRATION REQUIREMENTS...........................................
LEGAL OPINIONS......................................................
TAX OPINION.........................................................
EXPERTS.............................................................
ADDITIONAL INFORMATION..............................................
INDEX TO FINANCIAL STATEMENTS.......................................
</TABLE>
Until _________, 1997 (90 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
ROCKY FORD FINANCIAL, INC.
(HOLDING COMPANY FOR
ROCKY FORD FEDERAL
SAVINGS AND LOAN ASSOCIATION)
UP TO _______ SHARES
COMMON STOCK
_____________________
PROSPECTUS
_____________________
TRIDENT SECURITIES, INC.
____________, 1997
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Directors, officers and employees of the Company and/or the Association may
be entitled to benefit from the indemnification provisions contained in the
Delaware General Corporation Law (the "DGCL"), the Company's Certificate of
Incorporation and federal regulations applicable to the Association. The
general effect of these provisions is summarized below:
DELAWARE GENERAL CORPORATION LAW
Section 145 of the DGCL permits a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding of any type, (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, may not, of itself, create a presumption that these standards
have not been met.
A Delaware corporation may also indemnify any person who was or is a party
or is threatened to be made a party to any proceeding by or in the right of the
corporation by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation. However, no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought
determines upon application that such person is fairly and reasonably entitled
to be indemnified.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any proceeding
described above indemnification against expenses (including attorneys' fees)
actually and reasonably incurred by him is mandatory.
Any determination that indemnification of the director, officer, employee
or agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in subsections (a) and (b) must be made by a
majority of the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or if such a
quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or by
the stockholders.
Expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
or proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation.
The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section is not exclusive.
II-1
<PAGE>
In addition, a corporation shall have power to purchase and maintain
insurance against any liability of individuals whom the corporation is required
to indemnify.
ARTICLE XVII OF THE CERTIFICATE OF INCORPORATION
A. Persons. The Corporation shall indemnify, to the extent provided in
-------
paragraphs B, D or F:
(1) any person who is or was a director, officer, employee, or agent
of the Corporation; and
(2) any person who 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 him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees but excluding amounts paid in
settlement) actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
----------------------------
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject
of the suit or action, and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XV) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has
been adjudged liable to the Corporation unless (and only to the extent
that) the court in which the suit was brought shall determine, upon
application, that despite the adjudication but in view of all the
circumstances, he is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
-----------------------------
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph E, for
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
-------------------------------
person named in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject
of the nonderivative suit and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the Corporation, including, but
not limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XV) not approved by the board of directors and, with respect to any
criminal action or proceeding, he had no reasonable cause to believe his
conduct was unlawful. The termination of a nonderivative suit
II-2
<PAGE>
by judgment, order, settlement, conviction, or upon a plea of nolo
----
contendere or its equivalent shall not, in itself, create a presumption
----------
that the person failed to satisfy the standard of this subparagraph E(2).
F. Determination That Standard Has Been Met. A determination that the
----------------------------------------
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in subparagraph C(2) (second sentence), the determination may
be made by:
(1) the board of directors by a majority vote of a quorum consisting
of directors of the Corporation who were not parties to the action, suit or
proceeding; or
(2) independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
(3) the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
---------
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation shall pay in advance any expenses
---------------
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if:
(1) the board of directors authorizes the specific payment; and
(2) the person receiving the payment undertakes in writing to repay
the same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A through G.
I. Nonexclusive. The indemnification and advance payment of expenses
------------
provided by paragraphs A through H shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. Continuation. The indemnification provided by this Article XVII shall
------------
be deemed to be a contract between the Corporation and the persons entitled to
indemnification thereunder, and any repeal or modification of this Article XVII
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts. The indemnification and advance payment provided by paragraphs A
through H shall continue as to a person who has ceased to hold a position named
in paragraph A and shall inure to his heirs, executors and administrators.
K. Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who holds or who has held any position named in paragraph
A, against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the Corporation would have power to indemnify
him against such liability under paragraphs A through H.
L. Intention and Savings Clause. It is the intention of this Article
----------------------------
XVII to provide for indemnification to the fullest extent permitted by the
General Corporation Law of the State of Delaware, and this Article XVII shall be
interpreted accordingly. If this Article XVII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVII that shall
not have been invalidated and to the full extent permitted by applicable law.
If the General Corporation Law of the State of Delaware is amended, or other
Delaware law is enacted, to permit further or additional indemnification of the
persons defined in this Article XVII A, then the
II-3
<PAGE>
indemnification of such persons shall be to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as so amended, or such other
Delaware law.
Federal Regulations Providing for Indemnification of Directors and Officers of
- ------------------------------------------------------------------------------
Rocky Ford Federal Savings and Loan Association
- -----------------------------------------------
Federal regulations require that Rocky Ford Federal Savings and Loan
Association (the "Association") indemnify any person against whom an action is
brought by reason of that person's role as a director or officer of the
Association for (i) any judgments resulting from the action; (ii) reasonable
costs and expenses (including attorney's fees) incurred in connection with the
defense or settlement of such action; and (iii) reasonable costs and expenses
(including attorney's fees) incurred in connection with enforcing the
individual's indemnification rights against the Association, assuming a final
judgment is obtained in his favor.
The mandatory indemnification provided for by federal regulations is
limited to (i) actions where a final judgment on the merits is in favor of the
officer or director and (ii) in the case of a settlement, final judgment against
the director or officer or final judgment not on the merits, except as to where
the director or officer is found negligent or to have committed misconduct in
the performance of his or her duties, where a majority of the Board of Directors
of the Association determines that the director or officer was acting in good
faith within what he was reasonably entitled to believe was the scope of his or
her employment or authority for a purpose that was in the best interests of the
Association or its members or stockholders.
In addition, the Association has a directors' and officers' liability
policy providing for insurance against certain liabilities incurred by directors
and officers of the Association while serving in their capacities as such.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION *
<TABLE>
<S> <C>
Underwriting Fees and Expenses..................... $ 92,500
Legal Fees and Expenses............................ 95,000
Printing, Postage and Mailing...................... 40,000
Accounting Fees and Expenses....................... 45,000
Appraisal and Business Plan Fees and Expenses...... 30,000
Blue Sky Filing Fees and Expenses
(including legal counsel)...................... 15,000
Federal Filing Fees (OTS and SEC).................. 12,000
Conversion Agent Fees.............................. 7,000
Stock Transfer Agent fees and certificates......... 5,000
Other Expenses..................................... 8,500
--------
Total........................................... $350,000
========
</TABLE>
_________
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 27. EXHIBITS:
The exhibits schedules filed as a part of this registration statement
are as follows:
<TABLE>
<S> <C> <C>
* 1.1 Engagement Letter with Trident Securities, Inc.
1.2 Form of Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
* 3.1 Certificate of Incorporation of Rocky Ford Financial, Inc.
* 3.2 Bylaws of Rocky Ford Financial, Inc.
* 4 Form of Common Stock Certificate of Rocky Ford Financial, Inc.
* 5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality of
securities being registered
8.1 Federal Tax Opinion of Housley Kantarian & Bronstein, P.C.
8.2 State Tax Opinion
* 8.3 Opinion of Ferguson & Company as to the value of subscription
rights for tax purposes
* 10.1 Proposed Employment Agreement between Rocky Ford Federal Savings
and Loan Association and Keith E. Waggoner
* 10.2 Proposed Employment Agreement between Rocky Ford Financial, Inc.
and Keith E. Waggoner
* 10.3 Proposed Rocky Ford Financial, Inc. 1997 Stock Option and
Incentive Plan
* 10.4 Proposed Rocky Ford Financial, Inc. Management Recognition Plan
* 10.5 Rocky Ford Federal Savings and Loan Association Retirement Plan
for Directors and Senior Officer
* 10.6 Proposed Rocky Ford Federal Savings and Loan Association Incentive
Compensation Plan
23.1 Consent of Grimsley, White & Company
* 23.2 Consent of Housley Kantarian & Bronstein, P.C. (in opinion filed as
Exhibit 5)
* 23.3 Consent of Ferguson & Company
* 24 Power of Attorney
27 Financial Data Schedule
* 99.1 Proxy statement and form of proxy for solicitation of members of
Rocky Ford Federal Savings and Loan Association
99.2 Proposed Stock Order Form and Form of Certification
99.3 Miscellaneous Marketing Materials
* 99.4 Appraisal Report
</TABLE>
_______________
* Previously filed.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Because the small business issuer is registering securities under Rule 415
of the Act, the small business issuer will:
(1) 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
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 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 Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to 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.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amended
registration statement to be signed on its behalf by the undersigned, in the
City of Rocky Ford, State of Colorado, on March 14, 1997.
ROCKY FORD FINANCIAL, INC.
By: /s/ Keith E. Waggoner
----------------------------------
Keith E. Waggoner
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Keith E. Waggoner President and Chief March 14, 1997
- ------------------------
Keith E. Waggoner Executive Officer
(Principal Executive, Financial
and Accounting Officer)
* /s/ Donald F. Gause Chairman of the Board
- ------------------------
Donald F. Gause of Directors
* /s/ Norman Bailey Director
- ------------------------
Norman Bailey
* /s/ William E. Burrell Director
- ------------------------
William E. Burrell
* /s/ Francis E. Clute Director
- ------------------------
Francis E. Clute
* /s/ Brian H. Hancock Director
- ------------------------
Brian H. Hancock
* /s/ R. Dean Jones Director
- ------------------------
R. Dean Jones
* /s/ Wayne W. Whittaker Director
- ------------------------
Wayne W. Whittaker
*By: /s/ Keith E. Waggoner March 14, 1997
------------------------
Keith E. Waggoner
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT 1.2
ROCKY FORD FINANCIAL, INC.
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
272,000 TO 423,200 SHARES
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
$10.00 PER SHARE
SALES AGENCY AGREEMENT
----------------------
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Rocky Ford Financial, Inc., a Delaware-chartered corporation (the
"Company"), and Rocky Ford Federal Savings and Loan Association, a federally
chartered and insured mutual savings association (the "Association"), hereby
confirm, as of __________ __, 1997, their respective agreements with Trident
Securities, Inc. ("Trident"), a broker-dealer registered with the Securities and
Exchange Commission ("Commission") and a member of the National Association of
Securities Dealers, Inc. ("NASD"), as follows:
1. Introductory. The Association intends to convert from a federally
------------
chartered mutual savings association to a federally chartered stock savings
association as a wholly owned subsidiary of the Company (together with the
Offerings, as defined below, the issuance of shares of common stock of the
Association to the Company and the incorporation of the Company, the
"Conversion") pursuant to a plan of conversion adopted on January 14, 1997 (as
amended, the "Plan"). In accordance with the Plan, the Company is offering
shares of its common stock, par value $0.01 per share (the "Shares" and the
"Common Stock"), pursuant to nontransferable subscription rights in a
subscription offering (the "Subscription Offering") to certain depositors and
borrowers of the Association and to the Association's tax-qualified employee
benefit plans (i.e., the Association's Employee Stock Ownership Plan (the
"ESOP")). In the event of an oversubscription within any subscription priority
category, preference may be given within that category to natural persons and
trusts of natural persons who permanently reside in Otero County, Colorado (the
Association's "Local Community"), but only if such preference becomes permitted
by applicable law and is approved by the Association's Board of Directors in its
sole discretion. Concurrently with the Subscription Offering, shares of the
Common Stock not sold in the Subscription Offering are being offered to the
general public in a community offering, with preference being given to natural
persons and trusts of natural persons permanently residing in the Association's
Local Community (the "Community Offering") (the Subscription and Community
Offerings are sometimes referred to collectively as the "Offerings"), subject to
the right of the Company and the Association, in their absolute discretion, to
reject orders in the Community Offering in whole or in part. In the Offerings,
the Company is offering between 272,000 and 368,000 Shares, with the possibility
of offering up to 423,200 Shares without a resolicitation of subscribers, as
contemplated by Title 12 of the Code of Federal Regulations, Part 563b. No
person, individually or together with associates of and persons acting in
concert
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 2
with such person, may purchase in the aggregate more than the lesser of
5% or $150,000 of the Shares issued in the Conversion.
The Company and the Association have been advised by Trident that it will
utilize its best efforts in assisting the Company and the Association with the
sale of the Shares in the Offerings and, if deemed necessary by the Company in a
syndicated community offering. Prior to the execution of this Agreement, the
Company has delivered to Trident the Prospectus dated __________ __, 1997 (as
hereinafter defined) and all supplements thereto to be used in the Offerings.
Such Prospectus contains information with respect to the Company, the
Association and the Shares.
2. Representations and Warranties.
------------------------------
(a) The Company and the Association jointly and severally represent
and warrant to Trident that:
(i) The Company has filed with the Commission a registration
statement, including exhibits and an amendment or amendments thereto,
on Form SB-2 (No. 333-_____), including a Prospectus relating to the
Offerings, for the registration of the Shares under the Securities Act
of 1933, as amended (the "Act"); and such registration statement has
become effective under the Act and no stop order has been issued with
respect thereto and no proceedings therefor have been initiated or, to
the Company's best knowledge, threatened by the Commission. Except as
the context may otherwise require, such registration statement, as
amended or supplemented, on file with the Commission at the time the
registration statement became effective, including the Prospectus,
financial statements, schedules, exhibits and all other documents
filed as part thereof, as amended and supplemented, is herein called
the "Registration Statement," and the prospectus, as amended or
supplemented, on file with the Commission at the time the Registration
Statement became effective is herein called the "Prospectus," except
that if the prospectus filed by the Company with the Commission
pursuant to Rule 424(b) of the general rules and regulations of the
Commission under the Act (together with the enforceable published
policies and actions of the Commission thereunder, the "SEC
Regulations") differs from the form of prospectus on file at the time
the Registration Statement became effective, the term "Prospectus"
shall refer to the Rule 424(b) prospectus from and after the time it
is filed with or mailed for filing to the Commission and shall include
any amendments or supplements thereto from and after their dates of
effectiveness or use, respectively. If any Shares remain unsubscribed
following completion of the Subscription Offering and the Community
Offering, the Company (i) will promptly file with the Commission a
post-effective amendment to such Registration Statement relating to
the results of the Subscription and the Community Offerings, any
additional information with respect to the proposed plan of
distribution and any revised pricing information or (ii) if no such
post-
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 3
effective amendment is required, will file with, or mail for filing
to, the Commission a prospectus or prospectus supplement containing
information relating to the results of the Subscription and the
Community Offerings and pricing information pursuant to Rule 424(c) of
the Regulations, in either case in a form reasonably acceptable to the
Company and Trident.
(ii) The Association has filed an Application for Approval of
Conversion on Form AC, including exhibits (as amended or supplemented,
the "Form AC" and together with the Form H-(e)1-S referred to below,
the "Conversion Application") with the Office of Thrift Supervision
(the "Office") under the Home Owners' Loan Act, as amended (the
"HOLA") and the enforceable rules and regulations, including published
policies and actions, of the Office thereunder (the "OTS
Regulations"), which has been approved by the Office; and the
Prospectus and the proxy statement for the solicitation of proxies
from members for the special meeting to approve the Plan (the "Proxy
Statement") included as part of the Form AC have been approved for use
by the Office. No order has been issued by the Office preventing or
suspending the use of the Prospectus or the Proxy Statement; and no
action by or before the Office revoking such approvals is pending or,
to the Association's best knowledge, threatened. The Company has
filed with the Office the Company's application on Form H-(e)1-S
promulgated under the savings and loan holding company provisions of
the Home Owners' Loan Act and the regulations promulgated thereunder
("HOLA") and has received approval of its acquisition of the
Association from the Office.
(iii) At the date of the Prospectus and at all times subsequent
thereto through and including the Closing Date (i) the Registration
Statement and the Prospectus (as amended or supplemented, if amended
or supplemented) complied with the Act and the Regulations, (ii) the
Registration Statement (as amended or supplemented, if amended or
supplemented) did not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus (as amended or supplemented, if amended or supplemented)
did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading. Representations or warranties in this
subsection shall not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the
Company or the Association relating to Trident by or on behalf of
Trident expressly for use in the Registration Statement or Prospectus.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 4
(iv) The Company has been duly incorporated as a Delaware
corporation, and the Association has been duly organized as a mutual
savings association under the laws of the United States, and each of
them is validly existing and in good standing under the laws of the
jurisdiction of its organization with full power and authority to own
its property and conduct its business as described in the Registration
Statement and Prospectus; the Association is a member in good standing
of the Federal Home Loan Bank of Topeka; and the deposit accounts of
the Association are insured by the Savings Association Insurance Fund
("SAIF") administered by the Federal Deposit Insurance Corporation
("FDIC") up to the applicable legal limits. Each of the Company and
the Association is not required to be qualified to do business as a
foreign corporation in any jurisdiction where non-qualification would
have a material adverse effect on the Company and the Association,
taken as a whole. The Association does not own equity securities of
or an equity interest in any business enterprise except as described
in the Prospectus. Upon amendment of the Association's charter and
bylaws as provided in the rules and regulations of the Office and
completion of the sale by the Company of the Shares as contemplated by
the Prospectus, (i) the Association will be converted pursuant to the
Plan to a federally chartered capital stock savings association with
full power and authority to own its property and conduct its business
as described in the Prospectus, (ii) all of the authorized and
outstanding capital stock of the Association will be owned of record
and beneficially by the Company, and (iii) the Company will have no
direct subsidiaries other than the Association.
(v) The Association has good, marketable and insurable title to
all assets material to its business and to those assets described in
the Prospectus as owned by it, free and clear of all material liens,
charges, encumbrances or restrictions, except for liens for taxes not
yet due, except as described in the Prospectus and except as could not
in the aggregate have a material adverse effect upon the operations or
financial condition of the Association; and all of the leases and
subleases material to the operations or financial condition of the
Association, under which it holds properties, including those
described in the Prospectus, are in full force and effect as described
therein.
(vi) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary actions on the part of each of
the Company and the Association, and this Agreement is a valid and
binding obligation with valid execution and delivery of each of the
Company and the Association, enforceable in accordance with its terms
(except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws relating to or
affecting the enforcement of creditors' rights generally or the rights
of
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 5
creditors of savings and loan holding companies the accounts of whose
subsidiaries are insured by the FDIC or by general equity principles,
regardless of whether such enforceability is considered in a
proceeding in equity or at law, and except to the extent that the
provisions of Sections 8 and 9 hereof may be unenforceable as against
public policy or pursuant to Section 23A of the Federal Reserve Act,
12 U.S.C. Section 371c ("Section 23A")).
(vii) There is no litigation or governmental proceeding pending
or, to the best knowledge of the Company or the Association,
threatened against or involving the Company, the Association, or any
of their respective assets which individually or in the aggregate
would reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), results of operations and
business, including the assets and properties, of the Company and the
Association, taken as a whole.
(viii) The Company and the Association have received the
opinions of Housley Kantarian & Bronstein, P.C. with respect to
federal tax consequences of the Conversion, and of Grimsley, White &
Company with respect to the Colorado tax consequences of the
Conversion, to the effect that the Conversion will constitute a tax-
free reorganization under the Internal Revenue Code of 1986, as
amended, and will not be a taxable transaction for the Association or
the Company under the laws of Colorado, and the facts relied upon in
such opinions are accurate and complete.
(ix) Each of the Company and the Association has all such
corporate power, authority, authorizations, approvals and orders as
may be required to enter into this Agreement and to carry out the
provisions and conditions hereof, subject to the limitations set forth
herein and subject to the satisfaction of certain conditions imposed
by the Office in connection with its approvals of the Form AC and the
Application H-(e)1-S, and except as may be required under the
securities, or "blue sky," laws of various jurisdictions, and in the
case of the Company, as of the Closing Date, will have such approvals
and orders to issue and sell the Shares to be sold by the Company as
provided herein, and in the case of the Association, as of the Closing
Date, will have such approvals and orders to issue and sell the Shares
of its Common Stock to be sold to the Company as provided in the Plan,
subject to the issuance of amended charter in the form required for
federally chartered stock savings associations (the "Stock Charter"),
the form of which Stock Charter has been approved by the Office.
(x) Neither the Company nor the Association is in violation of
any rule or regulation of the Office or the FDIC that could reasonably
be expected to result in any enforcement action against the Company,
the Association, or their
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 6
officers or directors that might have a material adverse effect on the
condition (financial or otherwise), operations, businesses, assets or
properties of the Company and the Association, taken as a whole.
(xi) The consolidated financial statements and any related notes
or schedules which are included in the Registration Statement and the
Prospectus fairly present the consolidated financial condition,
income, retained earnings and cash flows of the Association at the
respective dates thereof and for the respective periods covered
thereby and comply as to form with the applicable accounting
requirements of the Regulations and the applicable accounting
regulations of the Office. Such financial statements have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set
forth therein, and such financial statements are consistent with
financial statements and other reports filed by the Association with
supervisory and regulatory authorities except as such generally
accepted accounting principles may otherwise require. The tables in
the Prospectus accurately present the information purported to be
shown thereby at the respective dates thereof and for the respective
periods therein.
(xii) There has been no material change in the condition
(financial or otherwise), results of operations or business, including
assets and properties, of the Company and the Association, taken as a
whole, since the latest date as of which such condition is set forth
in the Prospectus, except as set forth therein; and the
capitalization, assets, properties and business of each of the Company
and the Association conform to the descriptions thereof contained in
the Prospectus. None of the Company nor the Association has any
material liabilities of any kind, contingent or otherwise, except as
set forth in the Prospectus.
(xiii) There has been no breach or default (or the occurrence of
any event which, with notice or lapse of time or both, would
constitute a default) under, or creation or imposition of any lien,
charge or other encumbrance upon any of the properties or assets of
the Company and the Association pursuant to any of the terms,
provisions or conditions of, any agreement, contract, indenture, bond,
debenture, note, instrument or obligation to which the Company or the
Association is a party or by which any of them or any of their
respective assets or properties may be bound or is subject, or
violation of any governmental license or permit or any enforceable
published law, administrative regulation or order or court order,
writ, injunction or decree, which breach, default, encumbrance or
violation would have a material adverse effect on the condition
(financial or otherwise), operations, business, assets or properties
of the Company and the Association taken as a whole; all agreements
which are material to the condition (financial or otherwise), results
of operations or business of the Company and the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 7
Association taken as a whole are in full force and effect, and no
party to any such agreement has instituted or, to the best knowledge
of the Company and the Association, threatened any action or
proceeding wherein the Company or the Association would be alleged to
be in default thereunder.
(xiv) None of the Company or the Association is in violation of
its respective charter or bylaws. The execution and delivery hereof
and the consummation of the transactions contemplated hereby by the
Company and the Association do not conflict with or result in a breach
of the charter or bylaws of the Company or the Association (in either
mutual or stock form) or constitute a material breach of or default
(or an event which, with notice or lapse of time or both, would
constitute a default) under, give rise to any right of termination,
cancellation or acceleration contained in, or result in the creation
or imposition of any lien, charge or other encumbrance upon any of the
properties or assets of the Company or the Association pursuant to any
of the terms, provisions or conditions of, any material agreement,
contract, indenture, bond, debenture, note, instrument or obligation
to which the Company or the Association is a party or violate any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, writ, injunction or
decree (subject to the satisfaction of certain conditions imposed by
the Office in connection with its approval of the Conversion
Application), which breach, default, encumbrance or violation would
have a material adverse effect on the condition (financial or
otherwise), operations or business of the Company and the Association
taken as a whole.
(xv) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and prior to the
Closing Date (as hereinafter defined), except as otherwise may be
indicated or contemplated therein, none of the Company or the
Association has issued any securities which will remain issued at the
Closing Date or incurred any liability or obligation, direct or
contingent, or borrowed money, except borrowings in the ordinary
course of business, or entered into any other transaction not in the
ordinary course of business and consistent with prior practices, which
is material in light of the business of the Company and the
Association, taken as a whole.
