PROSPECTUS SUPPLEMENT
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ALASKA PACIFIC BANCSHARES, INC.
ALASKA FEDERAL SAVINGS BANK
401(k) PROFIT SHARING PLAN
This Prospectus Supplement relates to the offer and sale to
participants in the Alaska Federal Savings Bank 401(k) Profit Sharing Plan of up
to 805,000 shares of Alaska Pacific Bancshares, Inc. common stock, par value
$.01 per share and related participation interests in the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan, as set forth herein.
In connection with the proposed conversion of Alaska Federal Savings
Bank from mutual to stock form and the formation of Alaska Pacific Bancshares,
Inc. as the holding company of Alaska Federal Savings Bank, the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan has been amended to provide for an
investment fund consisting of Alaska Pacific Bancshares, Inc. common stock as an
investment option for the participants in the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan (the "Employer Stock Fund"). The amended Plan permits
participants in the Alaska Federal Savings Bank 401(k) Profit Sharing Plan to
direct the trustee of the Employer Stock Fund to purchase Alaska Pacific
Bancshares, Inc. common stock with amounts in the Alaska Federal Savings Bank
401(k) Profit Sharing Plan attributable to the accounts of such participants.
This Prospectus Supplement relates solely to the initial election of a
participant to direct the purchase of Alaska Pacific Bancshares, Inc. common
stock in the conversion from mutual to stock form and not to any future
purchases under the Alaska Federal Savings Bank 401(k) Profit Sharing Plan or
otherwise.
The Prospectus dated May 14, 1999 of Alaska Pacific Bancshares, Inc.
(the "Prospectus"), which is being delivered with this Prospectus Supplement,
includes detailed information with respect to Alaska Pacific Bancshares, Inc.,
the conversion from mutual to stock form, Alaska Pacific Bancshares, Inc. common
stock and the financial condition, results of operations and business of Alaska
Federal Savings Bank. This Prospectus Supplement, which provides detailed
information with respect to the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan, should be read only in conjunction with the Prospectus.
Capitalized terms not defined in this Prospectus Supplement have the meanings
ascribed to them in the Prospectus.
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY EACH PARTICIPANT, SEE "RISK FACTORS"
IN THE PROSPECTUS.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND
ARE NOT FEDERALLY INSURED OR GUARANTEED. THESE SECURITIES ARE
SUBJECT TO RISK, INCLUDING LOSS OF INVESTMENT.
THE SECURITIES OFFERED HEREBY 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 THIS PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is May 14, 1999.
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No person has been authorized to give any information or to make any
representation other than as contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
any such other information or representation must not be relied upon as having
been authorized by Alaska Pacific Bancshares, Inc., Alaska Federal Savings Bank
or the Alaska Federal Savings Bank 401(k) Profit Sharing Plan. This Prospectus
Supplement does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstance create any implication that there has been no change in
the affairs of Alaska Pacific Bancshares, Inc., Alaska Federal Savings Bank or
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan since the date hereof
or that the information herein contained or incorporated herein by reference is
correct as of any time subsequent to the date hereof. This Prospectus Supplement
should be read only in conjunction with the Prospectus that is delivered
herewith and should be retained for future reference.
TABLE OF CONTENTS
Page
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The Offering.................................................................. 1
Securities Offered................................................... 1
Election to Purchase Alaska Pacific Bancshares, Inc.
Common Stock in the conversion from mutual to stock form........... 1
Method of Directing Transfer......................................... 2
Time for Directing Transfer.......................................... 2
Irrevocability of Transfer Direction................................. 2
Subsequent Elections................................................. 2
Purchase Price of Alaska Pacific Bancshares, Inc.
Common Stock....................................................... 2
Nature of a Participant's Interest in Alaska Pacific
Bancshares, Inc. Common Stock...................................... 3
Voting and Tender Rights of Alaska Pacific Bancshares,
Inc. Common Stock.................................................. 3
Description of the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan................................................................. 3
Introduction......................................................... 4
Eligibility and Participation........................................ 4
Investment of Contributions.......................................... 4
Financial Data....................................................... 7
Administration of the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan................................................ 8
Reports to Participants.............................................. 9
Amendment and Termination............................................ 9
Merger, Consolidation or Transfer.................................... 9
Federal Tax Aspects of the Alaska Federal Savings Bank
401(k) Profit Sharing Plan......................................... 9
Restrictions on Resale.............................................. 13
Legal Opinions............................................................... 13
Summary Plan Description (including Summaries of Material
Modifications thereto)..................................................... A-1
Financial Statements........................................................ B-1
Election Form
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THE OFFERING
Securities Offered
Up to 805,000 shares of Alaska Pacific Bancshares, Inc. common stock
which may be acquired by the Alaska Federal Savings Bank 401(k) Profit Sharing
Plan for the accounts of employees participating in the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan, and related participation interests, are
offered hereby. Alaska Pacific Bancshares, Inc. is the issuer of such
securities. Only employees of Alaska Federal Savings Bank may participate in the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan. Information relating to
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan is contained in this
Prospectus Supplement and information relating to Alaska Pacific Bancshares,
Inc., the conversion from mutual to stock form and the financial condition,
results of operations and business of Alaska Federal Savings Bank is contained
in the Prospectus delivered herewith. The address of the principal executive
office of Alaska Pacific Bancshares, Inc. is 2094 Jordan Avenue, Juneau, Alaska
99801-8046 and its telephone number is (907) 789-4844. The address and telephone
number of Alaska Federal Savings Bank's principal office are the same as Alaska
Pacific Bancshares, Inc.'s.