(xvi) Upon consummation of the Conversion, the authorized,
issued and outstanding equity capital of the Company shall be within
the range as set forth in the Prospectus under the caption
"Capitalization," and no Common Stock of the Company shall be
outstanding immediately prior to the Closing Date; the issuance and
the sale of the Shares of the Company have been duly authorized by all
necessary action of the Company and approved by the Office and, when
issued in accordance with the terms of the Plan and paid for, shall be
validly issued,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 8
fully paid and nonassessable and shall conform to the description
thereof contained in the Prospectus; the issuance of the Shares is not
subject to preemptive rights, except as set forth in the Prospectus;
and good title to the Shares will be transferred by the Company upon
issuance thereof against payment therefor, free and clear of all
claims, encumbrances, security interests and liens against the Company
whatsoever. The certificates representing the Shares will conform in
all material respects with the requirements of applicable laws and
regulations. The issuance and sale of the capital stock of the
Association to the Company has been duly authorized by all necessary
action of the Association and the Company and appropriate regulatory
authorities (subject to the satisfaction of various conditions imposed
by the Office in connection with its approval of the Conversion
Application), and such capital stock, when issued in accordance with
the terms of the Plan, will be fully paid and nonassessable and will
conform in all material respects to the description thereof contained
in the Prospectus.
(xvii) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Shares, except for
the declaration of effectiveness of any required post-effective
amendment by the Commission and approval thereof by the Office and
approval of the Company's application on Form H-(e)1-S by the Office,
the issuance of the Stock Charter by the Office and as may be required
under the securities laws of various jurisdictions.
(xviii) All contracts and other documents required to be filed
as exhibits to the Registration Statement or the Conversion
Application have been filed with the Commission and/or the Office, as
the case may be.
(xix) Grimsley, White & Company, which has audited the financial
statements of the Association at September 30, 1996 and 1995 and for
the years ended September 30, 1996 and 1995 included in the
Prospectus, is an independent public accountant within the meaning of
the Code of Professional Ethics of the American Institute of Certified
Public Accountants and Title 12 of the Code of Federal Regulations,
Section 571.2(c)(3).
(xx) For the past five years, the Company and the Association
have timely filed all required federal, state and local franchise tax
returns, and no deficiency has been asserted with respect to such
returns by any taxing authorities, and the Company and the Association
have paid all taxes that have become due and, to the best of their
knowledge, have made adequate reserves for similar future tax
liabilities, except where any failure to make such filings, payments
and reserves, or the assertion of such a deficiency, would not have a
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Trident Securities, Inc.
Sales Agency Agreement
Page 9
material adverse effect on the condition of the Company and the
Association taken as a whole.
(xxi) All of the loans represented as assets of the Association
on the most recent financial statements of the Association included in
the Prospectus meet or are exempt from all requirements of federal,
state or local law pertaining to lending, including without limitation
truth in lending (including the requirements of Regulation Z and 12
C.F.R. Part 226 and Section 563.99), real estate settlement
procedures, consumer credit protection, equal credit opportunity and
all disclosure laws applicable to such loans, except for violations
which, if asserted, would not have a material adverse effect on the
Company and the Association taken as a whole.
(xxii) The records of account holders, depositors, borrowers and
other members of the Association delivered to Trident by the
Association or its agent for use during the Conversion have been
prepared or reviewed by the Association and, to the best knowledge of
the Company and the Association, are reliable and accurate.
(xxiii) None of the Company, the Association, or the employees
of the Company or the Association has made any payment of funds of the
Company or the Association prohibited by law, and no funds of the
Company or the Association have been set aside to be used for any
payment prohibited by law.
(xxiv) To the best knowledge of the Company and the Association,
the Company and the Association are in compliance with all laws, rules
and regulations relating to the discharge, storage, handling and
disposal of hazardous or toxic substances, pollutants or contaminants
and neither the Company nor the Association believes that the Company
or the Association is subject to liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, or any similar law, except for violations which, if asserted,
would not have a material adverse effect on the Company and the
Association, taken as a whole. There are no actions, suits,
regulatory investigations or other proceedings pending or, to the best
knowledge of the Company or the Association, threatened against the
Company or the Association relating to the discharge, storage,
handling and disposal of hazardous or toxic substances, pollutants or
contaminants. To the best knowledge of the Company and the
Association, no disposal, release or discharge of hazardous or toxic
substances, pollutants or contaminants, including petroleum and gas
products, as any of such terms may be defined under federal, state or
local law, has been caused by the Company or the Association or, to
the best knowledge of the Company or the Association, has occurred on,
in or at any of the facilities or
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 10
properties of the Company or the Association, except such disposal,
release or discharge which would not have a material adverse effect on
the Company and the Association, taken as a whole.
(xxv) At the Closing Date, the Company and the Association will
have completed the conditions precedent to, and shall have conducted
the Conversion in all material respects in accordance with, the Plan,
the OTS Regulations and all other applicable laws, regulations,
published decisions and orders, including all terms, conditions,
requirements and provisions precedent to the Conversion imposed by the
Office.
(b) Trident represents and warrants to the Company and the
Association that:
(i) Trident is registered as a broker-dealer with the
Commission, and is in good standing with the Commission and the NASD.
(ii) Trident is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with
full corporate power and authority to provide the services to be
furnished to the Company and the Association hereunder.
(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary action on the part of Trident,
and this Agreement is a legal, valid and binding obligation of
Trident, enforceable in accordance with its terms (except as the
enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of
creditors of registered broker-dealers accounts of whose may be
protected by the Securities Investor Protection Corporation or by
general equity principles, regardless of whether such enforceability
is considered in a proceeding in equity or at law, and except to the
extent that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy or pursuant to Section 23A).
(iv) Each of Trident and, to Trident's knowledge, its employees,
agents and representatives who shall perform any of the services
required hereunder to be performed by Trident shall be duly authorized
and shall have all licenses, approvals and permits necessary to
perform such services, and Trident is a registered selling agent in
the jurisdictions listed in Exhibit A hereto and will remain
registered in such jurisdictions in which the Company is relying on
such registration for the sale of the Shares, until the Conversion is
consummated or terminated.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 11
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with
the corporate charter or bylaws of Trident or violate, conflict with
or constitute a breach of, or default (or an event which, with notice
or lapse of time, or both, would constitute a default) under, any
material agreement, indenture or other instrument by which Trident is
bound or under any governmental license or permit or any law,
administrative regulation, authorization, approval or order or court
decree, injunction or order.
(vi) Any funds received by Trident to purchase Common Stock will
be handled in accordance with Rule 15c2-4 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(vii) There is not now pending or, to Trident's knowledge,
threatened against Trident any action or proceeding before the
Commission, the NASD, any state securities commission or any state or
federal court concerning Trident's activities as a broker-dealer.
3. Employment of Trident; Sale and Delivery of the Shares. On the basis
------------------------------------------------------
of the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Association hereby employ
Trident as their agent to utilize its best efforts in assisting the Company with
the Company's sale of the Shares in the Subscription Offering and Community
Offering. The employment of Trident hereunder shall terminate (a) forty-five
(45) days after the Subscription and Community Offering closes, unless the
Company and the Association, with the approval of the Office, are permitted to
extend such period of time, or (b) upon consummation of the Conversion,
whichever date shall first occur.
In the event the Company is unable to sell a minimum of 272,000 Shares (or
such lesser amount as the Office may permit) within the period herein provided,
this Agreement shall terminate, and the Company and the Association shall refund
promptly to any persons who have subscribed for any of the Shares, the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the other party hereunder, except as set forth in Sections 6, 8(a) and 9 hereof.
Appropriate arrangements for placing the funds received from subscriptions for
Shares in special interest-bearing accounts with the Association until all
Shares are sold and paid for were made prior to the commencement of the
Subscription and Community Offering, with provision for prompt refund to the
purchasers as set forth above, or for delivery to the Company if all Shares are
sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued such Shares and to release for delivery
certificates to subscribers thereof for such Shares
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 12
on the Closing Date against payment to the Company by any means authorized
pursuant to the Prospectus, at the principal office of the Company at 801 Swink
Avenue, Rocky Ford, Colorado or at such other place as shall be agreed upon
between the parties hereto. The date upon which Trident is paid the compensation
due hereunder is herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a
subscriber to forward the offering price of the Common Stock ordered on or
before twelve noon on the next business day following receipt or execution of an
order form by Trident to the Association for deposit in a segregated account or
(b) to solicit indications of interest in which event (i) Trident will
subsequently contact any potential subscriber indicating interest to confirm the
interest and give instructions to execute and return an order form or to receive
authorization to execute the order form on the subscriber's behalf, (ii) Trident
will mail acknowledgements of receipt of orders to each subscriber confirming
interest on the business day following such confirmation, (iii) Trident will
debit accounts of such subscribers on the third business day ("debit date")
following receipt of the confirmation referred to in (i), and (iv) Trident will
forward completed order forms together with such funds to the Association on or
before twelve noon on the next business day following the debit date for deposit
in a segregated account. Trident acknowledges that if the procedure in (b) is
adopted, subscribers' funds are not required to be in their accounts until the
debit date.
In addition to the expenses specified in Section 6 hereof, Trident shall
receive the following compensation for its services hereunder:
(a) A commission equal to 2.35% of the aggregate dollar amount of
Common Stock sold to residents in the State of Colorado in the Subscription
and Community Offerings, and a commission of 1.50% of the aggregate dollar
amount of Common Stock sold to residents outside the State of Colorado in
the Subscription and Community Offerings. All such fees are to be payable
in next-day funds to Trident on the Closing Date. No commissions shall be
payable on shares purchased by officers, directors, employees or their
associates or employee plans. Further, all commissions shall be based on
the amount of stock sold; however, commissions shall be capped at the
midpoint of the final appraised value. In addition, in the event that the
offering is closed above the midpoint appraised value as stated on the
final Prospectus cover, the above described commissions schedule shall be
applied on a pro rata basis as if the offering had closed at the midpoint
of valuation range.
(b) For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed upon jointly
by Trident and the Association to reflect market requirements at the time
of the stock allocation in a Syndicated Community Offering.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 13
(c) Trident shall be reimbursed for allocable expenses, incurred by
it whether or not the Offerings are successfully completed; provided,
however, that reimbursable legal fees will not exceed $26,500 (excluding
out of pocket expenses), that other reimbursable expenses will not exceed
$11,000 and that neither the Company nor the Association shall pay or
reimburse Trident for any of the foregoing expenses accrued after Trident
shall have notified the Company or the Association of its election to
terminate this Agreement pursuant to Section 11 hereof or after such time
as the Company or the Association shall have given notice in accordance
with Section 12 hereof that Trident is in breach of this Agreement. Full
payment to defray Trident's reimbursable expenses shall be made in next-day
funds on the Closing Date or, if the Conversion is not completed and is
terminated for any reason, within ten (10) business days of receipt by the
Company of a written request from Trident for reimbursement of its
expenses. Trident acknowledges receipt of $11,000 advance payment from the
Association which shall be credited against the total reimbursement due
Trident hereunder.
(c) Notwithstanding the limitations on reimbursement of Trident for
allocable expenses provided in the immediately preceding paragraph (b), in
the event that a resolicitation or other event causes the Offerings to be
extended beyond their original expiration date, Trident shall be reimbursed
for its allocable expenses incurred during such extended period, provided
that the allowance for allocable expenses provided for in the immediately
preceding paragraph (b) above have been exhausted and subject to the
following. Such reimbursement shall be in amount equal to the product
obtained by dividing $11,000 (original out-of-pocket expenses) by the total
number of days of the unextended Subscription Offering (calculated from the
date of the Prospectus to the intended close of the Subscription Offering
as stated in the Prospectus) and multiplying such product by the number of
days of the extension (that number of days from the date of the
supplemental prospectus used in the extended Subscription Offering to the
closing of the extension of the Subscription Offering described in such
supplemental prospectus).
The Company shall pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Shares. The Company and the Association
shall also pay all expenses of the Conversion incurred by them or on their prior
approval including but not limited to their attorneys' fees, NASD filing fees,
and attorneys' fees relating to any required state securities laws research and
filings, telephone charges, air freight, rental equipment, supplies, transfer
agent charges, fees relating to auditing and accounting and costs of printing
all documents necessary in connection with the Conversion.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 14
4. Offering. Subject to the provisions of Section 7 hereof, Trident is
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assisting the Company on a best efforts basis in offering a minimum of 272,000
and a maximum of 368,000 Shares, with the possibility of offering up to 423,200
Shares (except as the Office may permit to be decreased or increased) in the
Subscription and Community Offerings. The Shares are to be offered to the
public at the price set forth on the cover page of the Prospectus and the first
page of this Agreement.
5. Further Agreements. The Company and the Association jointly and
------------------
severally covenant and agree that:
(a) The Company shall deliver to Trident, from time to time, such
number of copies of the Prospectus as Trident reasonably may request. The
Company authorizes Trident to use the Prospectus in any lawful manner in
connection with the offer and sale of the Shares.
(b) The Company will notify Trident immediately upon discovery, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement becomes effective or any supplement to the
Prospectus has been filed, (ii) of the issuance by the Commission of any
stop order relating to the Registration Statement or of the initiation or
the threat of any proceedings for that purpose, (iii) of the receipt of any
notice with respect to the suspension of the qualification of the Shares
for offering or sale in any jurisdiction, and (iv) of the receipt of any
comments from the staff of the Commission relating to the Registration
Statement. If the Commission enters a stop order relating to the
Registration Statement at any time, the Company will make every reasonable
effort to obtain the lifting of such order at the earliest possible moment.
(c) During the time when a prospectus is required to be delivered
under the Act, the Company will comply so far as it is able with all
requirements imposed upon it by the Act, as now in effect and hereafter
amended, and by the Regulations, as from time to time in force, so far as
necessary to permit the continuance of offers and sales of or dealings in
the Shares in accordance with the provisions hereof and the Prospectus. If
during the period when the Prospectus is required to be delivered in
connection with the offer and sale of the Shares any event relating to or
affecting the Company and the Association, taken as a whole, shall occur as
a result of which it is necessary, in the opinion of counsel for Trident,
with the concurrence of counsel to the Company, to amend or supplement the
Prospectus in order to make the Prospectus not false or misleading in light
of the circumstances existing at the time it is delivered to a purchaser of
the Shares, the Company forthwith shall prepare and furnish to Trident a
reasonable number of copies of an amendment or amendments or of a
supplement or supplements to the Prospectus (in form and substance
satisfactory to counsel for Trident) which shall amend or supplement the
Prospectus so that, as amended or supplemented, the Prospectus shall not
contain an untrue statement of a material fact or omit to state a material
fact
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 15
necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser of the Shares, not misleading. The Company will not file or use
any amendment or supplement to the Registration Statement or the Prospectus
of which Trident has not first been furnished a copy or to which Trident
shall reasonably object after having been furnished such copy. For the
purposes of this subsection the Company and the Association shall furnish
such information with respect to themselves as Trident from time to time
may reasonably request.
(d) The Company and the Association have taken or will take all
reasonably necessary action as may be required to qualify or register the
Shares for offer and sale by the Company under the securities or blue sky
laws of such jurisdictions as Trident and either the Company or its counsel
may agree upon; provided, however, that the Company shall not be obligated
to qualify as a foreign corporation to do business under the laws of any
such jurisdiction. In each jurisdiction where such qualification or
registration shall be effected, the Company, unless Trident agrees that
such action is not necessary or advisable in connection with the
distribution of the Shares, shall file and make such statements or reports
as are, or reasonably may be, required by the laws of such jurisdiction.
(e) Appropriate entries will be made in the financial records of the
Association sufficient to establish a liquidation account for the benefit
of eligible account holders as of December 31, 1995 and supplemental
eligible account holders as of March 31, 1997 in accordance with the
requirements of the Office.
(f) The Company will file a registration statement for the Common
Stock under Section 12(g) of the Exchange Act, prior to completion of the
stock offering pursuant to the Plan and shall request that such
registration statement be effective upon completion of the Conversion. The
Company shall maintain the effectiveness of such registration for a minimum
period of three years or for such shorter period as may be required by
applicable law.
(g) The Company will make generally available to its security holders
as soon as practicable, but not later than 45 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the regulations promulgated under the Act)
covering a twelve-month period beginning not later than the first day of
the Company's fiscal quarter next following the effective date (as defined
in said Rule 158) of the Registration Statement.
(h) For a period of three (3) years from the date of this Agreement
(unless the Common Stock shall have been deregistered under the Exchange
Act), the Company will furnish to Trident, as soon as publicly available
after the end of each fiscal year, a copy of its annual report to
shareholders for such year; and the Company will furnish to
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 16
Trident (i) as soon as publicly available, a copy of each report or
definitive proxy statement of the Company filed with the Commission under
the Exchange Act or mailed to shareholders, and (ii) from time to time,
such other public information concerning the Company as Trident may
reasonably request.
(i) The Company shall use the net proceeds from the sale of the Shares
consistently with the manner set forth in the Prospectus.
(j) The Company shall not deliver the Shares until each and every
condition set forth in Section 7 hereof has been satisfied, unless such
condition is waived by Trident.
(k) The Company shall advise Trident, if necessary, as to the
allocation of deposits, in the case of eligible account holders and
supplemental eligible account holders and votes, in the case of other
members, and of the Shares in the event of an oversubscription and shall
provide Trident final instructions as to the allocation of the Shares
("Allocation Instructions") in such event and such information shall be
accurate and reliable. Trident shall be entitled to rely on such
instructions and shall have no liability in respect of its reliance
thereon, including without limitation, no liability for or related to any
denial or grant of a subscription in whole or in part.
(l) The Company and the Association will take such actions and furnish
such information as are reasonably requested by Trident in order for
Trident to ensure compliance with the NASD's "Interpretation Relating to
Free-Riding and Withholding."
6. Payment of Expenses. Whether or not the Conversion is consummated,
-------------------
the Company and the Association shall pay or reimburse Trident for (a) all
filing fees paid or incurred by Trident in connection with all filings with the
NASD with respect to the Subscription and Community Offerings and, (b) in
addition, if the Company is unable to sell a minimum of 272,000 Shares or such
lesser amount as the Office may permit or the Conversion is otherwise
terminated, the Company and the Association shall reimburse Trident for
allocable expenses incurred by Trident relating to the offering of the Shares as
provided in Section 3 hereof; provided, however, that neither the Company nor
the Association shall pay or reimburse Trident for any of the foregoing expenses
accrued after Trident shall have notified the Company or the Association of its
election to terminate this Agreement pursuant to Section 11 hereof or after such
time as the Company or the Association shall have given notice in accordance
with Section 12 hereof that Trident is in breach of this Agreement.
7. Conditions of Trident's Obligations. Except as may be waived by
-----------------------------------
Trident, the obligations of Trident as provided herein shall be subject to the
accuracy of the representations and warranties contained in Section 2 hereof as
of the date hereof and as of the Closing Date,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 17
to the performance by the Company and the Association of their obligations
hereunder and to the following conditions:
(a) At the Closing Date, Trident shall receive the favorable opinions
of Housley Kantarian & Bronstein, P.S., special counsel for the Company and
the Association, or ________________________, counsel to the Association,
dated the Closing Date, addressed to Trident, in form and substance
reasonably satisfactory to counsel for Trident and to the effect that:
(i) the Company has been duly incorporated, and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, and the Association is validly existing
as a mutual savings association in good standing under the laws of the
United States, each with full power and authority to own its
properties and conduct its business as described in the Prospectus;
(ii) each of the Company and the Association has been qualified
to do business and, to such counsel's knowledge, is in good standing
as a foreign corporation in each jurisdiction where the ownership or
leasing of its properties or the conduct of its business requires such
qualification or, if not so qualified and in good standing, failure to
so qualify would not have any material adverse effect on the Company
and the Association, taken as a whole;
(iii) the Association is a member of the Federal Home Loan Bank
of Topeka, and the deposit accounts of the Association are insured by
the SAIF up to the applicable legal limits;
(iv) to the knowledge of such counsel, the activities of the
Association as such activities are described in the Prospectus are
permitted under federal, Delaware and Colorado law to subsidiaries of
a Delaware business corporation and the Association does not have any
subsidiaries;
(v) to the knowledge of such counsel, the Association has
obtained all licenses, permits and other governmental authorizations
currently required for the conduct of its business as such business is
described in the Prospectus, all such licenses, permits and other
governmental authorizations are in full force and effect and the
Association is in all material respects complying therewith, except
where the failure to hold such licenses, permits or governmental
authorizations or the failure to so comply would not have a material
adverse effect on the Company and the Association, taken as a whole;
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 18
(vi) the Plan complies with, and, to the knowledge of such
counsel, the Conversion of the Association from a federally chartered
mutual savings association to a federally chartered stock savings
association and the creation of the Company as a holding company for
the Association have been effected in all material respects in
accordance with, the HOLA and the OTS Regulations; to such counsel's
knowledge, all of the terms, conditions, requirements and provisions
with respect to the Plan and the Conversion imposed by the Office,
except with respect to the filing or submission of certain required
post-Conversion reports or other materials by the Company or the
Association, have been complied with by the Company and the
Association; and, to the knowledge of such counsel, no person has
sought to obtain regulatory or judicial review of the final action of
the Office in approving the Plan;
(vii) the Company and Association have authorized Common Stock
as set forth in the Registration Statement and the Prospectus, and the
description of such Common Stock in the Registration Statement and the
Prospectus is accurate in all material respects;
(viii) the issuance and sale of the Shares have been duly and
validly authorized by all necessary corporate action on the part of
the Company; the Shares, upon receipt of payment and issuance in
accordance with the terms of the Plan and this Agreement, will be
validly issued, fully paid, nonassessable and, except as disclosed in
the Prospectus, free of preemptive rights, and good title thereto
shall be transferred by the Company free and clear of all claims,
encumbrances, security interests and liens created by the Company;
(ix) the certificates for the Shares are in proper form and
comply in all material respects with applicable Delaware law;
(x) the issuance and sale of the capital stock of the
Association to the Company have been duly authorized by all necessary
corporate action of the Association and the Company and have received
the approval of the Office, and such capital stock, upon receipt of
payment and issuance in accordance with the terms of the Plan, will be
validly issued, fully paid and nonassessable and owned of record and,
to the knowledge of such counsel, beneficially by the Company;
(xi) subject to the satisfaction of the conditions to the
Office's approval of the Conversion Application, no further approval,
authorization, consent or other order of any public board or body is
required in connection with the execution and delivery of this
Agreement, the issuance of the Shares and the consummation of the
Conversion, except with respect to the issuance to the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 19
Association of the Stock Charter by the Office and as may be required
under the "blue sky" laws of various jurisdictions;
(xii) the execution and delivery of this Agreement and the
consummation of the Conversion have been duly and validly authorized
by all necessary corporate action on the part of each of the Company
and the Association; and this Agreement is a legal, valid and binding
obligation of each of the Company and the Association, enforceable in
accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization,
receivership, conservatorship or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of
creditors of depository institutions whose accounts are insured by the
FDIC or savings and loan holding companies the accounts of whose
subsidiaries are insured by the FDIC or by general equity principles,
regardless of whether such enforceability is considered in a
proceeding in equity or at law, and except to the extent that the
provisions of Sections 8 and 9 hereof may be unenforceable as against
public policy or pursuant to Section 23A, as to which no opinion need
be rendered);
(xiii) there are no material legal or governmental proceedings
pending or, to the knowledge of such counsel, threatened against or
involving the assets of the Company or the Association (provided that
for this purpose such counsel need not regard any litigation or
governmental procedure to be "threatened" unless the potential
litigant or government authority has manifested to the management of
the Company or the Association, or to such counsel, a present
intention to initiate such litigation or proceeding);
(xiv) the statements in the Prospectus and incorporated by
reference in the Proxy Statement under the captions "Business of the
Association--Lending Activities," "Regulation," "Taxation,"
"Dividends," "Certain Restrictions on Acquisition of the Company and
the Association" and "Description of Capital Stock," insofar as they
are, or refer to, statements of law or legal conclusions (excluding
financial data included therein, as to which an opinion need not be
expressed), have been prepared or reviewed by such counsel and are
correct in all material respects;
(xv) the Form AC has been approved by the Office, and the
Prospectus and the Proxy Statement have been authorized for use by the
Office; the Registration Statement and any post-effective amendment
thereto has been declared effective by the Commission; except as to
any necessary qualifications or registration under the securities laws
of the jurisdictions in which the Shares were offered, no further
approval of any governmental authority is required for the issuance
and sale of the Shares (subject to the satisfaction of various
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 20
conditions subsequent imposed by the Office in connection with its
approval of the Conversion Application), and no proceedings are
pending by or before the Commission or the Office seeking to revoke or
rescind the orders declaring the Registration Statement effective or
approving the Conversion Application or, to the knowledge of such
counsel, are contemplated or threatened (provided that for this
purpose such counsel need not regard any litigation or governmental
procedure to be "threatened" unless the potential litigant or
government authority has manifested to the management of the Company
or the Association, or to such counsel, a present intention to
initiate such litigation or proceeding);
(xvi) the execution and delivery of this Agreement and the
consummation of the Conversion by the Company and the Association do
not conflict with or result in a breach of the charter or bylaws of
the Company or the Association (in either mutual or stock form) or, to
the best knowledge of such counsel, constitute a material breach of or
default (or an event which, with notice or lapse of time or both,
would constitute a default) under, give rise to any right of
termination, cancellation or acceleration contained in, or result in
the creation or imposition of any lien, charge or other encumbrance
upon any of the properties or assets of the Company or the Association
pursuant to any of the terms, provisions or conditions of, any
material agreement, contract, indenture, bond, debenture, note,
instrument or obligation to which the Company or the Association is a
party or violate any governmental license or permit or any enforceable
published law, administrative regulation or order or court order,
writ, injunction or decree (subject to the satisfaction of certain
conditions imposed by the Office in connection with its approval of
the Conversion Application), which breach, default, encumbrance or
violation would have a material adverse effect on the condition
(financial or otherwise), operations, business, assets or properties
of the Company and the Association taken as a whole;
(xvii) to the knowledge of such counsel, there has been no
material breach of any provision of the Company's or the Association's
charter or bylaws or breach or default (or the occurrence of any event
which, with notice or lapse of time or both, would constitute a
default) under any agreement, contract, indenture, bond, debenture,
note, instrument or obligation to which the Company or the Association
is a party or by which any of them or any of their respective assets
or properties may be bound, or any governmental license or permit, or
a violation of any enforceable published law, administrative
regulation or order, or court order, writ, injunction or decree which
breach, default, encumbrance or violation would have a material
adverse effect on the condition (financial or otherwise), operations,
business, assets or properties of the Company and the Association
taken as a whole; and,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 21
(xviii) the Conversion Application, the Registration Statement,
the Prospectus and the Proxy Statement, in each case as amended,
comply as to form in all material respects with the requirements of
the Act, the HOLA, the SEC Regulations and the OTS Regulations, as the
case may be (except as to information with respect to Trident included
therein and financial statements, notes to financial statements,
financial tables and other financial and statistical data, including
the appraisal, included therein, as to which an opinion need not be
expressed); to such counsel's knowledge, all documents and exhibits
required to be filed with the Conversion Application and the
Registration Statement have been so filed and the descriptions in the
Conversion Application and the Registration Statement of such
documents and exhibits are accurate in all material respects.
In rendering such opinions, such counsel may rely as to matters of
fact on certificates of officers and directors of the Company and the
Association and certificates of public officials delivered pursuant hereto.
Such counsel may assume that any agreement is the valid and binding
obligation of any parties to such agreement other than the Company and the
Association. Such opinions may be governed by, and interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section
of Business Law (1991), and, as a consequence, references in such opinions
to such counsel's "knowledge" may be limited to "actual knowledge" as
defined in the Accord (or knowledge based on certificates). Such opinions
may be limited to present statutes, regulations and judicial
interpretations and to facts as they presently exist; in rendering such
opinions, such counsel need assume no obligation to revise or supplement
them should the present laws be changed by legislative or regulatory
action, judicial decision or otherwise; and such counsel need express no
view, opinion or belief with respect to whether any proposed or pending
legislation, if enacted, or any regulations or any policy statements issued
by any regulatory agency, whether or not promulgated pursuant to any such
legislation, would affect the validity of the execution and delivery by the
Company and the Association of this Agreement or the issuance of the
Shares.
(b) At the Closing Date, Trident shall receive the letters of Housley
Kantarian & Bronstein, P.C., special counsel for the Company and the
Association, dated the Closing Date, addressed to Trident, in form and
substance reasonably satisfactory to counsel for Trident and to the effect
that: (i) based on such counsel's participation in conferences with
representatives of the Company, the Association, its counsel, the
independent appraiser, the independent certified public accountants,
Trident and its counsel, review of documents and understanding of
applicable law (including the requirements of Form SB-2 and the character
of the Registration Statement contemplated thereby) and the experience such
counsel has gained in its practice under the Act, nothing has come to such
counsel's attention that would lead it to believe that the Registration
Statement, as amended (except as to information in respect of Trident
contained therein
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 22
and except as to the financial statements, notes to financial statements,
financial tables and other financial and statistical data contained
therein, as to which such counsel need express no comment), at the time it
became effective contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under
which they were made, not misleading, or that the Prospectus, as amended
(except as to information in respect of Trident contained therein and
except as to financial statements, notes to financial statements, financial
tables and other financial and statistical data contained therein as to
which such counsel need express no comment), at the time the Prospectus was
filed with the Commission under Rule 424(b) and at the Closing Date,
contained any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (in making this
statement such counsel may state that it has not undertaken to verify
independently the information in the Registration Statement or Prospectus
and, therefore, does not assume any responsibility for the accuracy or
completeness thereof), and (ii) based on such counsel's participation in
conferences with representatives of the Company and the Association
concerning the Association and the Company, and their counsel, Housley
Kantarian & Bronstein, P.C. ("HKB"), nothing has come to such counsel's
attention that would lead it to believe that Trident should not rely on the
legal opinion of ____________________________________________ delivered
under Section 7(a) hereof (in making this statement, HKB may state, if
true, that its members are not licensed to practice law in Colorado, it has
not undertaken to research legal matters or issues involved in
_______________________________'s opinion and it has not undertaken to
verify independently factual information relied upon in
____________________________________'s opinion and, therefore, it does not
render any opinion with respect to _____________________________________'s
opinion and it does not assume responsibility for the accuracy or
completeness of _______________________________'s opinion).
(c) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them to review or
pass upon the matters required by Trident, and for the purpose of
evidencing the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained, including but
not limited to, resolutions of the Board of Directors of the Company and
the Association regarding the authorization of this Agreement and the
transactions contemplated hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material change in the condition,
financial or otherwise, business or results of operations of the Company
and the Association, taken as a whole, since the latest date as of which
such condition is set forth in the Prospectus, except as referred to
therein; (ii) there shall have been no transaction entered into by the
Company and the Association after the latest date as of which the financial
condition of the Company or
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 23
the Association is set forth in the Prospectus other than transactions
referred to or contemplated therein, transactions in the ordinary course of
business, and transactions which are not material to the Company and the
Association, taken as a whole; (iii) none of the Company or the Association
shall have received from the Office or Commission any direction (oral or
written) to make any change in the method of conducting their respective
businesses which is material to the business of the Company and the
Association, taken as a whole, with which they have not complied; (iv) no
action, suit or proceeding, at law or in equity or before or by any federal
or state commission, board or other administrative agency, shall be pending
or threatened against the Company or the Association or affecting any of
their respective assets, wherein an unfavorable decision, ruling or finding
would have a material adverse effect on the business, operations, financial
condition or income of the Company and the Association, taken as a whole;
and (v) the Shares shall have been qualified or registered for offering and
sale by the Company under the securities or blue sky laws of such
jurisdictions as Trident and the Company shall have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive officer and the principal financial officer of each of
the Company and the Association, dated the Closing Date, to the effect
that: (i) they have examined the Prospectus and, at the time the Prospectus
became authorized by the Company for use, the Prospectus did not contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading with respect to
the Company or the Association; (ii) since the date the Prospectus became
authorized by the Company for use, no event has occurred which should have
been set forth in an amendment or supplement to the Prospectus which has
not been so set forth, including specifically, but without limitation, any
material change in the business, condition (financial or otherwise) or
results of operations of the Company or the Association and, the conditions
set forth in clauses (ii) through (iv) inclusive of subsection (d) of this
Section 7 have been satisfied; (iii) to the best knowledge of such
officers, no order has been issued by the Commission or the Office to
suspend the Subscription Offering or the Community Offering or the
effectiveness of the Prospectus, and no action for such purposes has been
instituted or threatened by the Commission or the Office; (iv) to the best
knowledge of such officers, no person has sought to obtain review of the
final actions of the Office and division approving the Plan; and (v) all of
the representations and warranties contained in Section 2 of this Agreement
are true and correct, with the same force and effect as though expressly
made on the Closing Date.
(f) At the Closing Date, Trident shall receive, among other documents,
(i) copies of the letters from the Office authorizing the use of the
Prospectus and the Proxy Statement, (ii) a copy of the order of the
Commission declaring the Registration Statement effective; (iii) copies of
the letters from the Office evidencing the corporate
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 24
existence of the Association; (iv) a copy of the letter from the
appropriate Delaware authority evidencing the incorporation (and, if
generally available from such authority, good standing) of the Company; (v)
a copy of the Company's corporate charter certified by the appropriate
Delaware governmental authority; and, (vi) if available, a copy of the
letter from the Office approving the Association's Stock Charter.
(g) As soon as available after the Closing Date, Trident shall receive
a copy of the Association's certified Federal Stock Charter executed by the
appropriate federal governmental authority.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from Grimsley, White & Company,
independent certified public accountants, addressed to Trident and the
Company, in substance and form satisfactory to counsel for Trident, with
respect to the financial statements and certain financial information
contained in the Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance satisfactory to counsel for Trident from Grimsley, White &
Company, independent certified public accountants, dated the Closing Date
and addressed to Trident and the Company, confirming the statements made by
them in the letter delivered by them pursuant to the preceding subsection
as of a specified date not more than five (5) days prior to the Closing
Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel.
Any certificates signed by an officer or director of the Company or the
Association prepared for Trident's reliance and delivered to Trident or to
counsel for Trident shall be deemed a representation and warranty by the Company
and the Association to Trident as to the statements made therein. If any
condition to Trident's obligations hereunder to be fulfilled prior to or at the
Closing Date is not so fulfilled, Trident may terminate this Agreement or, if
Trident so elects, may waive any such conditions which have not been fulfilled,
or may extend the time of their fulfillment. If Trident terminates this
Agreement as aforesaid, the Company and the Association shall reimburse Trident
for its expenses as provided in Section 3(b) hereof.
8. Indemnification.
---------------
(a) The Company and the Association jointly and severally agree to
indemnify and hold harmless Trident, its officers, directors and employees
and each person, if any, who controls Trident within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any and all
loss, liability, claim, damage and expense whatsoever and shall further
promptly reimburse such persons for any legal or other expenses
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 25
reasonably incurred by each or any of them in investigating, preparing to
defend or defending against any such action, proceeding or claim (whether
commenced or threatened) arising out of or based upon (A) any
misrepresentation by the Company or the Association in this Agreement or
any breach of warranty by the Company or the Association with respect to
this Agreement or arising out of or based upon any untrue or alleged untrue
statement of a material fact or the omission or alleged omission of a
material fact required to be stated or necessary to make not misleading any
statements contained in (i) the Registration Statement or the Prospectus or
(ii) any application (including the Form AC and the Form H-(e)1-S) or other
document or communication (in this Section 8 collectively called
"Application") prepared or executed by or on behalf of the Company or the
Association or based upon written information furnished by or on behalf of
the Company or the Association, whether or not filed in any jurisdiction,
to effect the Conversion or qualify the Shares under the securities laws
thereof or filed with the Office or Commission, unless such statement or
omission was made in reliance upon and in conformity with written
information furnished to the Company or the Association with respect to
Trident by or on behalf of Trident expressly for use in the Prospectus or
any amendment or supplement thereof or in any Application, as the case may
be, or (B) the participation by Trident in the Conversion. This indemnity
shall be in addition to any liability the Company and the Association may
have to Trident otherwise.
(b) The Company shall indemnify and hold Trident harmless for any
liability whatsoever arising out of (i) the Allocation Instructions or (ii)
any records of account holders, depositors, borrowers and other members of
the Association delivered to Trident by the Association or its agents for
use during the Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and the
Association, their officers, directors and employees and each person, if
any, who controls the Company and the Association within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, to the same
extent as the foregoing indemnity from the Company and the Association to
Trident, but only with respect to (A) statements or omissions, if any, made
in the Prospectus or any amendment or supplement thereof, in any
Application or to a purchaser of the Shares in reliance upon, and in
conformity with, written information furnished to the Company or the
Association with respect to Trident by or on behalf of Trident expressly
for use in the Prospectus or in any Application; (B) any misrepresentation
by Trident in Section 2(b) of this Agreement; or (C) any liability of the
Company or the Association which is found in a final judgment by a court of
competent jurisdiction (not subject to further appeal) to have principally
and directly resulted from gross negligence or willful misconduct of
Trident.
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 26
the indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party otherwise than under this Section 8.
In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, jointly with the other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than the reasonable cost of investigation except as
otherwise provided herein. In the event the indemnifying party elects to
assume the defense of any such action and retain counsel acceptable to the
indemnified party, the indemnified party may retain additional counsel, but
shall bear the fees and expenses of such counsel unless (i) the
indemnifying party shall have specifically authorized the indemnified party
to retain such counsel or (ii) the parties to such suit include such
indemnifying party and the indemnified party, and such indemnified party
shall have been advised by counsel that one or more material legal defenses
may be available to the indemnified party which may not be available to the
indemnifying party, in which case the indemnifying party shall not be
entitled to assume the defense of such suit notwithstanding the
indemnifying party's obligation to bear the fees and expenses of such
counsel. An indemnifying party against whom indemnity may be sought shall
not be liable to indemnify an indemnified party under this Section 8 if any
settlement of any such action is effected without such indemnifying party's
consent. To the extent required by law, this Section 8 is subject to and
limited by the provisions of Section 23A.
9. Contribution. In order to provide for just and equitable contribution
------------
in circumstances in which the indemnity agreement provided for in Section 8
above is for any reason held to be unavailable to Trident, the Company and/or
the Association other than in accordance with its terms, the Company or the
Association and Trident shall contribute to the aggregate losses, liabilities,
claims, damages, and expenses of the nature contemplated by said indemnity
agreement incurred by the Company or the Association and Trident (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Association on the one hand and Trident on the other from the
offering of the Shares or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above, but also the
relative fault of the Company or the Association on the one hand and Trident on
the other hand in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Association on the one hand and Trident on the other shall be
deemed to be in the same proportions as the total net proceeds from the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 27
Conversion received by the Company and the Association bear to the total fees
received by Trident under this Agreement. The relative fault of the Company or
the Association on the one hand and Trident on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Association or by Trident
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Association and Trident agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
the indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 9, Trident
shall not be required to contribute any amount in excess of the amount by which
fees owed Trident pursuant to this Agreement exceeds the amount of any damages
which Trident has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. To the extent required by law, this Section 8 is
subject to and limited by the provisions of Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
--------------------------------------------------------
respective indemnities of the Company and the Association and Trident and the
representation and warranties of the Company and the Association and of Trident
set forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Trident or the Company or the Association
or any controlling person or indemnified party referred to in Section 8 hereof,
and shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of Trident, the Company,
the Association and any such controlling persons shall be entitled to the
benefit of the respective agreements, indemnities, warranties and
representations.
11. Termination. Trident may terminate this Agreement by giving the
-----------
notice indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make
it, in Trident's reasonable opinion, impracticable to proceed with the
offering of the Shares; or if trading on the New York Stock Exchange shall
have suspended; or if the United States shall have
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 28
become involved in a war or major hostilities; or if a general banking
moratorium has been declared by a state or federal authority which has
material effect on the Association or the Conversion; or if a moratorium in
foreign exchange trading by major international associations or persons has
been declared; or if there shall have been a material change in the
capitalization, condition or business of the Company, or if the Association
shall have sustained a material or substantial loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act, whether or not said loss shall have been insured; or if
there shall have been a material change in the condition or prospects of
the Company or the Association.
(b) If Trident elects to terminate this Agreement as provided in this
Section, the Company and the Association shall be notified promptly by
Trident by telephone or telegram, confirmed by letter.
(c) If this Agreement is terminated by Trident for any of the reasons
set forth in subsection (a) above, and to fulfill its obligations, if any,
pursuant to Sections 3, 6, 8(a) and 9 of this Agreement and upon demand,
the Company and the Association shall pay Trident the full amount so owing
thereunder.
(d) The Association may terminate the Conversion in accordance with
the terms of the Plan. Such termination shall be without liability to any
party, except that the Company and the Association shall be required to
fulfill their obligations pursuant to Sections 3(b), 3(c), 6, 8(a) and 9 of
this Agreement.
12. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Malizia, Spidi, Sloane & Fisch, P.C., 1301 K
Street, N.W., Suite 700 East, Washington, D.C. 20005, Attention: Charles E.
Sloane, Esquire) and if sent to the Company or the Association shall be mailed,
delivered or telegraphed and confirmed to Rocky Ford Federal Savings and Loan
Association, 801 Swink Avenue, Rocky Ford, Colorado 81067, Attention: Keith E.
Waggoner, President (with a copy to Housley Kantarian & Bronstein, P.C., Suite
700, 1220 - 19th Street, N.W., Washington, D.C. 20036, Attention: Howard S.
Parris, Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, Trident, the Company, the Association and the controlling
and other persons referred to in Section 8 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 29
14. Construction. Unless governed by preemptive federal law, this
------------
Agreement shall be governed by and construed in accordance with the substantive
laws of North Carolina.
15. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute but one and the same instrument.
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
ROCKY FORD FINANCIAL, ROCKY FORD FEDERAL SAVINGS AND LOAN
INC. ASSOCIATION
By: _______________________ By: ____________________________
Keith E. Waggoner Keith E. Waggoner
President and Chief President and Chief
Executive Officer Executive Officer
Date: _____________________ Date: ____________________________
Agreed to and accepted:
TRIDENT SECURITIES, INC.
By: ________________________
Date:
<PAGE>
Exhibit A
Jurisdictions where Trident is a Registered Selling Agent
Trident Securities, Inc. is a registered selling agent in the jurisdictions
--
listed below:
Alabama Missouri
Arizona Nebraska
Arkansas Nevada
California New Hampshire
Colorado New Jersey
Connecticut New Mexico
Delaware New York
District of Columbia North Carolina
Florida North Dakota (Trident Securities, Inc. only, no
agents)
Georgia Ohio
Idaho Oklahoma
Illinois Oregon
Indiana Pennsylvania
Iowa Rhode Island
Kansas South Carolina
Kentucky Tennessee
Louisiana Texas
Maine Vermont
Maryland Virginia
Massachusetts Washington
Michigan West Virginia
Minnesota Wisconsin
Mississippi Wyoming
Trident Securities, Inc. is not a registered selling agent in the jurisdictions
---
listed below:
Alaska
Hawaii
Montana
South Dakota
Utah
<PAGE>
EXHIBIT 2
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
ROCKY FORD, COLORADO
PLAN OF CONVERSION
FROM MUTUAL TO STOCK ORGANIZATION
I. GENERAL.
On January 14, 1997, the Board of Directors of Rocky Ford Federal Savings
and Loan Association, Rocky Ford, Colorado (the "Association"), after careful
study and consideration, adopted by unanimous vote this Plan of Conversion from
Mutual to Stock Organization (the "Plan"), whereby the Association will convert
from a federal mutual savings and loan association to a federal capital stock
savings and loan association (the "Converted Association") as a wholly owned
subsidiary of a Holding Company to be formed at the direction of the Association
(the "Conversion"). The Plan was subsequently amended on March 11, 1997.
The Conversion is subject to regulations of the Office of Thrift
Supervision of the United States Department of the Treasury ("OTS") pursuant to
Section 5(i) of the Home Owners' Loan Act and Part 563b of the Rules and
Regulations Applicable to All Savings Associations.
The Plan is subject to the prior written approval of the OTS and must be
adopted by the affirmative vote of at least a majority of the total outstanding
votes of the Members of the Association. Pursuant to the Plan, shares of
Conversion Stock in the Holding Company will be offered in a Subscription
Offering pursuant to non-transferable Subscription Rights at a predetermined and
uniform price first to the Association's Eligible Account Holders of record as
of December 31, 1995 (which shall include those depositors who had accounts
which were closed by the Association (for reasons other than at the request of
the depositor) during calendar year 1994), second to the Association's 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 may be offered
by the Association to the general public in a Community Offering. Shares
remaining, if any, 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 Converted Association, as a
subsidiary of the Holding Company.
It is the desire of the Board of Directors to attract new capital to the
Converted 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. In addition, the Board of Directors
currently intends to implement stock option plans and other stock benefit plans
subsequent to the Conversion to better attract and retain qualified directors
and officers. It is the further desire of the Board of Directors to reorganize
the Converted Association as the wholly owned subsidiary of the Holding Company
to enhance flexibility of operations, diversification of business opportunities
and financial capability for business and regulatory purposes and to enable the
Converted Association to compete more effectively with other financial service
organizations.
No change will be made in the Board of Directors or management of the
Association as a result of the Conversion.
II. DEFINITIONS.
Acting in Concert: The term "Acting in Concert" means (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.
<PAGE>
A person (as defined by 12 C.F.R. (S)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.
Associate: The term "Associate," when used to indicate a relationship with
---------
any person, means (i) any corporation or organization (other than the
Association, the Holding Company 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 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, except that such term shall not
include a "Tax-Qualified Employee Stock Benefit Plan," as defined herein; and
(iii) 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 of the Association or the
Holding Company, or any of their subsidiaries.
Association: The term "Association" means Rocky Ford Federal Savings and
-----------
Loan Association, in its present form as a federal mutual savings and loan
association.
Capital Stock: The term "Capital Stock" means any and all authorized
-------------
shares of stock of the Converted Association.
Community Offering: The term "Community Offering" means the offering of
------------------
shares of Conversion Stock to the general public by the Holding Company
concurrently with or after commencement of the Subscription Offering, giving
preference to natural persons and trusts of natural persons (including
individual retirement and Keogh retirement accounts and personal trusts in which
such natural persons have substantial interests) who are permanent Residents of
the Association's Local Community.
Conversion: The term "Conversion" means (i) the amendment of the
----------
Association's federal mutual charter and bylaws to authorize issuance of shares
of Capital Stock by the Converted Association and to conform to the requirements
of a federal capital stock savings and loan association under the laws of the
United States and applicable regulations; (ii) the issuance and sale of
Conversion Stock by the Holding Company in the Subscription and Community
Offerings and/or in an underwritten public offering or otherwise; and (iii) the
purchase by the Holding Company of all the Capital Stock of the Converted
Association to be issued in the Conversion immediately following or concurrently
with the close of the sale of the Conversion Stock.
Conversion Stock: The term "Conversion Stock" means the shares of common
----------------
stock to be issued and sold by the Holding Company pursuant to the Plan.
Converted Association: The term "Converted Association" means Rocky Ford
---------------------
Federal Savings and Loan Association in its form as a federal capital stock
savings and loan association resulting from the conversion of the Association to
the stock form of organization in accordance with the terms of the Plan.
Eligibility Record Date: The term "Eligibility Record Date" means the
-----------------------
close of business on December 31, 1995.
Eligible Account Holder: The term "Eligible Account Holder" means each
-----------------------
holder of one or more Qualifying Deposits in the Association on the Eligibility
Record Date, and shall also mean those depositors who had accounts (with a
Qualifying Deposit upon being closed) which were closed by the Association (for
reasons other than at the request of the depositor) during calendar year 1994.
Holding Company: The term "Holding Company" means a corporation to be
---------------
incorporated by the Association under state law for the purpose of becoming a
holding company for the Converted Association through
A-2
<PAGE>
the issuance and sale of Conversion Stock under the Plan and the concurrent
acquisition of 100% of the Capital Stock to be issued and sold pursuant to the
Plan.