Election to Purchase Alaska Pacific Bancshares, Inc. Common Stock in the
conversion from mutual to stock form
In connection with Alaska Federal Savings Bank's Conversion, the Alaska
Federal Savings Bank 401(k) Profit Sharing Plan has been amended to permit each
participant to direct that all or part of the funds in his or her accounts under
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan (hereinafter referred
to in the aggregate as a participant's "Accounts") be transferred to the
Employer Stock Fund and used to purchase Alaska Pacific Bancshares, Inc. common
stock in the conversion from mutual to stock form. The trustee of the Employer
Stock Fund will follow the participants' directions and exercise Subscription
Rights to purchase Alaska Pacific Bancshares, Inc. common stock in the
conversion from mutual to stock form to the extent provided in Alaska Federal
Savings Bank's Plan of Conversion. See "Alaska Federal's Conversion - Plan of
Distribution for the Subscription, Direct Community and Syndicated Community
Offerings" in the Prospectus. Funds not allocated to the purchase of Alaska
Pacific Bancshares, Inc. common stock will remain invested in accordance with
the investment instructions of participants in effect at such time.
Respective purchases by the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan in the conversion from mutual to stock form will be counted as
purchases by the individual participants at whose election they are made to the
extent of the funds directed by such participants to purchase Alaska Pacific
Bancshares, Inc. common stock, and will be subject to the purchase limitations
and subscription priorities applicable to such individuals, rather than being
counted in determining the maximum amount that Alaska Pacific Bancshares, Inc.'s
or Alaska Federal Savings Bank's Tax-Qualified Employee Plans (as defined in the
Prospectus) may purchase in the aggregate. See "Alaska Federal's Conversion -
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings" in the Prospectus.
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Method of Directing Transfer
Included with this Prospectus Supplement is an election and investment
form (the "Election Form"). If a participant wishes to direct some or all the
funds in his or her Accounts into the Employer Stock Fund to purchase Alaska
Pacific Bancshares, Inc. common stock in the conversion from mutual to stock
form, he or she should indicate that decision by checking the appropriate box in
Part 2 of the Election Form and completing this Part of the Election Form. If a
participant does not wish to make such an election, he or she should so indicate
by checking the appropriate box in Part 2 of the Election Form. See also
"Investment of Contributions - Alaska Pacific Bancshares, Inc. Common Stock
Investment Election Procedures" below.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund in order to purchase Alaska Pacific Bancshares, Inc. common
stock in the conversion from mutual to stock form is June 8, 1999, unless
extended (the "Election Deadline"). A participant's completed Election Form must
be returned to the conversion center by June 8, 1999 by 12:00 noon Alaska time
on such date.
Irrevocability of Transfer Direction
Once received in proper form, an executed Election Form may not be
modified, amended or revoked without the consent of Alaska Federal Savings Bank
unless the conversion from mutual to stock form has not been completed within 45
days after the end of the Subscription and Community Offering. See also
"Investment of Contributions - Alaska Pacific Bancshares, Inc.
Common Stock Investment Election Procedures" below.
Subsequent Elections
After the Election Deadline, participants will not be permitted to
direct or redirect any portion of their Accounts into Alaska Pacific Bancshares,
Inc. common stock. Participants may direct the trustee of the Employer Stock
Fund to sell their shares of Alaska Pacific Bancshares, Inc. common stock
purchased in the conversion from mutual to stock form through the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan pursuant to the procedures outlined in
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan by filing a request
form with the Alaska Federal Savings Bank 401(k) Profit Sharing Plan
Administrator. See "Investment of Contributions - Adjusting Your Investment
Strategy" below. Participants are urged to read the accompanying prospectus
carefully, particularly with regard to the liquidity of the common stock.
Purchase Price of Alaska Pacific Bancshares, Inc. Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
Alaska Pacific Bancshares, Inc. common stock in the conversion from mutual to
stock form will be used by the trustee of the Employer Stock Fund to purchase
Alaska Pacific Bancshares, Inc. common stock through the exercise of
Subscription Rights granted to the Alaska Federal Savings Bank 401(k)
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Profit Sharing Plan under Alaska Federal Savings Bank's Plan of Conversion. The
price paid for such shares of Alaska Pacific Bancshares, Inc. common stock will
be $10.00 per share, the same price as is paid by all other persons who purchase
Alaska Pacific Bancshares, Inc. common stock in the conversion from mutual to
stock form.
Nature of a Participant's Interest in Alaska Pacific Bancshares, Inc. Common
Stock
Alaska Pacific Bancshares, Inc. common stock will be held in the name
of the trustee of the Employer Stock Fund, in its capacity as trustee. The
trustee of the Employer Stock Fund will maintain individual accounts reflecting
each participant's individual interest in the Employer Stock Fund.
Voting and Tender Rights of Alaska Pacific Bancshares, Inc. Common Stock
The trustee of the Employer Stock Fund will exercise voting and tender
rights attributable to all Alaska Pacific Bancshares, Inc. common stock held by
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan Trust (the "Trust")
as directed by participants with interests in the Employer Stock Fund. Shares
with respect to which no instructions have been received by the trustee of the
Employer Stock Fund will be voted at the discretion of the trustee.