Holding Company Stock: The term "Holding Company Stock" means any and all
---------------------
authorized shares of stock of the Holding Company.
Independent Appraiser: The term "Independent Appraiser" means a person
---------------------
independent of the Association, experienced and expert in the area of corporate
appraisal, and acceptable to the OTS, retained by the Association to prepare an
appraisal of the pro forma market value of the Converted Association, as a
subsidiary of the Holding Company.
Local Community: The term "Local Community" means the county in which the
---------------
Association's office is located.
Market Maker: The term "Market Maker" means a dealer (i.e., any person who
------------
engages, either for all or part of such person's time, 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, (i)(a) regularly publishes bona fide,
competitive bid and offer quotations in a recognized interdealer quotation
system or (b) furnishes bona fide competitive bid and offer quotations on
request and (ii) is ready, willing and able to effect transactions in reasonable
quantities at its quoted prices with other brokers or dealers.
Member: The term "Member" means any person or entity who qualifies as a
------
member of the Association under its federal mutual charter and bylaws prior to
the Conversion.
Officer: The term "Officer" means an executive officer of the Holding
-------
Company or the Association (as applicable), including the Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents in charge of
principal business functions, Secretary and Treasurer.
Order Form: The term "Order Form" means the order form or forms to be used
----------
by Eligible Account Holders, Supplemental Eligible Account Holders and other
persons eligible to purchase Conversion Stock pursuant to the Plan.
Other Member: The term "Other Member" means any person, other than an
------------
Eligible Account Holder or a Supplemental Eligible Account Holder, who is a
Member as of the Voting Record Date.
OTS: The term "OTS" means the Office of Thrift Supervision of the United
---
States Department of the Treasury or any successor agency having jurisdiction
over the Conversion.
Plan: The term "Plan" means this Plan of Conversion under which the
----
Association will convert from a federal mutual savings and loan association to a
federal capital stock savings and loan association as a wholly owned subsidiary
of the Holding Company, as originally adopted by the Board of Directors or
amended in accordance with the terms hereof.
Qualifying Deposit: The term "Qualifying Deposit" means each savings
------------------
balance in any Savings Account in the Association as of the close of business on
the Eligibility Record Date (or on the date the Savings Account was closed by
the Association, for those depositors who had accounts which were closed by the
Association (for reasons other than that at the request of the depositor) during
fiscal 1994), or the Supplemental Eligibility Record Date, as applicable, which
is equal to or greater than $50.00.
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<PAGE>
Registration Statement: The term "Registration Statement" means the
----------------------
Registration Statement on Form S-1, or such other form as may be appropriate,
and any amendments thereto, filed by the Holding Company with the SEC pursuant
to the Securities Act of 1933, as amended, to register shares of Conversion
Stock.
Resident: The term "Resident," as used in this Plan in relation to the
--------
preference afforded natural persons and trusts of natural persons in the Local
Community, means any natural person who occupies a dwelling within the Local
Community, has an intention to remain within the Local Community for a period of
time (manifested by establishing a physical, ongoing, non-transitory presence
within the Local Community) and continues to reside therein at the time of the
Subscription and Community Offerings. The Association may utilize deposit or
loan records or such other evidence provided to it to make the determination as
to whether a person is residing in the Local Community. To the extent the
"person" is a corporation or other business entity, the principal place of
business or headquarters shall be within the Local Community. To the extent the
"person" is a personal benefit plan, the circumstances of the beneficiary shall
apply with respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
In all cases, such determination shall be in the sole discretion of the
Association.
Sale: The terms "sale" and "sell" mean every contract to sell or otherwise
----
dispose of a security or an interest in a security for value, but such terms do
not include an exchange of securities in connection with a merger or acquisition
approved by the OTS or any other federal agency having jurisdiction.
Savings Account: The term "Savings Account" means a withdrawable deposit
---------------
in the Association.
SEC: The term "SEC" means the Securities and Exchange Commission or any
---
successor agency.
Special Meeting: The term "Special Meeting" means the Special Meeting of
---------------
Members to be called for the purpose of submitting the Plan to the Members for
their approval.
Subscription Offering: The term "Subscription Offering" means the offering
---------------------
of shares of Conversion Stock to Eligible Account Holders, Tax-Qualified
Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other
Members under the Plan, giving preference within each subscription priority
category to natural persons and trusts of natural persons (including individual
retirement and Keogh retirement accounts and personal trusts in which such
natural persons have substantial interests) who are permanent Residents of the
Local Community if such preference is permitted by applicable law and approved
by the Association's Board of Directors in its sole discretion.
Subscription and Community Prospectus: The term "Subscription and
-------------------------------------
Community Prospectus" means the final prospectus to be used in connection with
the Subscription and Community Offerings.
Subscription Rights: The term "Subscription Rights" means non-
-------------------
transferable, non-negotiable, personal rights of Eligible Account Holders, Tax-
Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders
and Other Members to purchase Conversion Stock offered under the Plan.
Supplemental Eligibility Record Date: The term "Supplemental Eligibility
------------------------------------
Record Date" means the last day of the calendar quarter preceding the approval
of the Plan by the OTS.
Supplemental Eligible Account Holder: The term "Supplemental Eligible
------------------------------------
Account Holder" means each holder of one or more Qualifying Deposits in the
Association (other than Officers and directors of the Association and their
Associates) on the Supplemental Eligibility Record Date.
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified
-----------------------------------------
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of the Association or the Holding Company, such as an employee
stock ownership plan, stock bonus plan, profit sharing plan or other plan,
which, with its related trust, meets the require ments to be "qualified" under
section 401 of the Internal Revenue Code of 1986, as amended.
A-4
<PAGE>
"Non-Tax-Qualified Employee Stock Benefit Plan" means any defined benefit plan
or defined contribution plan which is not so qualified.
Voting Record Date: The term "Voting Record Date" means the date fixed by
------------------
the Board of Directors of the Association to determine Members of the
Association entitled to vote at the Special Meeting.
III. STEPS PRIOR TO SUBMISSION OF THE PLAN TO THE MEMBERS FOR APPROVAL.
Prior to submission of the Plan to its Members for approval, the
Association must receive approval from the OTS of an Application for Approval of
Conversion on Form AC, which includes the Plan to convert to the stock form of
organization (the "Application"). The following steps must be taken prior to
such regulatory approval:
A. The Board of Directors shall adopt the Plan by not less than a
two-thirds vote.
B. Promptly after adoption of the Plan by the Board of Directors, the
Association shall notify its 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 and/or by mailing a
letter to each of its Members.
C. A press release relating to the proposed Conversion may be
submitted to the local media.
D. Copies of the Plan adopted by the Board of Directors shall be made
available for inspection by Members 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. The Association shall submit or cause to be submitted the
Application to the OTS. The Holding Company shall submit or cause to be
submitted an Application H-(e)1 or Application H-(e)1-S to the OTS and the
Registration Statement to the SEC. Upon receipt of advice from the
regulatory authorities that the Application has been received and is in the
prescribed form, the Association shall publish a "Notice of Filing of an
Application for Conversion to a Stock Savings and Loan Association" in a
newspaper of general circulation, as referred to in Paragraph III.B.
herein. The Association also shall prominently display a copy of such
notice in each of its offices. The Holding Company shall publish notice of
the filing of the Application H-(e)1 or H-(e)1-S in accordance with
applicable regulations.
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 a taxable reorganization
for federal income tax purposes to the Association. Receipt of a favorable
opinion or ruling is a condition precedent to completion of the Conversion.
H. The Plan shall be submitted to a vote of the Members at the
Special Meeting after approval by the OTS.
IV. MEETING OF MEMBERS.
Following receipt of approval of the Plan by the OTS, the Special Meeting
to vote on the Plan shall be scheduled in accordance with the Association's
bylaws and applicable regulations. Notice of the Special Meeting will be given
by means of a proxy statement authorized for use by the OTS. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to the
Special Meeting, the Association will distribute proxy solicitation materials to
all voting Members as of the Voting Record Date established for voting at the
Special Meeting. Proxy materials will also be sent to each beneficial holder of
an Individual Retirement Account where the
A-5
<PAGE>
name of the beneficial holder is disclosed on the Association's records. The
proxy solicitation materials will include a copy of the Proxy Statement and
other documents authorized for use by the regulatory authorities and may also
include a Subscription and Community Prospectus as provided in Paragraph VI.
below. The Association will 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 paid card on which to indicate whether he or she wishes to receive the
Subscription and Community Prospectus, if the Subscription and Community
Offerings are not held concurrently with the proxy solicitation.
Pursuant to applicable regulations, an affirmative vote of at least a
majority of the total outstanding votes of the Members will be required for
approval of the Plan. Voting may be in person or by proxy. The OTS shall be
promptly notified of the actions of the Members at the Special Meeting.
V. SUMMARY PROXY STATEMENT.
The Proxy Statement to be furnished to Members may be in summary form,
provided that a statement is made in boldface type that a more detailed
description of the proposed transaction may be obtained by returning an enclosed
postage paid card or other written communication requesting a supplemental
information statement. Without prior approval from the OTS, the Special Meeting
shall not be held fewer than 20 days after the last day on which the
supplemental information statement is mailed to Members requesting the same.
The supplemental information statement may be combined with the Subscription and
Community Prospectus if the Subscription and Community Offerings are commenced
concurrently with 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 Community
Offering concurrently with or during the proxy solicitation of Members and may
close the Subscription and Community Offerings 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 and Other Members to return to
the Association by a reasonable date certain a postage-paid written
communication requesting receipt of a Subscription and Community Prospectus in
order to be entitled to receive a Subscription and Community Prospectus,
provided that the Subscription Offering shall not be closed until the expiration
of 30 days after mailing proxy solicitation materials to voting Members and a
postage-paid written communication to non-voting Eligible Account Holders and
Supplemental Eligible Account Holders. If the Subscription Offering is
commenced within 45 days after the Special Meeting, the Association shall
transmit, no more than 30 days prior to the commencement of the Subscription
Offering, to each voting Member who had been furnished with proxy solicitation
materials and to each non-voting Eligible Account Holder and Supplemental
Eligible Account Holder, written notice of the commencement of the Subscription
Offering which shall state that the Association is not required to furnish a
Subscription and Community Prospectus to them unless they return by a reasonable
date certain a postage-paid written communication requesting the receipt of the
Subscription and Community Prospectus.
Prior to commencement of the Subscription and Community Offerings, the
Holding Company shall file the Registration Statement with the SEC pursuant to
the Securities Act of 1933, as amended. The Holding Company shall not
distribute the Subscription and Community Prospectus until the Registration
Statement containing the same has been declared effective by the SEC and the
aforementioned documents have been approved by the OTS. The Subscription and
Community Prospectus may be combined with the Proxy Statement for the Special
Meeting.
A-6
<PAGE>
VII. CONSUMMATION OF CONVERSION.
The date of consummation of the Conversion will be the effective date of
the amendment of the Association's federal mutual charter to read in the form of
a federal stock charter, which shall be the date of the issuance and sale of the
Conversion Stock. After receipt of all orders for Conversion Stock, and
concurrently with the execution thereof, the amendment of the Association's
federal mutual charter 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, and the amended 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 100,000
shares of its common stock, representing all of the shares of Capital Stock to
be issued by the Converted Association in the Conversion, and the Holding
Company will make payment to the Converted Association of at least 50 percent of
the aggregate net proceeds realized by the Holding Company from the sale of the
Conversion Stock under the Plan, or such other portion of the aggregate net
proceeds as may be authorized or required by the OTS.
VIII. STOCK OFFERING.
A. General.
-------
The aggregate purchase price of all shares of Conversion Stock which
will be offered and sold will be equal to the estimated pro forma market
value of the Converted Association, as a subsidiary of the Holding Company,
as determined by an independent appraisal. The exact number of shares of
Conversion Stock to be offered will be determined by the Board of Directors
of the Association and the Board of Directors of the Holding Company, or
their respective designees, in conjunction with the determination of the
Purchase Price (as that term is defined in Paragraph VIII.B. below). The
number of shares to be offered may be subsequently adjusted prior to
completion of the Conversion as provided below.
B. Independent Evaluation and Purchase Price of Shares.
---------------------------------------------------
All shares of Conversion Stock sold in the Conversion will be sold at
a uniform price per share referred to in this Plan as the "Purchase Price."
The Purchase Price and the total number of shares of Conversion Stock to be
offered in the Conversion will be determined by the Board of Directors of
the Association and the Board of Directors of the Holding Company, or their
respective designees, 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 Converted Association, as a subsidiary of the
Holding Company, at such time. The estimated pro forma market value of the
Converted Association, as a subsidiary of the Holding Company, will be
determined for such purpose by an Independent Appraiser on the basis of
such appropriate factors as are not inconsistent with applicable
regulations. Immediately prior to the Subscription and Community
Offerings, a subscription price range of shares for the offerings will be
established (the "Valuation Range"), which will vary from 15% above to 15%
below the midpoint of such range. The number of shares of Conversion Stock
ultimately issued and sold will be determined at the close of the
Subscription and Community Offerings and any other offering. The
subscription price range and the number of shares to be offered may be
changed subsequent to the Subscription and Community Offerings as the
result of any appraisal updates prior to the completion of the Conversion,
without notifying eligible purchasers in the Subscription and Community
Offerings and without a resolicitation of subscriptions, provided the
aggregate Purchase Price is not below the low end or more than 15 percent
above the high end of the Valuation Range previously approved by the OTS or
if, in the opinion of the Boards of Directors of the Association and the
Holding Company, the new Valuation Range established by the appraisal
update does not result in a materially different capital position of the
Converted Association.
A-7
<PAGE>
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Association and the Holding Company and to the OTS that, to
the best knowledge of the Independent Appraiser, nothing of a material
nature has occurred which, taking into account all relevant factors, would
cause the Independent Appraiser to conclude that the aggregate value of the
Conversion Stock at the Purchase Price is incompatible with its estimate of
the aggregate consolidated pro forma market value of the Converted
Association, as a subsidiary of the Holding Company. If such confirmation
is not received, the Association may cancel the Subscription and Community
Offerings and/or any other offering, extend the Conversion, establish a new
Valuation Range, extend, reopen or hold new Subscription and Community
Offerings and/or other offerings or take such other action as the OTS may
permit.
C. Subscription Offering.
---------------------
Non-transferable Subscription Rights to purchase shares of Conversion
Stock will be issued at no cost to Eligible Account Holders, Tax-Qualified
Employee Stock Benefits Plans, Supplemental Eligible Account Holders and
Other Members of the Association pursuant to priorities established by
applicable regulations. All shares must be sold, and, to the extent that
Conversion Stock is available, no subscriber will be allowed to purchase
fewer than 25 shares of Conversion Stock, provided that this number shall
be decreased if the aggregate purchase price exceeds $500. The priorities
established by applicable regulations for the purchase of shares are as
follows:
1. Category No. 1: Eligible Account Holders.
a. Each Eligible Account Holder shall receive, without payment,
non-transferable Subscription Rights to purchase Conversion Stock in
an amount equal to the greater of (i) $125,000 of the Conversion
Stock, (ii) one-tenth of one percent of the total offering of shares
of Conversion Stock or (iii) 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 in the Converted Association in each case on
the Eligibility Record Date.
b. Non-transferable Subscription Rights to purchase Conversion
Stock received by Officers and directors of the Association and their
Associates 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 non-
transferable Subscription Rights to purchase shares pursuant to this
Subscription Category.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among subscribing Eligible Account Holders, giving
preference to natural persons and trusts of natural persons who are
permanent Residents of the Local Community, if such preference is
permitted by applicable law and approved by the Association's Board of
Directors in its sole discretion, as follows:
(I) 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 its total
allocation equal to 100 shares or the total amount of its
subscription, whichever is less.
(II) Any shares not so allocated shall be allocated among
the subscribing Eligible Account Holders on an equitable basis,
related to the amounts of their respective aggregate
A-8
<PAGE>
Qualifying Deposits, as compared to the total aggregate
Qualifying Deposits of all subscribing Eligible Account Holders.
2. Category No. 2: Tax-Qualified Employee Stock Benefit Plans.
a. Tax-Qualified Employee Stock Benefit Plans of the Converted
Association shall receive, without payment, non-transferable
Subscription Rights to purchase up to 10% of the shares of Conversion
Stock issued in the Conversion.
b. Subscription rights received in this Category shall be
subordinated to the Subscription Rights received by Eligible Account
Holders pursuant to Category No. 1, provided that any shares of
Conversion Stock sold in excess of the high end of the Valuation Range
may be first sold to Tax-Qualified Employee Stock Benefit Plans.
3. Category No. 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 of the Application
filed prior to OTS approval, then each Supplemental Eligible Account
Holder shall receive, without payment, non-transferable Subscription
Rights to purchase Conversion Stock in an amount equal to the greater
of (i) $125,000 of the Conversion Stock, (ii) one-tenth of one percent
of the total offering of shares of Conversion Stock or (iii) 15 times
the product (rounded down to the next whole number) obtained by
multiplying the total number of the 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 on the Supplemental Eligibility
Record Date.
b. Subscription Rights received pursuant to this Category shall
be subordinated to the Subscription Rights received by the Eligible
Account Holders and by Tax-Qualified Employee Stock Benefit Plans
pursuant to Category Nos. 1 and 2.
c. Any non-transferable Subscription Rights to purchase shares
received by an Eligible Account Holder in accordance with Category No.
1 shall reduce to the extent thereof the Subscription Rights to be
distributed to such Eligible Account Holder 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,
giving preference to natural persons and trusts of natural persons who
are permanent Residents of the Local Community, if such preference is
permitted by applicable law and approved by the Association's Board of
Directors in its sole discretion, as follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit
each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares of Conversion Stock
sufficient to make its total allocation (including the number of
shares of Conversion Stock, if any, allocated in accordance with
Category No. 1) equal to 100 shares of Conversion Stock or the
total amount of its subscription, whichever is less.
(II) Any shares of Conversion Stock not allocated in
accordance with subparagraph (I) above shall be allocated among
the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective
aggregate Qualifying Deposits on the Supplemental Eligibility
Record Date as compared to the total
A-9
<PAGE>
aggregate Qualifying Deposits of all subscribing Supplemental
Eligible Account Holders in each case on the Supplemental
Eligibility Record Date.
4. Category No. 4: Other Members.
a. Each Other Member, other than those Members who are Eligible
Account Holders or Supplemental Eligible Account Holders, shall
receive, without payment, non-transferable Subscription Rights to
purchase Conversion Stock in an amount equal to the greater of (i)
$125,000 of the Conversion Stock or (ii) one-tenth of one percent of
the total offering of shares of Conversion Stock.
b. Subscription Rights received pursuant to this Category shall
be subordinated to the Subscription Rights received by Eligible
Account Holders, Tax-Qualified Employee Stock Benefit Plans and
Supplemental Eligible Account Holders pursuant to Category Nos. 1, 2
and 3.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, the shares of Conversion Stock
available shall be allocated among subscribing Other Members, giving
preference to natural persons and trusts of natural persons who are
permanent Residents of the Local Community, if such preference is
permitted by applicable law and approved by the Association's Board of
Directors in its sole discretion, so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed
for by the Other Member. The shares remaining thereafter will be
allocated among subscribing Other Members whose subscriptions remain
unsatisfied on an equitable basis as determined by the Board of
Directors.
Order Forms may provide that the maximum purchase limitation
shall be based on the midpoint of the Valuation Range. In the event
the aggregate Purchase Price of the Conversion Stock issued and sold
is below the midpoint of the Valuation Range, that portion of
subscriptions in excess of the maximum purchase limitation will be
refunded. In the event the aggregate Purchase Price of Conversion
Stock issued and sold is above the midpoint of the Valuation Range,
persons who have subscribed for the maximum purchase limitation may be
given the opportunity to increase their subscriptions so as to
purchase the maximum number of shares subject to the availability of
shares. The Association will not otherwise notify subscribers of any
change in the number of shares of Conversion Stock offered.
D. Community Offering.
------------------
1. Any shares of Conversion Stock not purchased through the
exercise of Subscription Rights in the Subscription Offering may be
sold in a Community Offering, which may commence concurrently with the
Subscription Offering. Shares of Conversion Stock will be offered in
the Community Offering to the general public, giving preference to
natural persons and the trusts of natural persons (including
individual retirement and Keogh retirement accounts and personal
trusts in which such natural persons have substantial interests) who
are permanent Residents of the Local Community. The Community
Offering may commence concurrently with or as soon as practicable
after the completion of the Subscription Offering and 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. The offering price of the Conversion Stock to the general
public in the Community Offering will be the same price paid for such
stock by Eligible Account Holders and other persons in the
Subscription Offering. If sufficient shares are not available to
satisfy all orders in the Community Offering, the shares available
will be allocated by the Holding Company in its
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discretion. The Holding Company shall have the right to accept or
reject orders in the Community Offering in whole or in part.
2. Orders accepted in the Community Offering 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 to be offered in the Community Offering
will be offered and sold in a manner that will achieve the widest
distribution of the Conversion Stock.
E. Other Offering.
--------------
In the event a Community Offering does not appear 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.
F. Limitations Upon Purchases of Shares of Conversion Stock.
--------------------------------------------------------
The following additional limitations and exceptions shall apply
to all purchases of Conversion Stock:
1. No Person may purchase fewer than 25 shares of Conversion
Stock in the Conversion, to the extent such shares are available.
2. Purchases of Conversion Stock in the Community Offering by any
person, when aggregated with purchases by an Associate of that person,
or a group of persons Acting in Concert, shall not exceed $125,000 of
the Conversion Stock, except that Tax-Qualified Employee Stock Benefit
Plans may purchase up to 10% of the total shares of Conversion Stock
to be issued in the Conversion, and shares to be held by the Tax-
Qualified Employee Stock Benefit Plans and attributable to a
participant thereunder shall not be aggregated with shares of
Conversion Stock purchased by such participant or any other purchaser
of Conversion Stock in the Conversion.
3. Officers and directors of the Association and the Holding
Company, and Associates thereof, may not purchase in the aggregate
more than 35% of the shares of Conversion Stock issued in the
Conversion, or such greater amount as may be permitted under
applicable legal limits.
4. Directors of the Holding Company and the Association shall not
be deemed to be Associates or a group Acting in Concert with other
directors solely as a result of membership on the Board of Directors
of the Holding Company or the Association or any of their
subsidiaries.
5. Purchases of shares of Conversion Stock in the Conversion by
any person, when aggregated with purchases by an Associate of that
person, or a group of persons Acting in Concert, shall not exceed
$125,000 of the Conversion Stock, except that Tax-Qualified Employee
Stock Benefit Plans may purchase up to 10% of the total shares of
Conversion Stock to be issued in the Conversion, and shares purchased
by the Tax-Qualified Employee Stock Benefit Plans and attributable to
a participant thereunder shall not be aggregated with shares purchased
by such participant or any other purchaser of Conversion Stock in the
Conversion.
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Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the Holding Company and the Association
may increase or decrease any of the purchase limitations set forth herein
at any time. In the event that the individual purchase limitation is
increased after commencement of the Subscription and Community Offerings,
the Holding Company and the Association shall permit any person who
subscribed for the maximum number of shares of Conversion Stock to purchase
an additional number of shares, such that such person shall be permitted to
subscribe for the then maximum number of shares permitted to be subscribed
for by such person, subject to the rights and preferences of any person who
has priority Subscription Rights. In the event that either the individual
purchase limitation or the number of shares of Conversion Stock to be sold
in the Conversion is decreased after commencement of the Subscription and
Community Offerings, the orders of any person who subscribed for the
maximum number of shares of Conversion Stock shall be decreased by the
minimum amount necessary so that such person shall be in compliance with
the then maximum number of shares permitted to be subscribed for by such
person.
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 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 person. This right
of the Holding Company to purchase such excess shares shall be assignable
by the Holding Company.
G. Restrictions on and Other Characteristics of Stock Being Sold.
-------------------------------------------------------------
1. Transferability.
---------------
Except as provided in Paragraph XIII. below, Conversion Stock
purchased by persons other than directors and Officers of the
Association and directors and Officers of the Holding Company will be
transferable without restriction. Conversion Stock purchased by such
directors or Officers shall not be sold for a period of one year from
the date of Conversion except for any sale of such shares (i)
following the death of the original purchaser or (ii) resulting from
an exchange of securities in a merger or acquisition approved by the
applicable regulatory authorities.
The Conversion Stock issued by the Holding Company to such
directors and Officers shall bear the following legend giving
appropriate notice of the one-year holding period restriction:
"The shares of stock evidenced by this Certificate are restricted
as to transfer for a period of one year from the date of this
Certificate pursuant to applicable regulations of the Office of
Thrift Supervision of the United States Department of the
Treasury. Except in the event of the death of the registered
holder, the shares represented by this Certificate may not be
sold prior thereto without a legal opinion of counsel for the
Holding Company that said sale is permissible under the
provisions of applicable laws and regulations."
In addition, the Holding Company shall give appropriate
instructions to the transfer agent for the Holding Company Stock with
respect to the applicable restrictions relating to the transfer of
restricted stock. 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 directors and Officers as may be then applicable
to such restricted stock.
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<PAGE>
2. Repurchase and Dividend Rights.
------------------------------
Pursuant to present regulations, except as otherwise permitted by
the OTS, the Holding Company may not, for a period of three years from
the date of Conversion, repurchase Holding Company Stock from any
person, with the exception of (i) repurchases on a pro rata basis
pursuant to offers approved by the OTS and made to all stockholders,
(ii) repurchases of qualifying shares of directors or, (iii) unless
prohibited by the OTS, repurchases of shares to fund employee stock
benefit plans of the Holding Company or the Association. Upon 10
days' written notification to the OTS Regional Director for the
Converted Association and the Chief Counsel of the Corporate and
Securities Division of the OTS, however, the Holding Company may make
open market repurchases of outstanding Holding Company Stock, provided
that (i) such Regional Director and Chief Counsel do not object based
on a determination that (a) the repurchases would materially adversely
affect the financial condition of the Converted Association, (b) the
information submitted by the Converted Association is insufficient
upon which to base a conclusion as to whether the Converted
Association's financial condition would be materially adversely
affected, or (c) the Converted Association does not demonstrate a
valid purpose for the repurchases. Except as otherwise permitted by
the OTS, (i) no repurchases may occur in the first year following the
Conversion; (ii) any repurchases in the second and third years
following the Conversion must be part of an open-market stock
repurchase program that allows no more than five percent (5%) of the
outstanding Holding Company Stock to be purchased during any 12 month
period; and (iii) any repurchases within the first three years
following the Conversion must not cause the Converted Association to
become "undercapitalized," as defined pursuant to 12 C.F.R. (S)565.4
or a successor regulation.
Present regulations also provide that the Converted 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 Converted Association below the amount required for the
Liquidation Account. 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, Holding Company Stock in the event applicable
federal regulatory limitations are liberalized subsequent to the
Conversion.
3. Voting Rights.
-------------
After Conversion, holders of Savings Accounts and obligors on
loans will not have voting rights in the Converted Association.
Exclusive voting rights with respect to the Holding Company shall be
vested in the holders of Holding Company Stock, and the Holding
Company will have exclusive voting rights with respect to the Capital
Stock. Each stockholder of the Holding Company will be entitled to
vote on any matters coming before the stockholders of the Holding
Company for consideration and will be entitled to one vote for each
share of stock owned by said stockholder.
4. Purchases by Officers, Directors and Associates Following
---------------------------------------------------------
Conversion.
----------
Without the prior approval of the OTS, Officers and directors of
the Converted 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,
negotiated transactions involving more than 1% of the total
outstanding shares of Holding Company Stock and purchases made and
shares held by a Tax-
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<PAGE>
Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee
Stock Benefit Plan which may be attributable to Officers or directors
may be made without OTS permission or the use of a broker or dealer.
H. 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 Subscription and Community Prospectus by the
SEC, the Holding Company shall distribute such Subscription and Community
Prospectus and Order Forms for the purchase of shares in accordance with
the terms of the Plan.
The recipient of an Order Form will be provided neither fewer than 20
days nor more than 45 days from the date of mailing, unless extended, to
complete, execute and return properly the Order Form to the Holding Company
or the Association. Self-addressed, postage paid return envelopes will
accompany these forms when mailed. The Association or Holding Company will
collate the returned executed Order Forms upon completion of the
Subscription Offering. 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 person of any rights
to purchase shares of Conversion Stock hereunder.
The sale of all shares of Conversion Stock shall be completed within
45 days after the last day of the Subscription Offering unless extended by
the Holding Company and the Association with the approval of the OTS.
I. Method of Payment.
-----------------
Payment for all shares of Conversion Stock subscribed for in the
Subscription and Community Offerings must be received in full by the
Association or the Holding Company, together with properly completed and
executed Order Forms, indicating thereon the number of shares being
subscribed for and such other information as may be required thereon, on or
prior to the expiration date specified on the Order Form, unless such date
is extended by the Holding Company and the Association; provided, however,
that payments by Tax-Qualified Employee Stock Benefit Plans for Conversion
Stock may be made to the Association concurrently with the completion of
the Conversion.
Payment for all shares of Conversion Stock may be made in cash (if
delivered in person) or by check or money order, or, if the subscriber has
a Savings Account in the Association (including a certificate of deposit),
the subscriber may authorize the Association to charge the subscriber's
Savings Account for the purchase amount. The Association 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 and Community Offerings from the date payment is received
until the Conversion is completed or terminated. The Association shall not
knowingly loan funds or otherwise extend credit to any person for the
purpose of purchasing Conversion Stock.
If a subscriber authorizes the Association to charge its Savings
Account, the funds will remain in the subscriber's Savings Account and will
continue to earn interest, but may not be used by the subscriber until all
Conversion Stock has been sold or the Conversion is terminated, whichever
is earlier. The withdrawal will be given effect only concurrently with the
sale of all shares of Conversion Stock in the Conversion and only to the
extent necessary to satisfy the subscription at a price equal to the
Purchase Price. The Association will allow subscribers to purchase shares
of Conversion Stock by withdrawing funds from certificate accounts without
the assessment of early withdrawal penalties. In the case of early
withdrawal of only a portion of such account, the certificate evidencing
such account shall be cancelled if the remaining balance of the account is
less than the applicable minimum balance requirement. In that event, the
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<PAGE>
remaining balance will 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 From, and in the case of an employee stock ownership
plan, together with evidence of a loan commitment from the Holding Company
or an unrelated financial institution for the purchase of the shares of
Conversion Stock, during the Subscription Offering and by making payment
for the shares of Conversion Stock on the date of the closing of the
Conversion.
J. Undelivered, Defective or Late Order Forms; Insufficient Payment.
----------------------------------------------------------------
In the event 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 the Association is unable to locate the addressee);
(ii) is not received by the Holding Company or the Association, or is
received by the Holding Company or the Association after termination 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 will not be honored and will be treated as though
such person failed to return the completed Order Form within the time
period specified therein. Alternatively, the Holding Company or the
Association may, but will 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 subscribed shares of Conversion
Stock by such date as the Holding Company or the Association may specify.
Subscription orders, once tendered, cannot be revoked. The Holding
Company's and the Association's interpretation of the terms and conditions
of this Plan and acceptability of the Order Forms will be final and
conclusive.
K. Members in Non-Qualified States or in Foreign Countries.
-------------------------------------------------------
The Holding Company will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons
entitled to subscribe for Conversion Stock pursuant to the Plan reside.
However, no such person will be offered or receive any Conversion Stock
under this Plan who resides in a foreign country or who resides in a state
of the United States with respect to which any or all of the following
apply: (i) a small number of persons otherwise eligible to subscribe for
shares of Conversion Stock under this Plan reside in such state or foreign
country; (ii) the granting of Subscription Rights or the offer or sale of
shares of Conversion Stock to such person would require the Holding Company
or the Association or their employees to register, under the securities
laws of such state, as a broker, dealer, salesman or agent or to register
or otherwise qualify its securities for sale in such state or foreign
country; and (iii) such registration qualification would be impracticable
for reasons of cost or otherwise. No payments will be made in lieu of the
granting of Subscription Rights to any such person.
L. Sales Commissions.
-----------------
Sales commissions may be paid as determined by the Boards of Directors
of the Association and the Holding Company or their designees to securities
dealers assisting subscribers in making purchases of Conversion Stock in
the Subscription Offering or in the Community Offering, if the securities
dealer is named by the subscriber on the Order Form. In addition, a sales
commission may be paid to a securities dealer for advising and consulting
with respect to, or for managing the sale of Conversion Stock in, the
Subscription Offering, the Community Offering or any other offering.
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<PAGE>
IX. CHARTER AND BYLAWS.
As part of the Conversion, a federal stock charter and bylaws will be
adopted to authorize the Converted Association to operate as a federal capital
stock savings and loan association. By approving the Plan, the Members of the
Association will thereby approve amending the Association's existing federal
mutual charter and bylaws to read in the form of a 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 XIV. below. The effective
date of the amendment of the Association's federal mutual charter and bylaws to
read in the form of a 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.
X. REGISTRATION AND MARKET MAKING.
In connection and concurrently with the Conversion, the Holding Company
shall register the Holding Company Stock with the SEC pursuant to the Securities
Exchange Act of 1934, as amended, and shall undertake not to deregister the
Holding Company 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 Holding Company
Stock. The Holding Company shall also use its best efforts to have the Holding
Company Stock quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System or listed on a national or regional securities
exchange.
XI. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION.
All Savings Accounts in the Association will retain the same status after
Conversion as these accounts had prior to Conversion. Subject to Paragraph
VIII.I. hereof, each holder of a Savings Account in the Association shall
retain, without payment, a withdrawable Savings Account or Savings Accounts in
the Converted Association, equal in dollar amount and on the same terms and
conditions as in effect prior to Conversion. All Savings Accounts will continue
to be insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation up to the applicable limits of insurance coverage. All
loans shall retain the same status after Conversion as these loans had prior to
Conversion. After Conversion, holders of Savings Accounts and obligors on loans
of the Association will not have voting rights in the Converted Association.
Exclusive voting rights with respect to the Holding Company shall be vested in
the holders of the Conversion Stock issued by the Holding Company, and the
Holding Company will have exclusive voting rights with respect to the Converted
Association's Capital Stock.
XII. LIQUIDATION ACCOUNT.
After the Conversion, holders of Savings Accounts will not be entitled to
share in the residual assets after liquidation of the Converted Association.
However, pursuant to applicable regulations, the Association shall, at the time
of the Conversion, establish a Liquidation Account in an amount equal to its
regulatory capital as of the date of the latest statement of financial condition
contained in the final prospectus to be used in connection with the Conversion.
The function of the Liquidation Account is to establish a priority on
liquidation, and, except as provided in Paragraph VIII.G.2. 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 Converted Association.
The Liquidation Account shall be maintained by the Converted Association
subsequent to Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Converted 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 ("subaccount
balance").
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<PAGE>
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 the qualifying deposit in the related
Savings Account and the denominator is the total amount of the qualifying
deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders in the Association. Such initial subaccount balance shall not be
increased but 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 to which the subaccount relates at the
close of business on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date is less than the lesser of
(i) the deposit balance in such Savings Account at the close of business on any
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, the 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 Converted 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
balances for Savings Accounts then held before any liquidation distribution may
be made to stockholders. No merger, consolidation, sale of bulk assets or
similar combination or transaction with another institution insured by the
Federal Deposit Insurance Corporation shall be considered to be a complete
liquidation for these purposes. In such transactions, the Liquidation Account
shall be assumed by the surviving institution.
XIII. RESTRICTIONS ON ACQUISITION OF HOLDING COMPANY.
A. Present regulations provide that for a period of three years following
completion of the Conversion, no person (i.e., an 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 Holding Company Stock without the prior approval
of the OTS. However, approval is not required for purchases directly from the
Holding Company or underwriters or a selling group acting on its behalf with a
view towards public resale, or for purchases not exceeding 1% per annum of the
shares outstanding, or for the acquisition of securities by one or more Tax-
Qualified Employee Stock Benefit Plans of the Holding Company or the Converted
Association, provided that the plan or plans do not have beneficial ownership in
the aggregate of more than 25% of any class of Holding Company Stock. 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 Holding Company Stock within such
three-year period, without the prior approval of the OTS, Holding Company Stock
beneficially owned by such person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matter submitted to the stockholders for a
vote.
B. The Holding Company may provide in its Articles of Incorporation a
provision that, for a period of 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
Holding Company Stock except with respect to purchases by one or more Tax-
Qualified Employee Stock Benefit Plans of the Holding Company or Converted
Association. The Holding Company may provide in its Articles of Incorporation
for such other provisions affecting the acquisition of Holding Company Stock as
shall be determined by its Board of Directors.
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<PAGE>
XIV. INTERPRETATION AND AMENDMENT OR TERMINATION OF THE PLAN.
The Association's Board of Directors shall have the sole discretion to
interpret and apply the provisions of the Plan to particular facts and
circumstances and to make all determinations necessary or desirable to implement
such provisions, including but not limited to matters with respect to giving
preference to natural persons and trusts of natural persons who are permanent
Residents of the Association's Local Community, and any and all interpretations,
applications and determinations made by the Board of Directors in good faith and
on the basis of such information and assistance as was then reasonably available
for such purpose shall be conclusive and binding upon the Association and its
members and subscribers in the Subscription and Community Offerings, subject to
the authority of the OTS.
If deemed necessary or desirable, the Plan may be substantively amended at
any time prior to submission of the Plan and proxy materials to the Members by a
two-thirds vote of the Association's Board of Directors. After submission of
the Plan and proxy materials to the Members, the Plan may be amended by a two-
thirds vote of the Association's 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 Special Meeting.
In the event that mandatory new regulations pertaining to conversions are
adopted by the OTS or any successor agency prior to the completion of the
Conversion, the Plan will be amended to conform to the new mandatory regulations
without a resolicitation of proxies or another Special Meeting. In the event
that new conversion regulations adopted by the OTS or any successor agency 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 Special Meeting.
By adoption of the Plan, the Association's Members authorize the Board of
Directors to amend and/or terminate the Plan under the circumstances set forth
above.
XV. EXPENSES OF THE CONVERSION.
The Holding Company and the Association will use their best efforts to
assure that expenses incurred in connection with the Conversion shall be
reasonable.
XVI. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS.
The Holding Company and the Converted Association may make scheduled
discretionary contributions to their Tax-Qualified Employee Stock Benefit Plans,
provided such contributions do not cause the Converted Association to fail to
meet its then-applicable regulatory capital requirements.
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<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF HOUSLEY KANTARIAN & BRONSTEIN, P.C. APPEARS HERE]
March 14, 1997
Board of Directors
Rocky Federal Savings and Loan Association
801 Swink Avenue
Rocky Ford, Colorado 81067
Re: Certain Federal Income Tax Consequences Relating
to Proposed Holding Company Conversion
------------------------------------------------
Gentlemen:
In accordance with your request, set forth hereinbelow is the opinion of
this firm relating to certain federal income tax consequences of the proposed
conversion of Rocky Ford Federal Savings and Loan Association (the
"Association") from a federally chartered mutual savings and loan association to
a federally chartered stock savings and loan association (the "Stock
Association") and the concurrent acquisition of 100% of the outstanding capital
stock of the Stock Association by Rocky Ford Financial, Inc. (the "Holding
Company"), a Delaware corporation formed at the direction of the Board of
Directors of the Association to become the parent holding company of the Stock
Association (the "Conversion").
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
January 14, 1997 and amended on March 11, 1997 (the "Plan"); the federal mutual
charter and bylaws of the Association, as amended; the certificate of
incorporation and bylaws of the Holding Company; the Affidavit of
Representations dated March 14, 1997 provided to us by the Association (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 January 27, 1997, and as amended and filed on March 14, 1997 (the
"Registration Statement"). In such examination, we have assumed, and have not
independently verified, the genuineness of all signatures on original documents
where due
<PAGE>
Board of Directors
Rocky Federal Savings and Loan Association
March 14, 1997
Page 2
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
hereinbelow a general summary of the relevant facts and proposed transaction,
qualified in its entirety by reference to the documents cited above.
The Association is a federally chartered mutual savings and loan
association which was chartered as a federal savings and loan association in
1934 and is in the process of converting to a federally chartered stock savings
and loan association. It is currently a member of the Federal Home Loan Bank
system and its deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") up to the applicable limits. The Association is subject to
comprehensive regulation and supervision by the FDIC and the Office of Thrift
Supervision ("OTS"), and to examination by the OTS. The Association operates
through a single office located in Rocky Ford, Colorado.
The principal business of the Association historically has consisted of
attracting deposits from the general public and investing these deposits in
loans secured by first mortgages on single-family residences in the
Association's market area. The Association derives its income principally from
interest earned on loans and, to a lesser extent, interest earned on mortgage-
backed securities and investment securities and noninterest income. Funds for
these activities are provided principally by operating revenues, deposits and
repayments of outstanding loans and investment securities and mortgage-backed
securities. At December 31, 1996, the Association had total assets of $20.5
million, deposits of $17.3 million, and equity (substantially restricted) of
$2.9 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 or her 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 (or equity) 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.
<PAGE>
Board of Directors
Rocky Federal Savings and Loan Association
March 14, 1997
Page 3
Further, savings depositors and certain borrowers are members of the
Association and thereby have voting rights in the Association. Under the
Association's federal mutual charter, as amended, each savings depositor is
entitled to cast one vote for each $100 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 otherwise entitled in such borrower's capacity as a
savings depositor of the Association. Also under such federal mutual charter, no
member is entitled to cast more than 1,000 votes. All of the interests held by a
savings depositor in the Association cease when such depositor closes his or her
accounts with the Association.
The Holding Company was incorporated in January 1997 under the laws of the
State of Delaware to act as the savings and loan holding company of the Stock
Association upon consummation of the Conversion. Prior to consummation of the
Conversion, the Holding Company has not been engaged in, and is not expected to
engage in, any material operations. After the Conversion, the Holding Company's
principal business will be the business of the Stock Association. The Holding
Company has an authorized capital structure of 3,000,000 shares of common stock
(the "Common Stock") and 1,000,000 shares of serial preferred stock, par value
$0.01 per share.
PROPOSED TRANSACTION
--------------------
The Association's Board of Directors has determined that the Conversion
will be beneficial to the communities within its primary market area and persons
residing within those communities. The Conversion will provide those persons
with an opportunity to be an equity owner of the Association through ownership
in the Holding Company. The Association believes that, by combining quality
service and products with a local ownership base, its customers and community
members who become stockholders will be more inclined to do business with the
Association. This is consistent with the Association's objective of being a
locally owned financial institution servicing local needs. The Board of
Directors also believes that equity ownership will enable local stockholders to
participate in the Association's success and profitability through possible
capital appreciation and dividends. In addition, the Board of Directors of the
Association has decided that in order 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, it would be advantageous for the Association to undertake the
Conversion.
Further, the Board of Directors of the Association has determined that in
order to enhance flexibility of operations, diversification of business
activities and geographic operations, financial capability for business and
regulatory purposes, and to enable the Stock Association to more
<PAGE>
Board of Directors
Rocky Federal Savings and Loan Association
March 14, 1997
Page 4
effectively compete with other types of financial services organizations, it
would be advantageous to have the stock of Stock Association held by a parent
holding company. The Board of Directors has also determined that the Conversion
would enhance the future access of the Holding Company and the Stock Association
to the capital markets.
Accordingly, pursuant to the Plan, the Association will be converted from a
federally chartered mutual savings and loan association to a federally chartered
stock savings and loan association. The Stock Association will then issue to the
Holding Company 100,000 shares of the Stock Association's common stock,
representing all of the shares of capital stock to be issued by the Stock
Association in the Conversion, and the Holding Company will make payment to the
Stock Association of an amount equal to at least 50% of the aggregate net
proceeds realized by the Holding Company from the sale of its Common Stock sold
pursuant to the Plan (after deducting the amount necessary to fund a loan to an
Employee Stock Ownership Plan being established in connection with the
Conversion), or such other portion of the aggregate net proceeds as may be
authorized or required by the OTS. Pursuant to the Prospectus, the Holding
Company currently anticipates making such payment to the Stock Association of an
amount equal to 50% of the aggregate net proceeds from the sale of the Common
Stock.
Also pursuant to the Plan, the Holding Company will offer its shares of
Common Stock for sale in a Subscription Offering. Shares of Common Stock
remaining, if any, may then be offered to the general public in a Community
Offering. Shares of the Common Stock not otherwise subscribed for in the
Subscription Offering and Community Offering may be offered at the discretion of
the Holding Company to certain members of the general public as part of a
community offering on a best efforts basis by a selling group of selected
broker-dealers.
The purchase price per share and total number of shares of Common Stock to
be offered and sold pursuant to the Plan 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 Stock Association, as a subsidiary of
--- -----
the Holding Company, which will in turn be determined by an independent
appraiser. The aggregate purchase price for all shares of the Common Stock will
be equal to such estimated pro forma market value. Pursuant to the Plan, all
--- -----
such shares of Common Stock will be issued and sold at a uniform price per
share. The Conversion, including the sale of newly issued shares of the stock
of the Stock Association 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
non-transferable subscription rights on the basis of preference categories in
the following order of priority:
<PAGE>
Board of Directors
Rocky Federal Savings and Loan Association
March 14, 1997
Page 5
(1) Eligible Account Holders (including certain former depositors of the
Association as described in the Plan);
(2) Tax-Qualified Employee Stock Benefit Plans (i.e., the ESOP);
(3) Supplemental Eligible Account Holders; and
(4) Other Members.
However, any shares of Common Stock sold in excess of the high end of the
Valuation Range may be first sold to Tax-Qualified Employee Stock Benefit Plans
set forth in category (2) above.
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered in the Community Offering in the following order of priority:
(a) Natural persons and trusts of natural persons who are permanent
Residents of the Association's Local Community; and
(b) The general public.
Shares not sold in the Subscription Offering and the Community Offering, if
any, may thereafter be offered for sale to certain members of the general public
as part of a community offering on a best efforts basis by a selling group of
selected broker-dealers. The sale of shares in the Subscription Offering,
Community Offering, and as sold through the selected broker-dealers would be
consummated at the same time.
The Plan also provides for the establishment of a Liquidation Account by
the Stock Association for the benefit of all Eligible Account Holders and
Supplemental Eligible Account Holders in an amount equal to the net worth (or
regulatory capital) 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 Stock
Association, except that the Stock Association may not declare or pay cash
dividends on or repurchase any of its stock if the result thereof would be to
reduce its net worth below the amount required to maintain the Liquidation
Account. All such 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 Stock Association in event of liquidation
prior to any liquidating distribution being made with respect to capital stock.
Under the Plan, the Conversion shall not be deemed to be a liquidation of the
Association for purposes of distribution of the Liquidation Account. Instead,
upon consummation of the Conversion, the Liquidation Account, together with the
<PAGE>
Board of Directors
Rocky Federal Savings and Loan Association
March 14, 1997
Page 6
related rights and obligations of the Stock Association, shall be assumed by the
Stock Association.
Following the Conversion, voting rights in the Stock Association will rest
exclusively with the sole holder of stock in the Stock Association, which will
be the Holding Company. Voting rights in the Holding Company will rest
exclusively in the holders of the Common Stock. The Conversion will not
interrupt the business of the Association. The Stock Association will, after the
Conversion, engage in the same business as that of the Association immediately
prior to the Conversion, and will continue to be subject to regulation and
supervision by the OTS and the FDIC. Further, the deposits of the Stock
Association will continue to be insured by the FDIC. 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 Conversion except to the extent funds on deposit are used to pay for Common
Stock purchased in connection with the Conversion. All loans of the Association
will remain unchanged and retain their same characteristics in the Stock
Association immediately following the Conversion.