DESCRIPTION OF THE PLAN
Introduction
The Plan was adopted by Alaska Federal Savings Bank as a profit sharing
plan with a cash or deferred arrangement described at Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code"), to encourage employee
thrift and savings and to allow eligible employees to share in profits.
The Bank intends that the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan will comply in operation with each of the requirements of the Code
which are applicable to a plan qualified under Section 401(a) of the Code and
the requirements which are applicable to a qualified cash or deferred
arrangement under Section 401(k) of the Code.
The Plan is an "individual account plan" within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and a
"defined contribution plan" under the Code. As such, the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan is not subject to the Plan Termination Insurance
provisions of Title IV of ERISA. However, the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan is subject to those provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA that apply to "individual account plans"
and "defined contribution plans" other than "money purchase pension plans."
Accordingly, the Alaska Federal Savings Bank 401(k) Profit Sharing Plan is not
subject to the funding requirements contained in Part 3 of Title I of ERISA or
Section 412 of the Code which by their terms do not apply to an individual
account plan (other than a money purchase pension plan). In addition, the Alaska
Federal
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Savings Bank 401(k) Profit Sharing Plan does not provide for distribution of
participants' Accounts in the form of a qualified joint and survivor annuity or
a qualified preretirement survivor annuity. Neither the plan termination
insurance provisions, the funding requirements nor the annuity requirements
contained in ERISA and/or the Code will be extended to participants or
beneficiaries under the Alaska Federal Savings Bank 401(k) Profit Sharing Plan.
Reference to Full Text of Plan. The following statements are summaries
of certain provisions of the Alaska Federal Savings Bank 401(k) Profit Sharing
Plan. They are not a complete description of such provisions and are qualified
in their entirety by the full text of the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan which is filed as an exhibit to the registration statement
of which this Prospectus Supplement is a part and which is incorporated by
reference herein. Copies of the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan are available to all employees upon request to the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan Administrator. Each employee is urged to
read carefully the full text of the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan.
Reference to Summary Plan Description. Certain information regarding
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan is contained in the
Summary Plan Description (including Summaries of Material Modifications
thereto)(the "Summary Plan Description"), a copy of which is attached to, and
made a part of, this Prospectus Supplement.
Tax and Securities Laws. Participants should consult with legal counsel
regarding the tax and securities laws implications of participation in the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan. Any directors, officers
or beneficial owners of more than 10% of the outstanding shares of Alaska
Pacific Bancshares, Inc. common stock should consider the applicability of
Sections 16(a) and 16(b) of the Securities Exchange Act of 1934, as amended, to
his or her participation in the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan.
Eligibility and Participation
All employees of Alaska Federal Savings Bank who have met the
eligibility requirements may participate in the Alaska Federal Savings Bank
401(k) Profit Sharing Plan by completing and filing with Alaska Federal Savings
Bank an application for participation. See "JOINING THE PLAN - Eligibility" and
"- Participation" in the Summary Plan Description attached hereto.
As of May 1, 1999 there were approximately 70 persons eligible to
participate in the Alaska Federal Savings Bank 401(k) Profit Sharing Plan, and
38 persons had elected to participate in the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan.
Investment of Contributions
Investment Options. All amounts credited to participants' Accounts
under the Alaska Federal Savings Bank 401(k) Profit Sharing Plan are held in the
Trust, which is administered by the trustee of the Alaska Federal Savings Bank
401(k) Profit Sharing Plan appointed by Alaska Federal Savings Bank's Board of
Directors.
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Each participant must instruct the trustee of the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan as to how funds held in his or her
Accounts are to be invested. In addition to the Employer Stock Fund,
participants may elect to instruct the trustee of the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan to invest such funds in any or all of the
following investment options ("Investment Options"): (a) Cash Reserve, (b) U.S.
Government Fund, (c) Delaware Fund, (d) Decatur Total Return, (e) Dividend
Growth Fund, or (f) International Equity. Investments in the Employer Stock Fund
may be made only through reallocation of existing funds in the six investment
options listed above. A brief description of the Employer Stock Fund is set
forth below.
Employer Stock Fund. Effective until June 8, 1999, or such later date
as elected by Alaska Pacific Bancshares, Inc., participants in the Alaska
Federal Savings Bank 401(k) Profit Sharing Plan may elect to direct the trustee
of the Alaska Federal Savings Bank 401(k) Profit Sharing Plan to transfer some
or all of the funds in their Accounts to the Employer Stock Fund to purchase
Alaska Pacific Bancshares, Inc. common stock in the conversion from mutual to
stock form. The price paid for shares of Alaska Pacific Bancshares, Inc. common
stock will be the same price as is paid by all other persons who purchase Alaska
Pacific Bancshares, Inc. common stock in the conversion from mutual to stock
form. The number of shares, if any, subject to purchase for the Accounts of each
participant who may elect to invest in Alaska Pacific Bancshares, Inc. common
stock is not currently determinable. Any cash dividends received on Alaska
Pacific Bancshares, Inc. common stock held by the Alaska Federal Savings Bank
401(k) Profit Sharing Plan will be reinvested in accordance with the
participant's investment instructions then in effect.
The Plan is intended to comply with the requirements of Section 404(c)
of ERISA, whereby the participants (not the trustee of the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan or other Plan fiduciaries) will be
solely responsible for their decision to invest any portion of their Accounts in
any one or more of the Investment Options, including the Employer Stock Fund.
Please see the Summary Plan Description attached hereto and the other
information provided by the trustee of the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan, the Alaska Federal Savings Bank 401(k) Profit Sharing Plan
Administrator and other Plan fiduciaries with regard to each participant's
rights and responsibilities pertaining to the investment of his or her Accounts.