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 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 to the Stock Association as a result of the 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 Stock Association as in the hands of the Association immediately
prior to the Conversion (Section 362(b) of the Code).
<PAGE>
Board of Directors
Rocky Federal Savings and Loan Association
March 14, 1997
Page 7
3. The holding period of the assets of the Association to be received by
the Stock Association will include the period during which the assets
were held by the Association prior to the Conversion (Section 1223(2)
of the Code).
4. No gain or loss will be recognized by the Stock Association upon its
receipt of money from the Holding Company in exchange for shares of
common stock of Stock Association (Section 1032(a) of the Code). The
Holding Company will be transferring solely cash to the Stock
Association in exchange for all the outstanding capital stock of the
Stock Association 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 its
receipt of money in exchange for shares of the Common Stock (Section
1032(a) of the Code).
6. No gain or loss will be recognized by the Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members of the
Association upon the issuance to them of deposit accounts in the Stock
Association in the same dollar amount and on the same terms and
conditions in exchange for their deposit accounts in the Association
held immediately prior to the Conversion. (Section 1001(a) of the
Code; Treas. Reg. (S)1.1001-1(a)).
7. The tax basis of the savings accounts of the Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Members in the Stock
Association received as part of the 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. Each depositor of the Association will recognize gain upon the receipt
of his or her respective interest in the Liquidation Account
established by the Stock Association pursuant to the Plan and the
receipt of his or her subscription rights deemed to have been received
for federal income tax purposes, but only to the extent of the excess
of the combined fair market value of a depositor's interest in such
Liquidation Account and subscription rights over the depositor's basis
in the former interests in the Association other than deposit
accounts. Persons who subscribe in the Conversion but who are not
depositors of the Association will recognize gain upon the receipt of
subscription rights deemed to have been received for federal income
tax purposes, but only to the extent of the excess of the fair market
value of such subscription rights over such person's former
<PAGE>
Board of Directors
Rocky Federal Savings and Loan Association
March 14, 1997
Page 8
interests in the Association, if any. Any such gain realized in the
Conversion would be subject to immediate recognition.
9. The basis of each account holder's interest in the Liquidation Account
received in the Conversion and to be established by the Stock
Association pursuant to the 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 Conversion. (Rev. Rul. 56-572, 1956-2 C.B.182).
11. The basis of the shares of Common Stock acquired in the Conversion
will be equal to the purchase price of such shares, increased, in the
case of such shares 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 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 state,
local, foreign, or other federal 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 subsequent to
consummation of the Conversion. Prior to that time, we undertake to update or
supplement our opinion in the event of a material change in the federal income
tax consequences set forth above and to file such revised opinion as an exhibit
to the Registration Statement and the Association's Application for Conversion
on Form AC ("Form AC"). This opinion is not binding on the Internal Revenue
Service and there can be no
<PAGE>
Board of Directors
Rocky Federal Savings and Loan Association
March 14, 1997
Page 9
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.
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 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 Form AC, respectively, and the
references to our firm in the Prospectus, which is a part of both the
Registration Statement and Form AC, under the headings "The Conversion -- Effect
of Conversion to Stock Form on Depositors and Borrowers of the Association --Tax
Effects" and "Tax Opinion."
Very truly yours,
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
By: /s/ Howard S. Parris
------------------------------------
Howard S. Parris
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF GRIMSLEY, WHITE & COMPANY]
March 14, 1997
Board of Directors
Rocky Ford Federal Savings and Loan Association
Board Members:
You have requested our opinion as to the Colorado income tax consequences
relating to the proposed conversion of Rocky Ford Federal Savings and Loan
Association (the "Bank") from a federally chartered mutual savings bank to a
federally chartered stock savings bank ("Stock Bank") and the formation of Rocky
Ford Financial, Inc. ("Holding Company") which will acquire all of the
outstanding stock of Stock Bank.
You have submitted to us a copy of the federal income tax opinion ("Federal
Opinion") relating to the federal income tax consequences of the proposed
transactions prepared by your counsel. Housley Kantarian & Bronstein, P.C.,
Washington, D.C.
Our opinion regarding the Colorado income tax consequences of the proposed
transaction is based on the same facts and conditions contained in the Federal
Opinion dated March 14, 1997. It is also based on existing Colorado tax law
which is subject to change. We have not reviewed the legal documents necessary
to effectuate the steps to be undertaken, and we assume that all steps will be
properly effectuated under state and federal law and will be consistent with the
legal documentation.
In our opinion, the Colorado income tax consequences of the proposed transaction
are the same as the federal income tax consequences of the proposed transaction
identified in the Federal Opinion.
The State of Colorado has adopted federal taxable income, as currently amended,
as the starting point for computing Colorado taxable income. Income tax terms
are defined in relation to the Internal Revenue Code of 1986 as amended.
Taxpayer are required to use the same taxable year and accounting methods as are
used in computing federal taxable income (Colorado Revised Statutes L. 1992,
c330, Section 9, eff. 4-16-92)
Several specific modifications to federal taxable income are enumerated in the
Colorado Statutes in determining taxable income for Colorado purposes, however,
there are no specific modifications which apply to the proposed transaction.
Our opinion as expressed above is rendered only with respect to the Colorado
income tax consequences of the specific matters discussed herein, and we express
no opinion with respect to any other Colorado tax matter or any other federal,
state, local or foreign tax matter relating to the proposed transaction. Our
opinion is based on the facts and conditions as stated herein, whether directly
or by reference to the Federal
<PAGE>
Board of Directors
Rocky Ford Federal Savings and Loan Association
March 14, 1997
Page 2
Opinion. If any of the foregoing is not entirely complete or accurate, it is
imperative that we be informed immediately, as the inaccuracy or incompleteness
could have a material effect on our conclusions. In rendering our opinion, we
are relying upon the relevant provisions of the Internal Revenue Code of 1986,
as amended, and Colorado Statutes, as amended, the regulations and rules
thereunder and judicial and administrative interpretations thereof, which are
subject to change or modification by subsequent legislative, regulatory,
administrative, or judicial decisions. Any such changes could have an effect on
the validity of our opinion. We undertake no responsibility to update or
supplement our opinion. Our opinion is not binding on the Internal Revenue
Service or the Colorado Department of Revenue, nor can any assurance be given
that any of the foregoing parties will not take a contrary position or that our
opinion will be upheld if challenged by such parties.
Very truly yours
/s/ Grimsley, White & Company
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF GRIMSLEY, WHITE & COMPANY]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
As the independent certified public accountant of Rocky Ford Federal Savings and
Loan Association, we hereby consent to the use of our report and to all
references to our Firm included in or made part of this Amendment Number One to
the Registration Statement.
March 13, 1997
/s/ Grimsley, White & Company
Grimsley, White & Company
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 178,362
<INT-BEARING-DEPOSITS> 3,697,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 627,300
<INVESTMENTS-CARRYING> 3,095,415
<INVESTMENTS-MARKET> 3,154,772
<LOANS> 12,596,225
<ALLOWANCE> 60,000
<TOTAL-ASSETS> 20,535,532
<DEPOSITS> 17,335,263
<SHORT-TERM> 0
<LIABILITIES-OTHER> 341,670
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 2,858,599
<TOTAL-LIABILITIES-AND-EQUITY> 20,535,532
<INTEREST-LOAN> 274,176
<INTEREST-INVEST> 120,514
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 394,690
<INTEREST-DEPOSIT> 206,896
<INTEREST-EXPENSE> 206,896
<INTEREST-INCOME-NET> 187,794
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 117,309
<INCOME-PRETAX> 81,888
<INCOME-PRE-EXTRAORDINARY> 56,588
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,588
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.73
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 60,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 60,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 60,000
</TABLE>
<PAGE>
Rocky Ford Financial, Inc.
Stock Order Form
------------------------------------
EXPIRATION DATE
ROCKY FORD FEDERAL for Stock Order
SAVINGS AND LOAN Forms:
ASSOCIATION , 1997
STOCK INFORMATION 12:00 Noon,
CENTER 801 SWINK Mountain Time
AVENUE ROCKY FORD,
CO 81067 (719) -
- --------------------------------------------------------------------------------
IMPORTANT--PLEASE NOTE: A properly completed original stock order form must
be used to subscribe for common stock. Faxes or copies of this form are not
required to be accepted. Please read the Stock Ownership Guide and Stock
Order Form Instructions as you complete this Form.
- --------------------------------------------------------------------------------
The minimum number of shares that
(1) NUMBER OF SHARES may be subscribed for is 25
[ ] shares. The maximum number of
shares that may be subscribed for
SUBSCRIPTION PRICE in the Subscription Offering by
X $10.00 = any person is 12,500 shares. The
maximum number of shares that may
(2) TOTAL PAYMENT DUE be purchased by any person in the
[ ] Subscription Offering together
with his or her associates or
groups acting in concert is
12,500 shares. The maximum number
of shares that may be purchased
by any person in the Community
Offering together with any
associate or group of persons
acting in concert is 12,500
shares. The maximum number of
shares that may be purchased in
the conversion by any person
together with his or her
associates or groups acting in
concert is 12,500 shares.
Management has the authority to
increase or decrease these
limits.
[_] (3) EMPLOYEE/OFFICER/DIRECTOR (6) PURCHASER INFORMATION
INFORMATION Eligible Account Holder --
Check here if you are a director, Check here if you were a
officer or employee of Rocky Ford depositor of at least $50.00
Federal Savings and Loan Association or at Rocky Ford Federal on
a member of such person's immediate December 31, 1995. Enter
family. information below for all
deposit accounts that you had
at Rocky Ford Federal on
December 31, 1995.
- -------------------------------------------A. [_]
Check Amount
[_] (4) METHOD OF PAYMENT/CHECK
Supplemental Eligible Account
Enclosed is a check, Holder--Check here if you
bank draft or money were a depositor of at least
order made payable to $50.00 at Rocky Ford Federal
Rocky Ford Federal on , 199 but are not an
Savings and Loan Eligible Account Holder.
Association in the Enter information be low for
amount of: all deposit accounts that you
had at Rocky Ford Federal on
, 199 .
- -------------------------------------------B. [_]
[_] (5) METHOD OF PAYMENT/WITHDRAWAL
Other Member -- Check here if
The undersigned authorizes withdrawal you held a deposit or loan at
from the following account(s) at Rocky Rocky Ford Federal as of
Ford Federal. There is no penalty for , 199 but are not an
early withdrawal used for this payment. Eligible Account Holder or
Supplemental Eligible Account
Holder.
C. [_]
--------------------------------------
Account Number(s) Withdrawal Local Community Resident --
Amount(s) Check here if you are a
permanent resident of Otero
County, Colorado.
D. [_]
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
Account Title (Names on
Accounts)
Total Withdrawal ------------------ Account
Amount Number(s)
----------------------------------
----------------------------------
----------------------------------
PLEASE NOTE: FAILURE TO LIST
ALL YOUR ACCOUNTS MAY RESULT IN
THE LOSS OF PART OR ALL OF YOUR
SUBSCRIPTION RIGHTS. IF
ADDITIONAL SPACE IS NEEDED,
PLEASE UTILIZE THE BACK OF THIS
STOCK ORDER FORM.
(7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP
[_] Individual [_] Joint Tenants
[_] Tenants in Common
[_] Corporation or Partnership
[_] Uniform Gifts to Minors Act
[_] Fiduciary (i.e. trust, estate, etc.) [_] Other _________________
Social Security # or
Tax ID
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT CLEARLY)
Name(s) continued Social Security # or
Tax ID
Street Address City State Zip Code
-------------
(9) TELEPHONE Evening
INFORMATION Daytime County of Residence
( ) ( )
- --------------------------------------------------------------------------------
(10) NASD AFFILIATION
[_]
(11) ASSOCIATE--ACTING
IN CONCERT
[_]
Check here if you are a member of the National Check here, and
Association of Securities Dealers, Inc. ("NASD"), complete the reverse
a person associated with an NASD member, a member side of this Form, if
of the immediate family of any such person to you or any associates
whose support such person contributes, directly (as defined on the
or indirectly, or the holder of an account in reverse side of this
which an NASD member or person associated with an Form) or persons
NASD member has a beneficial interest. To comply acting in concert
with conditions under which an exemption from the with you have
NASD's Interpretation With Respect to Free-Riding submitted other
and Withholding is available, you agree, if you orders for shares in
have checked the NASD Affiliation box, (i) not to the Subscription
sell, transfer or hypothecate the stock for a and/or Community
period of 90 days following issuance, and (ii) to Offerings.
report this subscription in writing to the
applicable NASD member within one day of payment
therefor.
- --------------------------------------------------------------------------------
(12) ACKNOWLEDGMENT
To be effective, this fully completed Stock Order Form must be actually
received by Rocky Ford Federal, no later than 12:00 p.m. Noon, Mountain
Time, on , 1997, unless extended; otherwise this Stock Order Form and
all subscription rights will be void. Completed Stock Order Forms, together
with the required payment or withdrawal authorization, may be delivered to
any full service office of Rocky Ford Federal or may be mailed to the Post
Office Box indicated on the enclosed business reply envelope. All rights
exercisable hereunder are not transferable and shares purchased upon
exercise of such rights must be purchased for the account of the person
exercising such rights.
It is understood that this Stock Order Form will be accepted in accordance
with, and subject to, the terms and conditions of the Plan of Conversion of
Rocky Ford Federal described in the accompanying Prospectus. If the Plan of
Conversion is not approved by the voting members of Rocky Ford Federal at a
Special Meeting to be held on , 1997, or any adjournment thereof, all
orders will be cancelled and funds received as payment, with accrued
interest, will be returned promptly.
The undersigned agrees that after receipt by Rocky Ford Federal, this Stock
Order Form may not be modified, withdrawn or cancelled (unless the
conversion is not completed within 45 days after the completion of the
Subscription Offering) without the Association's consent, and if
authorization to withdraw from deposit accounts at Rocky Ford Federal has
been given as payment for shares, the amount authorized for withdrawal shall
not otherwise be available for withdrawal by the undersigned.
Under penalty of perjury, I certify that the Social Security or Tax ID
Number and the other information provided under number 8 of this Stock Order
Form are true, correct and complete that I am purchasing for my own account
and that there is no agreement or understanding regarding the transfer of my
subscription rights or the sale or transfer of these shares.
Applicable Regulations prohibit any person 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. Rocky Ford Federal and Rocky Ford
Financial, Inc. 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 such transfer.
SIGNATURE DATE SIGNATURE DATE DATE REC'D _________
CATEGORY ___________
ORDER # __ BATCH ___
DEPOSIT ____________
A SIGNED ACKNOWLEDGEMENT FORM MUST ACCOMPANY ALL STOCK ORDER FORMS
(SEE REVERSE SIDE)
I acknowledge that the common stock offered is not a savings or deposit
account and is not federally insured or guaranteed.
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED TWICE: BELOW AND ON THE
ACKNOWLEDGEMENT FORM ON THE REVERSE HEREOF.
<PAGE>
ITEM (6)A, B, C--(CONTINUED)
Account Title (Names on Account Account Title (Names on Account
Accounts) Number(s) Accounts) Number(s)
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
ITEM (11)--(CONTINUED)
List below all other orders "Associate" is defined as: (i) any
submitted by you or your corporation or organization (other than
Associates (as defined) or by Rocky Ford Federal, Rocky Ford Financial,
persons acting in concert with Inc., or a majority-owned subsidiary of
you. Rocky Ford Federal or Rocky Ford Financial,
Inc.) 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 a director or in
a similar fiduciary capacity; provided,
however, such term shall not include Rocky
Ford Financial, Inc.'s or Rocky Ford
Federal's employee benefit plans in which
such person has a substantial beneficial
interest or serves as a director or in a
similar fiduciary capacity; and (iii) any
relative or spouse of such person, or any
relative of such spouse, who either has the
same home as such person or who is a
Director of Rocky Ford Federal or Rocky Ford
Financial, Inc. or any subsidiaries thereof.
Number of
Name(s) listed on Shares
other Stock Order Ordered
Forms
- --------------------------------
- --------------------------------
- --------------------------------
- --------------------------------
- --------------------------------
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED BELOW AND ON THE FRONT OF
THIS FORM.
ACKNOWLEDGEMENT FORM
I/WE ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED, AND IS NOT GUARANTEED BY ROCKY FORD FEDERAL SAVINGS AND
LOAN ASSOCIATION (THE "Association") OR BY THE FEDERAL GOVERNMENT.
If anyone asserts that this security is federally insured or guaranteed, or
is as safe as an insured deposit, I should call the Office of Thrift
Supervision, Midwest Region Director, Frederick R. Casteel at (972) 281-
2000.
I/We further certify that, before purchasing the common stock, par value
$.01 per share, of Rocky Ford Financial, Inc., the proposed holding company
for Rocky Ford Federal Savings and Loan Association, I/we received a
Prospectus dated , 1997 (the "Prospectus").
The Prospectus that I/we received contains disclosure concerning the nature
of the security being offered and describes the risks involved in the
investment, including but not limited to:
1. Anticipated Low Return on Equity Following Conversion_______(page 16)
2. Future of Thrift Industry___________________________________(page 16)
3. Potential Effects of Changes in Interest Rates and the Current
Interest Rate Environment_____________________________________(page 16)
4. Limited and Illiquid Market for the Common Stock____________(page 17)
5. Dependence on Chief Executive Officer_______________________(page 18)
6. Certificate of Incorporation, Bylaw and Statutory Provisions That
Could Discourage Hostile Acquisitions of Control______________(page 18)
7. Valuation Not Indicative of Future Price of Common Stock____(page 18)
8. Possible Income Tax Consequences of Distribution of Subscription
Rights________________________________________________________(page 18)
9. Possible Dilutive Effect of MRP and Stock Options___________(page 19)
10. Potential Impact on Voting Control of Purchases by Management___(page 19)
11. Potential Cost of ESOP and MRP______________________________(page 20)
Signature Date Signature Date
Name (Please Print) Name (Please Print)
<PAGE>
Rocky Ford Financial, Inc.
STOCK OWNERSHIP GUIDE
INDIVIDUAL
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", "single person",
etc.
- --------------------------------------------------------------------------------
JOINT TENANTS
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
- --------------------------------------------------------------------------------
TENANTS IN COMMON
Tenants in common may also be specified to identify two or more owners. When
stock is 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.
- --------------------------------------------------------------------------------
UNIFORM GIFT TO MINORS ACT ("UGMA")
Stock may be held in the name of a custodian for a minor under the Uniform
Gift to Minors Act of each state. There may be only one custodian and one
minor designated on a stock certificate. The standard abbreviation for
Custodian is "CUST", while the Uniform Gift to Minors Act is "UGMA". Standard
U.S. Postal Service state abbreviations should be used to describe the
appropriate state. For example, stock held by John Doe as custodian for Susan
Doe under the Colorado Uniform Gift to Minors Act will be abbreviated John
Doe, CUST Susan Doe UGMA, CO (use minor's social security number).
- --------------------------------------------------------------------------------
FIDUCIARIES
Information provided with respect to stock to be held in a fiduciary
capacity must contain the following:
. The name(s) of the fiduciary. If an individual, list the first name,
middle initial and last name. If a corporation, list the full corporate
title (name). If an individual and a corporation, list the corporation's
title before the individual.
. The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
. A description of the document governing the fiduciary relationship, such
as a living trust agreement or court order. Documentation establishing a
fiduciary relationship may be required to register your stock in a
fiduciary capacity.
. The date of the document governing the relationship, except that the date
of a trust created by a will need not be included in the description.
. The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is: John
Doe, Trustee Under Agreement Dated 10-1-87 for Susan Doe.
- --------------------------------------------------------------------------------
STOCK ORDER FORM INSTRUCTIONS
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
purchased by the Purchase Price of $10.00 per share. The minimum purchase is
25 shares. No Eligible Account Holder, Supplemental Eligible Account Holder
or Other Member, including individuals on a joint account, may purchase in
their capacity as such in the subscription Offering more than 12,500 shares,
or $125,000, of Common Stock. No person, including associates of and persons
acting in concert with such person, may purchase in the Community Offering
more than 12,500 shares, or $125,000, of Common Stock. No person or entity,
together with associates or persons acting in concert, may purchase more than
12,500 shares, or $125,000, of the Common Stock in the Stock Conversion.
Rocky Ford Financial, Inc. and Rocky Ford Federal reserve the right to reject
the subscription of any order received in the Community Offering, in whole or
in part.
- --------------------------------------------------------------------------------
ITEM 3--
Please check this box to indicate whether you are a director, officer or
employee of Rocky Ford Federal or a member of such person's immediate family.
- --------------------------------------------------------------------------------
ITEM 4--
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 Rocky Ford Federal
Savings and Loan Association. Your funds will earn interest at the Bank's
passbook rate of interest until the Stock Conversion is completed. DO NOT
MAIL CASH TO PURCHASE STOCK! Please check this box if your method of payment
is by check, bank draft or money order.
- --------------------------------------------------------------------------------
ITEM 5--
If you pay for your stock by a withdrawal from a deposit account at Rocky
Ford Federal, insert the account number(s) and the amount of your withdrawal
authorization for each account. The total amount withdrawn should equal the
amount of your stock purchase. There will be no penalty assessed for early
withdrawals from certificate accounts used for stock purchases. THIS FORM OF
PAYMENT MAY NOT BE USED IF YOUR ACCOUNT IS AN INDIVIDUAL RETIREMENT ACCOUNT.
PLEASE CONTACT THE STOCK INFORMATION CENTER FOR INFORMATION REGARDING
PURCHASES FROM AN INDIVIDUAL RETIREMENT ACCOUNT.
- --------------------------------------------------------------------------------
ITEM 6--
Please check the appropriate box if you were;
(a) A depositor at Rocky Ford Federal on December 31, 1995 (the "Eligibility
Record Date") with at least $50.00 on deposit.
(b) A depositor at Rocky Ford Federal on , 199 (the "Supplemental
Eligibility Record Date") with at least $50.00 on deposit.
(c) A depositor or certain loan customer at Rocky Ford Federal on , 1997
(the "Voting Record Date").
(d) A permanent resident of Otero County, Colorado.
- --------------------------------------------------------------------------------
ITEMS 7, 8 AND 9--
The stock transfer industry has developed a uniform system of shareholder
registrations that we will use in the issuance of your Rocky Ford Financial,
Inc. Common Stock. Please complete items 7, 8 and 9 as fully and accurately
as possible, and be certain to supply your social security or Tax I.D.
number(s) and your daytime and evening telephone number(s). We will need to
call you if we cannot execute your order as given. If you have any questions
regarding the registration of your stock, please consult your legal advisor.
Stock ownership must be registered in one of the ways described above under
"Stock Ownership Guide."
- --------------------------------------------------------------------------------
ITEM 10--
Please check this box if your are a member of the NASD or if this item
otherwise applies to you.
- --------------------------------------------------------------------------------
ITEM 11--
Please check this box if you or any associate (as defined on the reverse side
of the Stock Order Form) or person acting in concert with you has submitted
another order for shares and complete the reverse side of the Stock Order
Form.
- --------------------------------------------------------------------------------
ITEM 12--
Please sign and date the Stock Order Form and Certification Form where
indicated. Before you sign, review the Stock Order Form, including the
acknowledgement, and the Certification Form. Normally, one signature is
required. An additional signature is required only when payment is to be made
by withdrawal from a deposit account that requires multiple signatures to
withdraw funds.
- --------------------------------------------------------------------------------
You may mail your completed Stock Order Form and Certification Form in the
envelope that has been provided, or you may deliver your Stock Order Form and
Certification Form directly to Rocky Ford Federal. Your Stock Order Form and
Certification Form, properly completed, and payment in full (or withdrawal
authorization) at the subscription price must be received by Rocky Ford
Federal no later than 12:00 Noon, Mountain time, on , 1997 or it will
become void. Stock Order Forms and Certification Forms shall be deemed
received only upon actual receipt at Rocky Ford Federal. If you have any
remaining questions, or if you would like assistance in completing your Stock
Order Form, you may call the Stock Information Center at 719- . The
Stock Information Center will be open between the hours of 9:00 a.m. and 4:00
p.m., Mountain Time, Monday through Friday.
<PAGE>
ROCKY FORD FINANCIAL, INC.
PROPOSED HOLDING COMPANY FOR
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
ROCKY FORD, COLORADO
PROPOSED MARKETING MATERIALS
3-12-97
[DRAFT]
<PAGE>
Marketing Materials
Rocky Ford Financial, Inc.
Rocky Ford, Colorado
Table of Contents
-----------------
I. Press Releases
A. Explanation
B. Schedule
C. Distribution List
D. Press Release Examples
II. Advertisements
A. Explanation
B. Schedule
C. Advertisement Examples
III. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
IV. Cover Letters
A. Explanation
B. Examples
V. IRA Mailing
A. Explanation
B. Quantity
C. IRA Mailing Example
VI. Individual Letters and Community Meeting Invitation
A. Explanation
B. Method of Distribution
C. Examples
VII. Counter Cards and Lobby Posters
A. Explanation
B. Quantity
VIII. Proxy Reminder
A. Explanation
B. Example
1
<PAGE>
I. Press Releases
A. Explanation
In an effort to assure that all customers receive prompt accurate
information in a simultaneous manner, Trident advises the Association to
forward press releases to area newspapers, radio stations, etc. at various
points during the conversion process.
Only press releases approved by Conversion Counsel and the OTS will be
forwarded for publication in any manner.
B. Schedule
1. OTS Approval of Conversion
2. Close of Stock Offering
2
<PAGE>
C. Distribution List
National Distribution List
--------------------------
National Thrift News Wall Street Journal
- -------------------- -------------------
212 West 35th Street World Financial Center
13th Floor 200 Liberty
New York, New York 10001 New York, NY 10004
Richard Chang
American Banker SNL Securities
- --------------- --------------
One State Street Plaza Post Office Box 2124
New York, New York 10004 Charlottesville, Virginia 22902
Michael Weinstein
Barrons Investors Business Daily
- ------- ------------------------
Dow Jones & Company 12655 Beatrice Street
Barrons Statistical Information Post Office Box 661750
200 Burnett Road Los Angeles, California 90066
Chicopee, Massachusetts 01020
New York Times
- --------------
229 West 43rd Street
New York, NY 10036
3
<PAGE>
Local Media List
----------------
(To be provided)
Newspaper
- ---------
Radio
- -----
4
<PAGE>
D. Press Release Examples
PRESS RELEASE FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Keith E. Waggoner
(719) 254-7642
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
-----------------------------------------------
CONVERSION TO STOCK FORM APPROVED
---------------------------------
Rocky Ford, Colorado (__________ __, 1997) - Keith E. Waggoner, CEO of
Rocky Ford Federal Savings and Loan Association ("Rocky Ford Federal Savings and
Loan" or the "Association"), Rocky Ford, Colorado, announced that Rocky Ford
Federal Savings and Loan has received approval from the Office of Thrift
Supervision to convert from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings and loan association. In
connection with the Conversion, Rocky Ford Federal Savings and Loan has formed a
holding company, Rocky Ford Financial, Inc., to hold all of the outstanding
capital stock of Rocky Ford Federal Savings and Loan.
Rocky Ford Financial, Inc. is offering up to 368,000 shares of its common
stock, subject to adjustment, at a price of $10.00 per share. Certain account
holders and borrowers of the Association will have an opportunity to subscribe
for stock through a Subscription Offering that closes on ___________, 1997.
Shares that are not subscribed for during the Subscription Offering may be
offered to certain members of the general public in a Community Offering, with
first preference given to natural persons and trusts of natural persons who are
residents of Otero County. The Subscription Offering and Community Offering, if
conducted, will be managed by Trident Securities, Inc. of Raleigh, North
Carolina. Copies of the Prospectus relating to the offerings and describing the
Plan of Conversion will be mailed to customers on or about __________ __, 1997.
As a result of the Conversion, Rocky Ford Federal Savings and Loan will be
structured in
5
<PAGE>
the stock form as are all commercial banks and an increasing number of savings
institutions and will be a wholly-owned subsidiary of Rocky Ford Financial, Inc.
According to Mr. Waggoner, "Our day to day operations will not change as a
result of the Conversion and deposits will continue to be insured by the FDIC up
to the applicable legal limits."
Customers with questions concerning the stock offering should call Rocky
Ford Federal Savings and Loan's Stock Information Center at (719) ________, or
visit Rocky Ford Federal Savings and Loan's office.
6
<PAGE>
PRESS RELEASE FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Keith E. Waggoner
(719) 254-7642
ROCKY FORD FEDERAL SAVINGS AND LOAN COMPLETES INITIAL STOCK OFFERING
--------------------------------------------------------------------
Rocky Ford, Colorado - (____________, 1997) Keith E. Waggoner, CEO of Rocky
Ford Federal Savings and Loan Association ("Rocky Ford Federal Savings and
Loan" or the "Association"), announced today that Rocky Ford Financial, Inc.,
the proposed holding company for Rocky Ford Federal Savings and Loan, has
completed its initial stock offering in connection with the Association's
conversion from mutual to stock form. A total of ____________ shares were sold
at the price of $10.00 per share.
On ____________, 1997, Rocky Ford Federal Savings and Loan's Plan of
Conversion was approved by the Association's voting members at a special meeting
of members.
Mr. Waggoner said that the officers and boards of directors of Rocky Ford
Financial, Inc. and Rocky Ford Federal Savings and Loan wished to express their
thanks for the response to the stock offering and that Rocky Ford Federal
Savings and Loan looks forward to serving the needs of its customers and new
stockholders as a community-based stock institution. The stock is anticipated
to commence trading on ____________, 1997 on the OTC Bulletin Board. Trident
Securities, Inc. of Raleigh, North Carolina managed the stock offering.
7
<PAGE>
II. Advertisements
A. Explanation
The intended use of the attached advertisement "A" is to notify Rocky Ford
Federal Savings and Loan's customers and members of the local community
that the conversion offering is underway.
The intended use of advertisement "B" is to remind Rocky Ford Federal
Savings and Loan's customers of the closing date of the Subscription
Offering.
B. Media Schedule
1. Advertisement A - To be run immediately following OTS approval and
possibly run weekly for the first three weeks.
2. Advertisement B - To be run during the last week of the subscription
offering.
Trident may feel it is necessary to run more ads in order to remind
customers of the close of the Subscription Offering and the Community
Offering, if conducted.
Alternatively, Trident may, depending upon the response from the customer
base, choose to run fewer ads or no ads at all.
These ads will run in the local newspapers.
The ad size will be as shown or smaller.
8
<PAGE>
- --------------------------------------------------------------------------------
THIS ANNOUNCEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THESE SHARES
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION,
THE OFFICE OF THRIFT SUPERVISION OR THE FEDERAL DEPOSIT INSURANCE CORPORATION,
NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
NEW ISSUE __________, 1997
368,000 SHARES
These shares are being offered pursuant
to a Plan of Conversion whereby
ROCKY FORD FEDERAL
SAVINGS AND LOAN ASSOCIATION
Rocky Ford, Colorado, will
convert from a federal mutual savings and loan association to a
federal capital stock savings and loan association
and become a wholly owned subsidiary of
ROCKY FORD FINANCIAL, INC.
COMMON STOCK
_______________
PRICE $10.00 PER SHARE
_______________
TRIDENT SECURITIES, INC.
For a copy of the prospectus call (719) ________.
Copies of the prospectus may be obtained in any State in which this
announcement
is circulated from Trident Securities, Inc. or such other brokers and
dealers
as may legally offer these securities in such state.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
ROCKY FORD FEDERAL
SAVINGS AND LOAN ASSOCIATION
__________ __, 1997 IS THE DEADLINE TO
ORDER STOCK OF ROCKY FORD FINANCIAL, INC.
Customers of Rocky Ford Federal Savings and Loan Association
have the opportunity
to invest in Rocky Ford Federal Savings and Loan Association
by subscribing
for common stock in its proposed holding company
ROCKY FORD FINANCIAL, INC.
A Prospectus relating to these securities is
available at our office or by calling our
Stock Information Center at (719) ________.
This announcement is neither an offer to sell nor a
solicitation of an offer to buy the stock of
Rocky Ford Financial, Inc. The offer is made only by the
Prospectus. The shares of common stock are not
deposits or savings accounts and will not be insured
by the Federal Deposit Insurance Corporation
or any other government agency.
Copies of the Prospectus may be obtained in any State in which this announcement
is circulated from Trident Securities, Inc. or such other brokers and dealers
as may legally offer these securities in such state.
- --------------------------------------------------------------------------------
10
<PAGE>
III. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
conversion. It serves two purposes: a) to answer some of the most commonly
asked questions in "plain, everyday language"; and b) to highlight in
brochure form the purchase commitments of the Association's officers and
directors shown in the Prospectus. Although most of the answers are taken
verbatim from the Prospectus, it saves the individual from searching for
the answer to a simple question.
B. Method of Distribution
There are four primary methods of distribution of the Question and Answer
brochure. However, regardless of the method the brochures are always
accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial mailing to
all members of the Association.
2. Question and Answer brochures are available in Rocky Ford Federal
Savings and Loan's office.
3. Question and Answer brochures are sent out in a standard information
packet to all interested investors who phone the Stock Information
Center requesting information.
11
<PAGE>
PROPOSED OFFICER AND DIRECTOR PURCHASES
<TABLE>
<CAPTION>
Name and Position Total Shares Amount of Purchase
- ----------------- ------------ ------------------
<S> <C> <C>
Donald F. Gause, President and Director 12,500 $ 125,000
Keith E. Waggoner, Executive Vice President 12,500 $ 125,000
and Chief Executive Officer
Norman L. Bailey, Director 12,500 $ 125,000
William E. Burrell, Director 12,500 $ 125,000
Francis E. Clute, Director 12,500 $ 125,000
Brian H. Hancock, Director 12,500 $ 125,000
R. Dean Jones, Director 12,500 $ 125,000
Wayne W. Whittaker, Director 12,500 $ 125,000
------- ----------
All directors and executive officers,
as a group (8 persons) and their
associates * 100,000 $1,000,000
</TABLE>
* Represents 31.25 % of the total shares to be issued based upon the issuance of
320,000 shares. Excludes amounts associated with the Association's proposed
ESOP and MRP.
12
<PAGE>
QUESTIONS AND ANSWERS
REGARDING
THE PLAN OF CONVERSION
On January 14, 1997, the Board of Directors of Rocky Ford Federal Savings and
Loan Association ("Rocky Ford Federal Savings and Loan" or the "Association")
unanimously adopted the Plan of Conversion, pursuant to which Rocky Ford Federal
Savings and Loan will convert from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings and loan association. In
addition, all of Rocky Ford Federal Savings and Loan's outstanding capital stock
will be issued Rocky Ford Financial, Inc. (the "Holding Company"), which was
organized by Rocky Ford Federal Savings and Loan to own Rocky Ford Federal
Savings and Loan as a subsidiary.
This brochure is provided to answer general questions you might have about the
Conversion. Following the Conversion, Rocky Ford Federal Savings and Loan will
continue to provide financial services to its depositors, borrowers and other
customers as it has in the past and will operate with its existing management
and employees. The Conversion will not affect the terms, balances, interest
rates or existing federal insurance coverage on Rocky Ford Federal Savings and
Loan's deposits or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with Rocky Ford Federal Savings and
Loan.
For complete information regarding the Conversion, see the Prospectus and the
Proxy Statement dated __________ __, 1997. Copies of each of the Prospectus and
the Proxy Statement may be obtained by calling the Stock Information Center at
(719) ________.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ROCKY FORD FINANCIAL, INC. COMMON STOCK. OFFERS TO BUY OR TO SELL
MAY BE MADE ONLY BY THE PROSPECTUS. PLEASE READ THE PROSPECTUS PRIOR TO MAKING
AN INVESTMENT DECISION. THE SHARES OF ROCKY FORD FINANCIAL, INC. COMMON STOCK
BEING OFFERED IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS ARE NOT SAVINGS OR
DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND
OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
13
<PAGE>
QUESTIONS AND ANSWERS
ROCKY FORD FINANCIAL, INC.
(THE PROPOSED HOLDING COMPANY FOR
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION)
Questions and Answers Regarding the Subscription and Community Offerings
MUTUAL TO STOCK CONVERSION
--------------------------
1. Q. WHAT IS A "CONVERSION"?
A. Conversion is a change in the legal form of organization. Rocky Ford
Federal Savings and Loan currently operates as a federally-chartered
mutual savings and loan association with no stockholders. Through the
Conversion, Rocky Ford Federal Savings and Loan will become a
federally-chartered stock savings and loan association, and the stock
of its holding company, Rocky Ford Financial, Inc. will be held by
stockholders who purchase stock in the Subscription and Community
Offerings or in the open market following the Offerings.
2. Q. WHY IS ROCKY FORD FEDERAL SAVINGS AND LOAN CONVERTING?
A. Rocky Ford Federal Savings and Loan, as a mutual savings and loan
association, does not have stockholders and has no authority to issue
capital stock. By converting to the stock form of organization, the
Association will be structured in the form used by commercial banks,
most business entities and a growing number of savings institutions.
The Conversion will be important to the future growth and performance
of the Rocky Ford Federal Savings and Loan by providing a larger
capital base from which the Association may operate, the ability to
attract and retain qualified management through stock-based employee
benefit plans, enhanced ability to diversify into other financial
services related activities and expanded ability to render services to
the public.
The Board of Directors and management of Rocky Ford Federal Savings
and Loan believe that the stock form of organization is preferable to
the mutual form of organization for a financial institution. The
Board and management recognize the decline in the number of mutual
thrifts from over 12,500 mutual institutions in 1929 to under 800
mutual thrifts today.
Rocky Ford Federal Savings and Loan believes that converting to the
stock form of organization will allow Rocky Ford Federal Savings and
Loan to more effectively compete with local community banks, thrifts,
and with statewide and regional banks, which are in stock form. Rocky
Ford Federal Savings and Loan believes that by combining its existing
quality service and products with a local ownership base the
Association's customers and community members who become
14
<PAGE>
stockholders will be inclined to do more business with Rocky Ford
Federal Savings and Loan.
Furthermore, because Rocky Ford Federal Savings and Loan competes with
local and regional banks not only for customers, but also for
employees, Rocky Ford Federal Savings and Loan believes that the stock
form of organization will better afford Rocky Ford Federal Savings and
Loan the opportunity to attract and retain employees, management and
directors through various stock benefit plans which are not available
to mutual savings institutions.
3. Q. IS ROCKY FORD FEDERAL SAVINGS AND LOAN'S MUTUAL TO STOCK
CONVERSION BENEFICIAL TO THE COMMUNITIES THAT THE ASSOCIATION SERVES?
A. Management believes that the structure of the Subscription and
Community Offerings is in the best interest of the communities that
Rocky Ford Federal Savings and Loan serves because following the
Conversion it is anticipated that a significant portion of the Common
Stock will be owned by local residents desiring to share in the
ownership of a local community financial institution. Management
desires that a significant portion of the shares of common stock sold
in the Offerings will be sold to residents of the Association's Local
Community (Otero County, Colorado).
4. Q. WHAT EFFECT WILL THE CONVERSION HAVE ON DEPOSIT ACCOUNTS AND
LOANS?
A. Terms and balances of accounts in Rocky Ford Federal Savings and Loan
and interest rates paid on such accounts will not be affected by the
Conversion. Insurable accounts will continue to be insured by the
Federal Deposit Insurance Corporation ("FDIC") up to the maximum
amount permitted by law. The Conversion also will not affect the
terms or conditions of any loans to existing borrowers or the rights
and obligations of these borrowers under their individual contractual
arrangements with Rocky Ford Federal Savings and Loan.
5. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN ROCKY FORD FEDERAL
SAVINGS AND LOAN'S PERSONNEL?
A. No. Both before and after the Conversion, Rocky Ford Federal Savings
and Loan's business of accepting deposits, making loans and providing
financial services will continue without interruption with the same
board of directors, management and staff.
6. Q. WHAT APPROVALS MUST BE RECEIVED BEFORE THE CONVERSION BECOMES
EFFECTIVE?
A. First, the Board of Directors of Rocky Ford Federal Savings and Loan
must adopt the Plan of Conversion, which occurred on January 14, 1997.
The Plan of Conversion was then amended on _______________. Second,
the Office of Thrift Supervision must approve the applications
required to effect the Conversion. These approvals have been
obtained. Third, the Plan of Conversion must be approved by a
majority of all votes eligible to be cast by Rocky Ford Federal
Savings and Loan's voting members. A Special Meeting of voting
members will be held on
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<PAGE>
__________ __, 1997, to consider and vote upon the Plan of Conversion.
THE HOLDING COMPANY
-------------------
7. Q. WHAT IS A HOLDING COMPANY?
A. A holding company is a company that owns another entity. Concurrent
with the Conversion, Rocky Ford Federal Savings and Loan will become a
subsidiary of Rocky Ford Financial, Inc., a company organized by Rocky
Ford Federal Savings and Loan to acquire all of the capital stock of
Rocky Ford Federal Savings and Loan to be outstanding after the
Conversion.
8. Q. IF I DECIDE TO BUY STOCK IN THIS OFFERING, WILL I OWN STOCK IN THE
HOLDING COMPANY OR ROCKY FORD FEDERAL SAVINGS AND LOAN?
A. You will own stock in Rocky Ford Financial, Inc. However, Rocky Ford
Financial, Inc., as a holding company, will own all of the outstanding
capital stock of Rocky Ford Federal Savings and Loan.
9. Q. WHY DID THE BOARD OF DIRECTORS FORM THE HOLDING COMPANY?
A. The Board of Directors believes that the Conversion of Rocky Ford
Federal Savings and Loan and the formation of the Holding Company will
result in a stronger financial institution with the ability to provide
additional flexibility to diversify the Association's business
activities. The Holding Company will also be able to use stock-based
incentive programs to attract and retain executive and other
personnel.
ABOUT BECOMING A STOCKHOLDER
----------------------------
10. Q. WHAT ARE THE SUBSCRIPTION AND COMMUNITY OFFERINGS?
A. Under the Plan of Conversion adopted by Rocky Ford Federal Savings and
Loan, the Holding Company is offering shares of stock in the
Subscription Offering, to certain current and former customers of the
Association and to the Association's Employee Stock Ownership Plan
("ESOP"). Shares which are not subscribed for in the Subscription
Offering, if any, may be offered to the general public in a Community
Offering with preference given to natural persons who are residents of
the Association's Local Community (Otero County). These Offerings are
consistent with the board's objective of Rocky Ford Financial, Inc.
being a locally owned financial institution. The Subscription
Offering and Community Offering, if conducted, are being managed by
Trident Securities, Inc. It is anticipated that any shares not
subscribed for in either the Subscription or Community Offerings may
be offered for sale in a Syndicated Community Offering, which is an
offering on a best efforts basis by a selling group of broker-dealers.
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<PAGE>
11. Q. MUST I PAY A COMMISSION TO BUY STOCK IN CONJUNCTION WITH THE
SUBSCRIPTION, COMMUNITY OR SYNDICATED COMMUNITY OFFERINGS?
A. No. You will not pay a commission to buy the stock if the stock is
purchased in the Subscription Offering or Community Offering, if
conducted.
12. Q. HOW MANY SHARES OF ROCKY FORD FINANCIAL, INC. STOCK WILL BE ISSUED IN
THE CONVERSION?
A. It is currently expected that between 272,000 shares and 368,000
shares of common stock will be sold at a price of $10.00 per share.
Under certain circumstances the number of shares may be increased to
423,200.
13. Q. HOW WAS THE PRICE DETERMINED?
A. The aggregate price of the common stock was determined by Ferguson &
Company, an independent appraisal firm specializing in the thrift
industry, and was approved by the Office of Thrift Supervision. The
price is based on the pro forma market value of Rocky Ford Federal
Savings and Loan and the Holding Company as determined by the
independent evaluation.
14. Q. WHO IS ENTITLED TO BUY STOCK IN THE CONVERSION?
A. The shares of Rocky Ford Financial, Inc. to be issued in the
Conversion are being offered in the Subscription Offering in the
following order of priority to: (i) The term "Eligible Account
Holders" shall hereinafter mean depositors whose accounts in the
Association total $50.00 or more as of December 31, 1995, and those
depositors who had accounts, which totalled $50.00 or more upon
closing, which were closed by the Association (for reasons other than
at the request of the depositor) during calendar year 1994, (ii) the
Association's ESOP, (iii) depositors with $50.00 or more on deposit at
the Association as of March 31, 1997, other than Eligible Account
Holders, ("Supplemental Eligible Account Holders"), (iv) depositors
and borrowers of the Association as of _____________, 1997, other than
Eligible Account Holders and Supplemental Eligible Account Holders
("Other Members"), subject to the priorities and purchase limitations
set forth in the Plan of Conversion. Subject to the prior rights of
holders of subscription rights, Common Stock not subscribed for in the
Subscription Offering may be offered in the Community Offering to
certain members of the general public, with preference given to
natural persons and trusts of natural persons residing in the
Association's Local Community (Otero County). Shares, if any, not
subscribed for in the Subscription or Community Offerings may be
offered to the general public in a Syndicated Community Offering.
15. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE?
A. No. Subscription rights granted to Rocky Ford Federal Savings and
Loan's Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members in the Conversion are not transferable. Persons
violating such prohibition, directly or indirectly, may lose their
right to purchase stock in the Conversion and be subject to
17
<PAGE>
other possible sanctions. IT IS THE RESPONSIBILITY OF EACH SUBSCRIBER
QUALIFYING AS AN ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE
ACCOUNT HOLDER OR OTHER MEMBER TO LIST COMPLETELY ALL ACCOUNT NUMBERS
FOR QUALIFYING SAVINGS ACCOUNTS OR LOANS AS OF THE QUALIFYING DATE ON
THE STOCK ORDER FORM.
16. Q. WHAT ARE THE MINIMUM AND MAXIMUM NUMBERS OF SHARES THAT I CAN PURCHASE
IN THE CONVERSION?
A. The minimum number of shares is 25. The maximum number of shares that
may be purchased in aggregate in the Conversion by any person or
entity other than the ESOP, together with any associate or persons or
entities acting in concert with such person, currently is the lesser
of 5% or $125,000 of common stock issued in the conversion.
17. Q. ARE THE BOARD OF DIRECTORS AND MANAGEMENT OF ROCKY FORD FEDERAL
SAVINGS AND LOAN BUYING A SIGNIFICANT AMOUNT OF THE STOCK OF THE
HOLDING COMPANY?
A. Directors and executive officers of the Association are expected to
subscribe for 100,000 shares. The purchase price paid by directors
and executive officers will be the same $10.00 per share price as that
paid by all other persons who order stock in the Subscription or
Community Offerings.
18. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK?
A. To subscribe for shares of stock in the Subscription Offering, you
should send or deliver a stock order form together with full payment
(or appropriate instructions for withdrawal from permitted deposit
accounts as described below) to Rocky Ford Federal Savings and Loan in
the postage-paid envelope provided. The stock order form and payment
or withdrawal authorization instructions must be received prior to the
close of the Subscription Offering, which will terminate at 12:00
p.m., Local Time, on __________ __, 1997, unless extended. Payment
for shares may be made in cash (if made in person) or by check or
money order. Subscribers who have deposit accounts with Rocky Ford
Federal Savings and Loan may include instructions on the stock order
form requesting withdrawal from such deposit account(s) to purchase
shares of Rocky Ford Financial, Inc. Withdrawals from certificates of
deposit may be made without incurring an early withdrawal penalty.
If shares remain available for sale after the expiration of the
Subscription Offering, they may be offered in the Community Offering,
which may commence at any time after the commencement of the
Subscription Offering and may terminate at any time without notice,
but may not terminate later than ______________, 1997. Persons who
wish to order stock in the Community Offering should return their
stock order form as soon as possible after the Community Offering
begins. Members of the general public should contact the Stock
Information Center at (719) ________ for additional information.