The investment in Alaska Pacific Bancshares, Inc. common stock involves
certain risks. No assurance can be given that shares of Alaska Pacific
Bancshares, Inc. common stock purchased pursuant to the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan will thereafter be able to be sold at a price
equal to or in excess of the purchase price. See also "Risk Factors" in the
Prospectus.
Alaska Pacific Bancshares, Inc. Common Stock Investment Election
Procedures. Participants may instruct the trustee of the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan to purchase Alaska Pacific Bancshares, Inc.
common stock by redirecting funds from their existing Accounts into the Employer
Stock Fund by filing an Election Form with the Alaska Federal Savings Bank
401(k) Profit Sharing Plan Administrator on or prior to the Election Deadline.
Total funds redirected by each participant into the Employer Stock Fund must
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represent whole share amounts (i.e., must be divisible by the $10.00 per share
purchase price) and must be allocated in not less than 10% increments from
Investment Options containing the participant's Plan funds. When a participant
instructs the trustee of the Alaska Federal Savings Bank 401(k) Profit Sharing
Plan to redirect the funds in his or her existing Accounts into the Alaska
Federal Savings Bank 401(k) Profit Sharing Plan in order to purchase Alaska
Pacific Bancshares, Inc. common stock, the trustee of the Employer Stock Fund
will liquidate funds from the appropriate Investment Option(s) and apply such
redirected funds as requested, in order to effect the new allocation.
For example, a participant may fund an election to purchase 100 shares
of Alaska Pacific Bancshares, Inc. common stock by redirecting the aggregate
purchase price of $1,000 for such shares from the following Investment Options
(provided the necessary funds are available in such Investment Options): (i) 10%
from Cash Reserve, (ii) 30% from Delaware Fund, and (iii) 60% from Dividend
Growth Fund. In such case, the trustee of the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan would liquidate $100 of the participant's funds from Cash
Reserve, $300 from funds in Delaware Fund and $600 from funds in Dividend Growth
Fund to raise the $1,000 aggregate purchase price. If a participant's
instructions cannot be fulfilled because the participant does not have the
required funds in one or more of the Investment Options to purchase the shares
of Alaska Pacific Bancshares, Inc. common stock subscribed for, the participant
will be required to file a revised Election Form with the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan Administrator by the Election Deadline. Once
received in proper form, an executed Election Form may not be modified, amended
or rescinded without the consent of Alaska Federal Savings Bank unless the
conversion from mutual to stock form has not been completed within 45 days after
the end of the Subscription and Community Offering.
Adjusting Your Investment Strategy. Unless changed in accordance with
the terms of the Alaska Federal Savings Bank 401(k) Profit Sharing Plan, future
allocations of a participant's contributions would remain unaffected by the
election to purchase Alaska Pacific Bancshares, Inc. common stock through the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan in the conversion from
mutual to stock form. A participant may modify a prior investment allocation
election or request the transfer of funds to another investment vehicle by
filing a written notice with the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan Administrator. However, fund transfers out of the Employer Stock
Fund are permitted only during an "Investment Change Period." An "Investment
Change Period" opens at the beginning of the third business day after Alaska
Pacific Bancshares, Inc. issues a "Quarterly Earnings Release" and closes at the
end of the twelfth business day after such release. The term "Quarterly Earnings
Release" means any press release issued by Alaska Pacific Bancshares, Inc. for
general distribution which announces, for the first time, Alaska Pacific
Bancshares, Inc.'s. Results of operations for a particular fiscal quarter. The
Bank anticipates these opportunities will occur four times per year. The Bank
will attempt to notify participants of the commencement of each Investment
Change Period but will not assume responsibility for doing so.
Valuation of Accounts. The Investment Options (other than the Employer
Stock Fund) are valued daily, and the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan is valued from time to time by the trustee of the Employer Stock
Fund, but not less often than monthly. In determining such value, the Trust
assets shall be valued at their current fair market value.
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When Alaska Pacific Bancshares, Inc. common stock is sold subsequent to
the conversion, the cost or net proceeds are charged or credited to the Accounts
of participants affected by the purchase or sale. The Bank expects to pay any
brokerage commissions, transfer fees and other expenses incurred in the sale and
purchase of Alaska Pacific Bancshares, Inc. common stock for the Employer Stock
Fund. A participant's Accounts will be adjusted to reflect changes in the value
of shares of Alaska Pacific Bancshares, Inc. common stock resulting from stock
dividends, stock splits and similar changes.
The net gain (or loss) of the Trust from investments (including
interest payments, dividends, realized and unrealized gains and losses on
securities, and any expenses paid from the Trust) are determined not less often
than monthly, and are allocated among the Accounts of participants according to
the balance of each such Accounts as of the end of each quarter. For purposes of
such allocations, all assets of the Trust are valued at their fair market value
pursuant to the method described in the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan.
Financial Data
Employer Contributions. For the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan Year ended December 31, 1998, Alaska Federal Savings Bank
made matching contributions totaling approximately $44,803.18. The Bank has made
no discretionary contributions to the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan for the fiscal year ended December 31, 1998. See generally
"CONTRIBUTIONS TO THE PLAN" in the Summary Plan Description attached hereto.
Due to the additional expenses related to the establishment and
operation of the ESOP and RRP, Alaska Federal Savings Bank may determine to
reduce its matching contribution under the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan in the future.