19. Q. MAY I USE FUNDS IN A RETIREMENT ACCOUNT TO PURCHASE STOCK?
18
<PAGE>
A. Yes. If you are interested in using funds held in your retirement
account at Rocky Ford Federal Savings and Loan, the Stock Information
Center can assist you in transferring those funds to a self-directed
IRA, if necessary, and directing the trustee to purchase the stock.
This process may be done without an early withdrawal penalty and
generally without a negative tax consequence to your retirement
account. Due to the additional paperwork involved, IRA transfers must
be completed by _________. For additional information, call the Stock
Information Center at (719) __________.
20. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR A STOCK PURCHASE?
A. Yes. Rocky Ford Federal Savings and Loan will pay interest at its
passbook rate from the date the funds are received until completion of
the stock offering or termination of the Conversion. All funds
authorized for withdrawal from deposit accounts with Rocky Ford
Federal Savings and Loan will continue to earn interest at the
contractual rate until the date of the completion of the Conversion.
21. Q. MAY I OBTAIN A LOAN FROM ROCKY FORD FEDERAL SAVINGS AND LOAN TO PAY
FOR SHARES PURCHASED IN THE CONVERSION?
A. No. Federal regulations prohibit Rocky Ford Federal Savings and Loan
from making loans for this purpose. However, federal regulations do
not prohibit you from obtaining a loan from another source for the
purpose of purchasing stock in the Conversion.
22. Q. IF I BUY STOCK IN THE CONVERSION, HOW WOULD I GO ABOUT BUYING
ADDITIONAL SHARES OR SELLING SHARES IN THE AFTERMARKET?
A. Rocky Ford Financial, Inc., as a newly organized company, has never
issued capital stock, and consequently there is no established market
for its Common Stock at this time. Rocky Ford Financial, Inc. has
requested that Trident Securities, Inc. make a market for the Common
Stock through the OTC Bulletin Board. However, it is unlikely that an
active trading market for the Common Stock will develop, and there can
be no assurance that the shares of Common Stock being offered in the
Conversion can be resold at or above the $10.00 purchase price.
23. Q. WHAT IS THE HOLDING COMPANY'S DIVIDEND POLICY?
A. The Board of Directors of the Holding Company intends to adopt a
policy of paying regular semi-annual cash dividends at an annual rate
of $0.30 per share (3.0%) commencing no earlier than the quarter
ending December 31, 1997. Dividends will be subject to determination
and declaration by the Board of Directors, which will take into
account a number of factors, including the operating results and
financial condition of the Holding Company, net worth and capital
requirements and regulatory restrictions on the payment of dividends
by the Association to the Holding Company upon which dividends paid by
the Holding Company eventually will be primarily dependent. There can
be no assurance that dividends will in fact be paid on the Common
Stock or that, if paid, such dividends will not be reduced or
19
<PAGE>
eliminated in future periods.
24. Q. WILL THE FDIC INSURE THE SHARES OF THE HOLDING COMPANY?
A. No. The shares of Rocky Ford Financial, Inc. are not savings deposits
or savings accounts and are not insured by the FDIC or any other
government agency.
25. Q. IF I SUBSCRIBE FOR SHARES AND LATER CHANGE MY MIND, WILL I BE ABLE TO
GET A REFUND OR MODIFY MY ORDER?
A. No. Your order cannot be canceled, withdrawn or modified once it has
been received by Rocky Ford Federal Savings and Loan without the
consent of Rocky Ford Federal Savings and Loan.
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
-----------------------------------------
26. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO BE HELD TO
CONSIDER THE PLAN OF CONVERSION?
A. You are eligible to vote at the Special Meeting of Members to be held
on __________ __, 1997 if you were a depositor or borrower of Rocky
Ford Federal Savings and Loan at the close of business on the Voting
Record Date (_______, 1997) and continue as such until the Special
Meeting. If you were a member on the Voting Record Date, you should
have received a proxy statement and a proxy card with which to vote.
27. Q. HOW MANY VOTES DO I HAVE?
A. Each account holder is entitled to one vote for each $100, or fraction
thereof, on deposit in such account(s). Each borrower member is
entitled to cast one vote in addition to the number of votes, if any,
he or she is entitled to cast as an account holder. No member may
cast more than 1,000 votes.
28. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS APPROVED, WILL I
BE PROHIBITED FROM BUYING STOCK DURING THE SUBSCRIPTION OFFERING?
A. No. Voting against the Plan of Conversion in no way restricts you
from purchasing Rocky Ford Financial, Inc. stock in the Subscription
Offering.
29. Q. DID THE BOARD OF DIRECTORS OF ROCKY FORD FEDERAL SAVINGS AND LOAN
UNANIMOUSLY ADOPT THE PLAN OF CONVERSION?
A. Yes. Rocky Ford Federal Savings and Loan's Board of Directors
unanimously adopted the Plan of Conversion and urges that all members
vote "FOR" approval of such Plan.
20
<PAGE>
30. Q. WHAT HAPPENS IF ROCKY FORD FEDERAL SAVINGS AND LOAN DOES NOT GET
ENOUGH VOTES TO APPROVE THE PLAN OF CONVERSION?
A. The Conversion would not take place, and Rocky Ford Federal Savings
and Loan would remain a mutual savings institution.
31. Q. AS A QUALIFYING DEPOSITOR OR BORROWER OF ROCKY FORD FEDERAL SAVINGS
AND LOAN, AM I REQUIRED TO VOTE?
A. No. However, failure to return your proxy card or otherwise vote will
have the same effect as a vote AGAINST the Plan of Conversion.
32. Q. WHAT IS A PROXY CARD?
A. A proxy card gives you the ability to vote without attending the
Special Meeting in person. If you received more than one
informational packet, then you should vote the proxy cards in all
packets. Your proxy card(s) is (are) located in the window sleeve of
your informational packet(s).
You may attend the meeting and vote, even if you have returned your
proxy card, if you choose to do so. However, if you are unable to
attend, you still are represented by proxy. Previously executed
proxies, other than those proxies sent pursuant to the Conversion,
will not be used to vote for approval of the Plan of Conversion, even
if the respective members do not execute another proxy or attend the
Special Meeting and vote in person.
33. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK OFFERING?
A. You may call the Stock Information Center at (719) ________ for
further information or to request a copy of the Prospectus, a stock
order form, a proxy statement or a proxy card.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ROCKY FORD FINANCIAL, INC. COMMON STOCK. SUCH OFFERS AND
SOLICITATIONS MAY BE MADE ONLY BY MEANS OF THE PROSPECTUS. COPIES OF THE
PROSPECTUS MAY BE OBTAINED BY CALLING THE STOCK INFORMATION CENTER AT (719)
______________.
THE SHARES OF ROCKY FORD FINANCIAL, INC. COMMON STOCK BEING OFFERED ARE NOT
SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION
INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
21
<PAGE>
IV. Cover Letters for Initial Mailing
A. Explanation
These cover letters are used as an introduction for the Offering and Proxy
materials mailed to potential investors.
B. Examples
22
<PAGE>
(Rocky Ford Federal Savings and Loan Letterhead)
____________, 1997
Dear Valued Customer:
Rocky Ford Federal Savings and Loan Association ("Rocky Ford Federal
Savings and Loan" or the "Association") is pleased to announce that it has
received regulatory approval to proceed with its plan to convert to a federally-
chartered stock savings and loan association. This stock conversion is the most
significant event in the history of Rocky Ford Federal Savings and Loan in that
it allows customers, community members, directors and employees an opportunity
to own stock in Rocky Ford Financial, Inc., the proposed holding company for the
Association.
For over 63 years, the Association has successfully operated as a mutual
company. We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage deposits at the
Association, or the terms or conditions of any loans to existing borrowers under
their individual contract arrangements with the Association. Let us also assure
you that the Conversion will not result in any changes in the management,
personnel or the Board of Directors of the Association.
As one of our valued members, you have the opportunity to invest in the
Association's future by purchasing stock in Rocky Ford Financial, Inc. during
the Subscription Offering, without paying a sales commission.
If you decide to exercise your subscription rights to purchase shares, you
must return the properly completed stock order form together with full payment
for the subscribed shares so that it is received by the Association not later
than 12:00 p.m. Local Time on __________, 1997.
Enclosed is a proxy card. Your Board of Directors solicits your vote "FOR"
the Association's Plan of Conversion. A vote in favor of the Plan does not
obligate you to purchase stock. Please sign and return your proxy card
promptly; your vote is important to us.
We have also enclosed a Prospectus and Proxy Statement which fully
describes the Association, its management, board and financial strength and the
Plan of Conversion. Please review it carefully before you vote or invest. For
your convenience we have established a Stock Information Center. If you have
any questions, please call the Stock Information Center collect at (719) _____.
We look forward to continuing to provide quality financial services to you
in the future.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and Proxy Statement. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
23
<PAGE>
(Rocky Ford Federal Savings and Loan Letterhead)
____________, 1997
Dear Interested Investor:
Rocky Ford Federal Savings and Loan Association ("Rocky Ford Federal
Savings and Loan" or the "Association") is pleased to announce that it has
received regulatory approval to proceed with its plan to convert to a federally-
chartered stock savings and loan association. This stock conversion is the most
significant event in the history of the Association in that it allows customers,
community members, directors and employees an opportunity to own stock in Rocky
Ford Financial, Inc., the proposed holding company for the Association.
For over 63 years, the Association has successfully operated as a mutual
company. We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on the Association
deposits, or the terms or conditions of any loans to existing borrowers under
their individual contract arrangements with the Association.
Let us also assure you that the Conversion will not result in any changes
in the management, personnel or the Board of Directors of the Association.
Enclosed is a Prospectus which fully describes the Association, its
management, board and financial strength. Please review it carefully before you
make an investment decision. If you decide to invest, please return to the
Association a properly completed stock order form together with full payment for
shares at your earliest convenience but not later than 12:00 p.m. Local Time on
_________, 1997. For your convenience we have established a Stock Information
Center. If you have any questions, please call the Stock Information Center
collect at (719) ________.
We look forward to continuing to provide quality financial services to you
in the future.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and Proxy Statement. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
24
<PAGE>
(Rocky Ford Federal Savings and Loan Letterhead)
____________, 1997
Dear Friend:
Rocky Ford Federal Savings and Loan Association ("Rocky Ford Federal
Savings and Loan" or the "Association") is pleased to announce that we have
received regulatory approval to proceed with its plan to convert to a federally-
chartered stock savings and loan association. This stock conversion is the most
significant event in the history of Rocky Ford Federal Savings and Loan in that
it allows customers, community members, directors and employees an opportunity
to own stock in Rocky Ford Financial, Inc., the proposed holding company for the
Association.
For over 63 years, the Association has successfully operated as a mutual
company. We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on the Association
deposits, or the terms or conditions of any loans to existing borrowers under
their individual contract arrangements with the Association.
Let us also assure you that the Conversion will not result in any changes
in the management, personnel or the Board of Directors of the Association.
Our records indicate that you were a depositor of the Association on
__________, but that you were not a member on _____________, 1997. Therefore,
under applicable law, you are entitled to subscribe for Common Stock in Rocky
Ford Financial, Inc.'s Subscription Offering. Orders submitted by you and
others in the Subscription Offering are contingent upon the current members'
approval of the Plan of Conversion at a special meeting of members to be held on
_________, 1997 and upon receipt of all required regulatory approvals.
If you decide to exercise your subscription rights to purchase shares, you
must return the properly completed stock order form together with full payment
for the subscribed shares so that it is received at the Association not later
than 12:00 p.m. Local Time on _________, 1997.
Enclosed is a Prospectus which fully describes the Association, its
management, board and financial strength. Please review it carefully before you
invest. For your convenience we have established a Stock Information Center.
If you have any questions, please call the Stock Information Center collect at
(719) ________.
We look forward to continuing to provide quality financial services to you
in the future.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and Proxy Statement. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
25
<PAGE>
(Rocky Ford Federal Savings and Loan Letterhead)
___________, 1997
Dear Member:
As a qualified member of Rocky Ford Federal Savings and Loan Association
("Rocky Ford Federal Savings and Loan" or the "Association"), you have the right
to vote upon the Association's proposed Plan of Holding Company Conversion and
also generally have the right to subscribe for shares of common stock of Rocky
Ford Financial, Inc., the proposed holding company for Rocky Ford Federal
Savings and Loan through the mutual to stock conversion of Rocky Ford Federal
Savings and Loan. However, the proposed plan of Holding Company Conversion
provides that Rocky Ford Financial, Inc. will not offer stock in any state in
which compliance with the securities laws would be impracticable for reasons of
cost or otherwise. Unfortunately, the securities laws of your state would
require Rocky Ford Financial, Inc. to register its common stock and /or its
employees in order to sell the common stock to you. Such registration would be
prohibitively expensive or otherwise impracticable in light of the few members
residing in your state.
You may vote on the proposed Plan of Holding Company Conversion and we urge
you to read the enclosed Summary Proxy Statement and execute the enclosed
Revocable Proxy. Questions regarding the execution of the Revocable Proxy
should be directed to Rocky Ford Federal Savings and Loan's Stock Information
Center at (719)______________.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and Proxy Statement. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or sale of stock would
be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
26
<PAGE>
V. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of the
Association in order to alert the customers that funds held in an IRA can
be used to purchase stock. Since this transaction is not as simple as
designating funds from a certificate of deposit like a normal stock
purchase, this letter informs the customer that this process is slightly
more detailed and involves a personal visit to the Association.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of the
Association. These letters would be mailed following OTS approval for the
conversion and after each customer has received the initial mailing
containing a Proxy Statement and a Prospectus.
C. Example - See following page.
27
<PAGE>
(Rocky Ford Federal Savings and Loan Letterhead)
__________ __, 1997
Dear Individual Retirement Account Participant:
As you know, Rocky Ford Federal Savings and Loan Association is in the
process of converting from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings and loan association and has
formed Rocky Ford Financial, Inc. to hold all of the stock of Rocky Ford Federal
Savings and Loan (the "Conversion"). Through the Conversion, certain current
and former depositors and borrowers of Rocky Ford Federal Savings and Loan have
the opportunity to purchase shares of common stock of Rocky Ford Financial, Inc.
in a Subscription Offering. Rocky Ford Financial, Inc. currently is offering up
to 368,000 shares, subject to adjustment, of Rocky Ford Financial, Inc. at a
price of $10.00 per share.
As the holder of an individual retirement account ("IRA") at Rocky Ford
Federal Savings and Loan, you have an opportunity to become a shareholder in
Rocky Ford Financial, Inc. using funds being held in your IRA. If you desire
to purchase shares of common stock of Rocky Ford Financial, Inc. through your
IRA, Rocky Ford Federal Savings and Loan can assist you in self-directing those
funds. This process can be done without an early withdrawal penalty and
generally without a negative tax consequence to your retirement account.
If you are interested in ordering Rocky Ford Financial, Inc. Common stock
utilizing IRA funds, you must contact our Conversion Center at (719) __________.
Sincerely,
Keith E. Waggoner
CEO
This letter is neither an offer to sell nor a solicitation of an offer to buy
Rocky Ford Financial, Inc. common stock. The offer is made only by the
Prospectus, which was recently mailed to you.
THE SHARES OF ROCKY FORD FINANCIAL, INC. COMMON STOCK ARE NOT DEPOSITS AND WILL
NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
- ---
GOVERNMENT AGENCY.
28
<PAGE>
VI. Individual Letters and Community Meeting Invitations
A. Explanation
In order to educate the public about the stock offering, Trident suggests
holding Community meetings in various locations. In an effort to target a
group of interested investors, Trident requests that each Director of the
Association submit a list of acquaintances that he or she would like to
invite to a community meeting.
B. Method of Distribution of Invitations and Prospect Letters
Each Director submits his list of prospects.
Invitations are sent to each Director's prospects through the mail. All
invitations are preceded by a Prospectus and all attendees are given a
Prospectus at the meeting. Letters will be sent to prospects to thank them
for their attendance and to remind them of closing dates.
C. Examples enclosed.
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================================================================================
The Directors and Officers
of
Rocky Ford Federal Savings and Loan Association
cordially invite you to attend a brief
presentation regarding the stock offering of
Rocky Ford Financial, Inc., our proposed holding company
Please join us at the
______________
_____________________
___________________________
____________
____________
for refreshments
YOU MUST RESPOND BY ____________ TO RESERVE A SEAT
R.S.V.P. (719) _____________
================================================================================
30
<PAGE>
Sent to prospects who are customers*
_______________, 1997
&salutation& &firstname& &last name&
&address&
&city&, &state& &zip&
Dear &prefername&
Recently you may have read in the newspaper that Rocky Ford Federal
Savings and Loan Association ("The Association") will convert from a federally-
chartered mutual savings and loan association to a federally-chartered stock
savings and loan association. This is the most significant event in the history
of the Association in that it allows customers, employees and directors the
opportunity to share in Rocky Ford Federal Savings and Loan's future by becoming
charter stockholders of the Association's newly-formed holding company, Rocky
Ford Financial, Inc.
As a customer of Rocky Ford Federal Savings and Loan, you should have
received a packet of information regarding the conversion, including a
Prospectus and a Proxy Statement. In addition, we are holding several
presentations for friends of the officers and directors to discuss the stock
offering in more detail. You will receive an invitation in the near future.
Please feel free to call me or the Rocky Ford Federal Savings and Loan's
Stock Information Center at (719) ________ if you have any questions. I look
forward to seeing you at one of our informational presentations.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and the Summary Proxy Statement, respectively. There
shall be no sale of stock in any state in which any offer, solicitation of an
offer or sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
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<PAGE>
*Sent to prospects who are not customers*
____________, 1997
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
Recently you may have read in the newspaper that Rocky Ford Federal Savings
and Loan Association ("The Association") will be converting from a federally-
chartered mutual savings and loan association to a federally-chartered stock
savings and loan association. This is the most significant event in the history
of the Association in that it allows customers, employees and directors the
opportunity to share in Rocky Ford Federal Savings and Loan's future by becoming
charter stockholders of the Association's holding company, Rocky Ford Financial,
Inc.
[Director] has asked that you be sent a Prospectus and stock order form
which will allow you to become a charter stockholder, should you desire. In
addition, we are holding several presentations for friends of the officers and
directors of Rocky Ford Federal Savings and Loan to discuss the stock offering
in more detail. You will receive an invitation in the near future.
Please feel free to call me or the Rocky Ford Federal Savings and Loan's
Stock Information Center at (719) _______ if you have any questions. I look
forward to seeing you at one of our information presentations.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and the Summary Proxy Statement, respectively. There
shall be no sale of stock in any state in which any offer, solicitation of an
offer or sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
32
<PAGE>
*Sent to those attending a community meeting*
____________, 1997
&salutation& &firstname& &lastname&
&address&
&City&, &state& &zip&
Dear &prefername&:
Thank you for attending our informational presentation relating to Rocky
Ford Federal Savings and Loan Association 's conversion to a stock company. The
information presented at the meeting and the Prospectus you recently received
should assist you in making an informed investment decision.
Obviously, we are excited about this stock offering and the opportunity to
share in the future of Rocky Ford Federal Savings and Loan. This conversion is
the most important event in our history and it gives the Association the
strength to compete in the future and will provide the Association additional
corporate flexibility.
We may contact you in the near future to get an indication of your interest
in our offering. If you make a decision to invest, please return your order
form no later than ___________, 1997. If you have any questions, please call
the Stock Information Center at (719) ________.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and the Summary Proxy Statement, respectively. There
shall be no sale of stock in any state in which any offer, solicitation of an
offer or sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
33
<PAGE>
* Sent to those not attending a community meeting *
_________, 1997
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
I am sorry you were unable to attend our recent presentation regarding
Rocky Ford Federal Savings and Loan Association's mutual to stock conversion.
The Board of Directors and management team of Rocky Ford Federal Savings and
Loan are committed to contributing to long term shareholder value and as a group
we are personally investing approximately $1,000,000 of our own funds. We are
enthusiastic about the stock offering and the opportunity to share in the future
of Rocky Ford Federal Savings and Loan.
We have established a Stock Information Center to assist you with any
questions regarding the stock offering. Should you require any assistance
between now and ___________, 1997, I encourage you to either stop by our Stock
Information Center or call (719) __________.
I hope you will join me as a charter stockholder in Rocky Ford Financial,
Inc.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and the Summary Proxy Statement, respectively. There
shall be no sale of stock in any state in which any offer, solicitation of an
offer or sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
34
<PAGE>
* Final Reminder Letter *
_________, 1997
&salutation&firstname&lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
I am writing to remind you that the deadline for purchasing stock in Rocky
Ford Financial, Inc. is quickly approaching. I hope you will join me in
becoming a charter stockholder in one of Colorado's newest publicly owned
financial institutions.
The deadline for becoming a charter stockholder is ____________, 1997. If
you have any questions, please call our Stock Information Center at (719)
__________.
Once again, I look forward to having you join me as a charter stockholder
in Rocky Ford Financial, Inc.
Sincerely,
Keith E. Waggoner
CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and the Summary Proxy Statement, respectively. There
shall be no sale of stock in any state in which any offer, solicitation of an
offer or sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
35
<PAGE>
VII. Counter Cards and Lobby Posters
A. Explanation
Counter cards and lobby posters serve two purposes: (1) As a notice to
Rocky Ford Federal Savings and Loan's customers and members of the local
community that the stock sale is underway and (2) to remind the customers
of the end of the Subscription Offering. Trident has learned in the past
that many people forget the deadline for subscribing and therefore we
suggest the use of these simple reminders.
B. Quantity
Approximately 2 - 3 Counter cards will be used at teller windows and on
customer service representatives' desk.
Approximately 1 - 2 Lobby posters will be used at Rocky Ford Federal
Savings and Loan's office.
C. Example
D. Size
The counter card will be approximately 8 1/2" x 11".
The lobby poster will be approximately 16" x 20".
36
<PAGE>
C.
POSTER OR COUNTER CARD
================================================================================
"TAKE STOCK IN OUR FUTURE"
"ROCKY FORD FINANCIAL, INC.
STOCK OFFERING MATERIALS
AVAILABLE HERE"
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
================================================================================
37
<PAGE>
VIII. Proxy Reminder
A. Explanation
A proxy reminder is used when the majority of votes needed to adopt the
Plan of Conversion is still outstanding. The proxy reminder is mailed to
those "target vote" depositors who have not previously returned their
signed proxy.
The target vote depositors are determined by the conversion agent.
B. Example
C. Size
Proxy reminder is approximately 8 1/2" x 11".
38
<PAGE>
B. Example
_________________________________________________________________________
P R O X Y R E M I N D E R
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
YOUR VOTE ON OUR STOCK CONVERSION PLAN HAS NOT BEEN RECEIVED.
- --------- ---------------------
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
- ---------------------------
VOTING AGAINST THE PLAN.
VOTING FOR THE CONVERSION WILL NOT AFFECT THE INSURANCE OF YOUR ACCOUNTS.
DEPOSIT ACCOUNTS WILL CONTINUE TO BE FEDERALLY INSURED UP TO THE APPLICABLE
LIMITS.
YOU MAY PURCHASE STOCK IF YOU WISH, BUT VOTING DOES NOT OBLIGATE YOU TO BUY
STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL, OR DELIVER, THE
----------------------------
PROXY CARD TO ROCKY FORD FEDERAL SAVINGS AND LOAN TODAY.
PLEASE VOTE ALL PROXY CARDS RECEIVED.
---
WE RECOMMEND THAT YOU VOTE TO APPROVE THE PLAN OF CONVERSION. THANK YOU.
THE BOARD OF DIRECTORS AND MANAGEMENT OF
ROCKY FORD FEDERAL SAVINGS AND LOAN ASSOCIATION
_________________________________________________________________________
IF YOU RECENTLY MAILED THE PROXY,
PLEASE ACCEPT OUR THANKS AND DISREGARD THIS REQUEST.
FOR FURTHER INFORMATION CALL (719) _______.
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Rocky Ford Financial, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and the Summary Proxy Statement, respectively. There
shall be no sale of stock in any state in which any offer, solicitation of an
offer or sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
39