Performance of Alaska Pacific Bancshares, Inc. Common Stock. As of the
date of this Prospectus Supplement, no shares of Alaska Pacific Bancshares, Inc.
common stock have been issued or are outstanding and there is no established
market for Alaska Pacific Bancshares, Inc. common stock. Accordingly, there is
no record of the historical performance of Alaska Pacific Bancshares, Inc.
common stock.
Performance of Investment Options. The following table provides
performance data with respect to the Investment Options available under the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan, based on information
provided to the Company by Delaware Group Retirement Services, the trustee for
funds invested in such Investment Options.
The information set forth below with respect to the Investment Options
has been reproduced from materials supplied by Delaware Trust. The Bank and
Alaska Pacific Bancshares, Inc. take no responsibility for the accuracy of such
information.
Additional information regarding the Investment Options may be
available from Delaware Trust or Alaska Federal Savings Bank. Participants
should review any available
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additional information regarding these investments before making an investment
decision under the Alaska Federal Savings Bank 401(k) Profit Sharing Plan.
<TABLE>
<CAPTION>
Net Investment Performance
--------------------------------------------
For Twelve-Month Period December 31, 1998
Ended December 31, Annualized
----------------------- -----------------
1998 1997 1996 3 Years 5 Years
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Cash Reserve...................... 4.75 4.84 4.63 4.74 4.53
U.S. Government Fund.............. 7.08 8.45 2.82 6.09 5.04
Delaware Fund..................... 17.40 24.47 13.94 18.52 15.64
Growth & Income Fund.............. 10.57 31.24 19.97 20.30 18.77
International Equity.............. 9.03 4.26 20.23 10.97 9.15
DEVON ............................ 22.16 34.93 22.90 26.53 23.71
Small Cap Value .................. (5.10) 33.03 22.12 15.52 12.11
DELCAP ........................... 17.72 14.04 13.77 15.16 13.42
TREND ............................ 13.57 19.43 10.71 14.51 14.01
</TABLE>
Each participant should note that past performance is not necessarily
an indicator of future results.
Administration of the Alaska Federal Savings Bank 401(k) Profit Sharing Plan
Trustee. The trustee of the Employer Stock Fund is appointed by the
Board of Directors of Alaska Federal Savings Bank to serve at its pleasure. The
current trustee for the Investment Options (other than the Employer Stock Fund)
is Delaware Trust. First Bankers Trust Company, N.A. will serve as trustee of
the Employer Stock Fund.
The trustee of the Alaska Federal Savings Bank 401(k) Profit Sharing
Plan receives and holds the contributions to the Alaska Federal Savings Bank
401(k) Profit Sharing Plan in trust and distributes them to participants and
beneficiaries in accordance with the provisions of the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan. The trustee of the Employer Stock Fund is
responsible, following participant direction, for effectuating the investment of
the assets of the Trust in Alaska Pacific Bancshares, Inc. common stock.
Plan Administrator. Delaware Trust and Alaska Federal Savings Bank
share the duties of Plan Administrator. The Bank is responsible for
administration of the Alaska Federal Savings Bank 401(k) Profit Sharing Plan and
is appointed by and serves at the pleasure of the Board of Directors of Alaska
Federal Savings Bank. The Bank may appoint individuals to assist in the
administration of the Alaska Federal Savings Bank 401(k) Profit Sharing Plan and
in carrying out its responsibilities for interpretation of the provisions of the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan, prescribing procedures
for filing applications for benefits, preparation and distribution of
information explaining the Alaska Federal Savings Bank 401(k) Profit Sharing
Plan, furnishing Alaska Federal Savings Bank with reports with respect to the
administration of the Alaska Federal Savings Bank 401(k) Profit Sharing Plan,
receiving, reviewing and keeping on file reports of the financial condition of
the Trust, and appointing or employing individuals to assist in the
administration of the Alaska Federal Savings Bank 401(k) Profit Sharing Plan.
Delaware Trust is responsible for maintenance of Plan records, preparation and
filing of all returns and reports relating to the Alaska Federal Savings Bank
401(k) Profit
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Sharing Plan which are required to be filed with the U.S. Department of Labor
and the IRS, and for all disclosures required to be made to participants and
beneficiaries under Sections 104 and 105 of ERISA.
Reports to Plan Participants
As of the end of each fiscal quarter, the Alaska Federal Savings Bank
401(k) Profit Sharing Plan Administrator will furnish to each participant a
statement showing (i) balances in the participant's Accounts as of the end of
that period, (ii) the amount of contributions and forfeitures allocated to his
or her Accounts for that period, and (iii) the adjustments to his or her
Accounts to reflect a respective share of dividends on Alaska Pacific
Bancshares, Inc. common stock, and other income, gains or losses, if any.
Amendment and Termination
It is the intention of Alaska Federal Savings Bank to continue the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan indefinitely.
Nevertheless, Alaska Federal Savings Bank, by action of its Board of Directors,
may terminate the Alaska Federal Savings Bank 401(k) Profit Sharing Plan in its
sole discretion at any time and for any reason. If the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan is terminated in whole or in part, then,
regardless of other provisions in the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan, each participant affected by such termination shall become fully
vested in all of his Accounts. The Bank reserves the right to make from time to
time any amendment or amendments to the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan which do not cause any part of the Trust to be used for, or
diverted to, any purpose other than the exclusive benefit of participants or
their beneficiaries; provided, however, that Alaska Federal Savings Bank may
make any amendment it determines necessary or desirable, with or without
retroactive effect, to comply with ERISA and the Code.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan with another plan, or the transfer of
the Trust assets to another plan, the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan requires that each participant would (if either the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan or the other plan were then terminated)
receive a benefit immediately after the merger, consolidation or transfer which
is equal to or greater than the benefit he or she would have been entitled to
receive immediately before the merger, consolidation or transfer (if the Alaska
Federal Savings Bank 401(k) Profit Sharing Plan had then been terminated).
Federal Tax Aspects of the Alaska Federal Savings Bank 401(k) Profit Sharing
Plan
The Plan will be administered to comply in operation with the
requirements (i) for qualification under Section 401(a) of the Code, (ii) for
treatment as a qualified cash or deferred arrangement under Section 401(k) of
the Code, and (iii) for exclusion of elective deferrals under Section 402(g) of
the Code. Assuming that the Alaska Federal Savings Bank 401(k) Profit Sharing
Plan is administered in accordance with such Sections of the Code, participation
in the
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Alaska Federal Savings Bank 401(k) Profit Sharing Plan should have the following
implications for federal income tax purposes:
(a) Amounts contributed to participants' Accounts, including
participant elective deferrals, and the investment earnings on these Accounts,
are not includable in participants' gross income for federal income tax purposes
until such contributions or earnings are actually distributed or withdrawn from
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan. However, participant
elective deferrals to the Alaska Federal Savings Bank 401(k) Profit Sharing Plan
are subject to both FICA and Medicare taxes. Special tax treatment may apply to
the taxable portion of any distribution that includes Alaska Pacific Bancshares,
Inc. common stock, that is paid to another employer's plan or to an IRA in a
"rollover," or that is eligible for special tax treatment for lump sum
distributions (as described below).
(b) Income earned by the Trust will not be taxable to the Trust.
Permitted Rollover Amounts. Most payments from the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan will be "eligible rollover
distributions." This means that they can be rolled over to an IRA or to another
employer plan that accepts rollovers. Required minimum payments, beginning
generally in the year in which the participant reaches age 70 1/2 or retires,
whichever is later, cannot be rolled over.
Direct Rollover. A participant may choose a direct rollover of all or
any portion of a payment that is an "eligible rollover distribution." In a
direct rollover, the eligible rollover distribution is paid directly from the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan to an IRA or another
employer plan that accepts rollovers. If the participant chooses a direct
rollover, the rollover amount will not be taxed until it is taken out of the IRA
or the employer plan.
Payments that are not Rolled Over. A payment made to a participant is
subject to 20% mandatory income tax withholding. This amount is sent to the IRS
as income tax withholding, and it will be credited against any income tax owed
for the year. The payment is taxed in the year it is received unless, within 60
days, it is rolled over to an IRA or to another plan that accepts rollovers. If
the payment is not rolled over, special tax rules may apply (as described
below).
Sixty-Day Rollover Option. Even if a participant has an eligible
rollover distribution paid to him or her, all or part of it can still be rolled
over to an IRA or to another employer plan that accepts rollovers. However, the
rollover must be made within 60 days after the payment is received. The portion
of the payment that is rolled over will not be taxed until it is taken out of
the IRA or the employer plan. The participant can roll over up to 100% of the
payment from the Alaska Federal Savings Bank 401(k) Profit Sharing Plan,
including an amount equal to the 20% that was withheld, by including other money
to replace the 20% that was withheld. On the other hand, if only the 80% that
was received is rolled over, the participant will be taxed on the 20% that was
withheld.
Additional 10% Tax. If a participant receives a payment before reaching
age 59 1/2 and does not roll it over, then, in addition to the regular income
tax, an extra tax equal to 10% of the
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taxable portion of the payment may be imposed. The additional 10% tax does not
apply to the payment if it is (1) paid because the participant separates from
service with the employer during or after the year in which the participant
reaches age 55, (2) paid because of retirement due to disability, (3) paid as
equal (or almost equal) payments over the participant's life or life expectancy
(or the participant's and his or her beneficiary's lives or life expectancies),
(4) used to pay certain medical expenses, (5) paid to a beneficiary upon a
participant's death, or (6) paid to an alternate payee pursuant to a qualified
domestic relations order.
Special Tax Treatment. If an eligible rollover distribution is not
rolled over, it will be taxed in the year it is received. However, if it
qualifies as a "lump sum distribution," it may be eligible for special tax
treatment. A lump sum distribution is a payment, within one year, of the
participant's entire balance under the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan (and certain other similar plans of the employer) that is payable
because the participant has reached age 59 1/2, has separated from service with
his employer, or has died. For a payment to qualify as a lump sum distribution,
the recipient must have been a participant in the Alaska Federal Savings Bank
401(k) Profit Sharing Plan for at least 5 years. The special tax treatment for
lump sum distributions is described below.
Five-Year Averaging. If the participant receives a lump sum
distribution after reaching age 59 1/2, he or she may be able to make a
one-time election to figure the tax on the payment by using "5-year
averaging." 5-year averaging often reduces the tax owed because it
treats the payment much as if it were paid over 5 years. The entire tax
(using current tax rates) is paid in the year in which the lump sum
distribution is received.
Ten-Year Averaging For Those Born Before January 1, 1936. If a
participant receives a lump sum distribution and was born before
January 1, 1936, he or she can make a one-time election to figure the
tax on the payment by using "10-year averaging" (using 1986 tax rates)
instead of 5-year averaging (using current tax rates). Like the 5- year
averaging rules, 10-year averaging often reduces the amount of tax
owed.
Capital Gain Treatment For Those Born Before January 1, 1936.
In addition, if a participant who was born before January 1, 1936,
receives a lump sum distribution, he or she may elect to have the
portion of the payment that is attributable to pre-1974 participation
in the Alaska Federal Savings Bank 401(k) Profit Sharing Plan (if any)
taxed as long-term capital gain.
There are other limits on the special tax treatment for lump sum
distributions. For example, a participant can generally elect this special tax
treatment only once during his or her lifetime, and the election applies to all
lump sum distributions received in that same year. If the participant has
previously rolled over a payment from the Alaska Federal Savings Bank 401(k)
Profit Sharing Plan (or certain other similar plans of the employer), he or she
cannot use this special tax treatment for later payments from the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan. If the payment is rolled over to an
IRA, the participant will not be able to use this special tax treatment for
later payments from the IRA. Also, if any portion of the payment is rolled over
to an IRA, this special tax treatment is not available for the rest of the
payment.
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The special tax treatment for lump sum distributions described above,
other than the special rules for those born before January 1, 1936, has been
repealed for all such distributions received in tax years beginning after
December 31, 1999.
Employer Securities. There is a special rule for a payment from the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan that includes employer
securities. To use this special rule, the payment must qualify as a lump sum
distribution, as described above (or would qualify except that the participant
has not participated in the Alaska Federal Savings Bank 401(k) Profit Sharing
Plan for at least 5 years). Under this rule, the participant has the option of
not paying tax on the "net unrealized appreciation" of the securities until they
are sold. Net unrealized appreciation generally is the increase in the value of
the securities that took place while they were held by the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan.
The participant may elect not to have the special rule apply to the net
unrealized appreciation. In such case, the net unrealized appreciation will be
taxed in the year the securities are received from the Alaska Federal Savings
Bank 401(k) Profit Sharing Plan (and may be eligible for the special tax
treatment described above), unless they are rolled over. The securities
(including any net unrealized appreciation) can be rolled over to an IRA or to
another employer plan that accepts rollovers.
Other Payment Recipients. In general, the rules summarized above that
apply to payments to participants also apply to payments to participants'
surviving spouses and to spouses or former spouses who are alternate payees
pursuant to a qualified domestic relations order. Some of the rules summarized
above also apply to a deceased participant's beneficiary who is not a spouse.
However, there are some significant exceptions for payments to surviving
spouses, alternate payees, and other beneficiaries.
A surviving spouse of a deceased participant may choose to have an
eligible rollover distribution paid in a direct rollover to an IRA or paid to
the spouse. If the spouse has the payment made to him or her, such spouse can
keep it or roll it over to an IRA (but not to an employer plan). An alternate
payee has the same choices as the participant. Thus, an alternate payee can have
the payment paid as a direct rollover or paid to the alternate payee. If the
alternate payee has it paid to him or her, the alternate payee can either keep
it or roll it over to an IRA or to another employer plan that accepts rollovers.
A beneficiary other than the surviving spouse cannot roll over the payment under
any circumstances.
A surviving spouse, alternate payee or another beneficiary may be able
to use the special tax treatment for lump sum distributions and the special rule
for payments that include employer securities, as described above. A payment
that is received because of the participant's death may be eligible for the
special tax treatment available for lump sum distributions if the participant
met the appropriate age requirements, whether or not the participant had 5 years
of participation in the Alaska Federal Savings Bank 401(k) Profit Sharing Plan.
The foregoing is only a brief summary of certain federal income tax
aspects of the Alaska Federal Savings Bank 401(k) Profit Sharing Plan which are
of general application under the Code and is not intended to be a complete or
definitive description of the federal income tax
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consequences of participating in or receiving distributions from the Alaska
Federal Savings Bank 401(k) Profit Sharing Plan. Accordingly, each participant
may wish to consult a tax advisor concerning the Federal, state and local tax
consequences of participating in and receiving distributions from the Alaska
Federal Savings Bank 401(k) Profit Sharing Plan.
Participants subject to taxes imposed by state, local and other taxing
authorities, including foreign governments, should also consult with their own
attorneys or tax advisers regarding the tax consequences thereunder.
Restrictions on Resale
Any person receiving shares of Alaska Pacific Bancshares, Inc. common
stock under the Alaska Federal Savings Bank 401(k) Profit Sharing Plan who is an
"affiliate" of Alaska Federal Savings Bank or Alaska Pacific Bancshares, Inc. as
the term "affiliate" is used in Rules 144 and 405 under the Securities Act of
1933 (e.g., directors, officers and substantial shareholders of Alaska Federal
Savings Bank) may re-offer or resell such shares only pursuant to a registration
statement or, assuming the availability thereof, pursuant to Rule 144 or some
other exemption from the registration requirements of the Securities Act of
1933. Any person who may be an "affiliate" of Alaska Federal Savings Bank or
Alaska Pacific Bancshares, Inc. may wish to consult with counsel before
transferring any Alaska Pacific Bancshares, Inc. common stock owned by him or
her. In addition, participants are advised to consult with counsel as to the
applicability of Section 16 of the Securities Exchange Act of 1934 which may
restrict the sale of Alaska Pacific Bancshares, Inc. common stock acquired under
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan, or other sales of
Alaska Pacific Bancshares, Inc. common stock.
LEGAL OPINIONS
The validity of the issuance of Alaska Pacific Bancshares, Inc. common
stock will be passed upon by Breyer & Associates PC, 1100 New York Avenue, N.W.,
Washington, D.C. 20005, which firm acted as special counsel for Alaska Pacific
Bancshares, Inc. and Alaska Federal Savings Bank in connection with Alaska
Federal Savings Bank's Conversion.
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================================================================================
Summary Plan Description
Prepared for
Alaska Federal Savings Bank
================================================================================
#4021(2/96) (C)1998 Universal Pensions, Inc., Brainerd, MN 56401
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Introduction
Effective 05-01-1999, Alaska Federal Savings Bank has amended the Alaska Federal
Savings Bank 401(k) Savings Plan designed to help you meet your financial needs
during your retirement years. The Plan was originally effective on 07-01- 1992
and its plan sequence number is 001. The plan sequence number identifies the
number of qualified plans that Alaska Federal Savings Bank currently maintains
or has previously maintained.
To become a Participant in the Plan, you must meet the Plan's eligibility
requirements. Once you become a Participant, Alaska Federal Savings Bank will
maintain an Individual Account for you. Each Plan Year your account will be
adjusted to reflect contributions, gains, losses, etc. The percentage of your
account to which you will be entitled when you terminate employment depends on
the Plan's vesting schedule. These features are explained further in the
following pages.
The actual Plan is a complex legal document that has been written in the manner
required by the Internal Revenue Service e (IRS) and is referred to as the Basic
Plan Document. This document is called a Summary Plan Description (SPD) and e
explains and summarizes the important features of the Basic Plan Document.
Alaska Federal Savings Bank may make e contributions to this Plan. In addition,
you may be able to elect to reduce your annual taxable income by deferring a
portion of your Compensation into the Plan as Employee 401(k) Contributions. You
should consult the Basic Plan Document for technical and detailed Plan
provisions. The legal operation of the Plan is controlled by the Basic Plan
Document and not this SPD.
If at any time you have specific questions about the Plan as it applies to you,
please bring them to the attention of the Plan Administrator whose address and
telephone number appear in Section One of this SPD. You may also examine the
Basic Plan Document itself at a reasonable time by making arrangements with the
Plan Administrator.
#4021(2/96) (C)1998 Universal Pensions, Inc., Brainerd, MN 56401
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Contents of the Summary Plan Description
SECTION ONE DEFINITIONS
SECTION TWO ELIGIBILITY AND PARTICIPATION
Information in this section includes:
Eligible Classes of Employees
Age and Service Requirements
How Hours of Service Are Counted
When You Can Participate in the Plan
SECTION THREE FUNDING AND ADMINISTRATION OF THE
PLAN
Information in this section includes:
Plan Contribution Sources, Allocations and Limitations
Compensation
Plan Administration and Management
Self Direction of Investments
SECTION FOUR DISTRIBUTION OF BENEFITS AND
VESTING
Information in this section includes:
Benefit Eligibility
Distribution of Benefits
How Your Vested Amount is Determined
Restrictions or Penalties on Distributions
Payouts to Your Beneficiaries
SECTION FIVE CLAIMS PROCEDURE
Information in this section
includes:
What to do to Receive Benefits
How to File a Claim
SECTION SIX MISCELLANEOUS
Information in this section
includes:
Borrowing From the Plan
Break in Service Situations
Plan Termination
SECTION SEVEN RIGHTS UNDER ERISA
Information in this section includes:
The Rights and Protections a Plan Participant is Entitled
to Under the Employee Retirement Income Security Act
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SECTION ONE: DEFINITIONS
The following definitions are used in the text of this SPD. These words and
phrases are capitalized throughout the SPD for ease of reference.
Compensation - means the earnings paid to you by Alaska Federal Savings Bank.
Employee - means any person employed by Alaska Federal Savings Bank.
Employee 401(k) Contributions - means the dollars you put into the Plan through
before-tax payroll deductions.
Employer - means Alaska Federal Savings Bank, the corporation maintaining this
Plan.
Employer Contribution - means the amount contributed to the Plan on your behalf
by Alaska Federal Savings Bank.
Individual Account - means the contribution account established and maintained
for you which is made up of all contributions made by you or on your behalf.
Matching Contribution - means a contribution made by Alaska Federal Savings Bank
to the 401(k) Plan on your behalf based upon your Employee 401(k) Contributions
and/or your Nondeductible Employee Contributions.
Participant - means an Employee who has met the eligibility requirements, has
entered the Plan, and has become eligible to make or receive a contribution to
his or her Individual Account.
Payroll Deduction Form - means the agreement you sign to authorize Alaska
Federal Savings Bank to deduct your Employee 401(k) Contributions from your
Compensation and put them into the 401(k) Plan.
Plan - means the specific retirement Plan Alaska Federal Savings Bank has set
up. The Plan is governed by a legal document containing various technical and
detailed provisions. The Plan Administrator has a copy of the Plan document.
Plan Administrator - The Plan Administrator is responsible for directly
administering the Plan. Alaska Federal Savings Bank is the Plan Administrator of
this Plan and is therefore responsible for the day-to-day administration and
management of the Plan. To ensure efficient and sound operation and management
of the Plan, Alaska Federal Savings Bank has the discretionary authority to
appoint other persons as may be necessary to act on its behalf or assist in
performing these responsibilities. The address and phone number of Alaska
Federal Savings Bank are listed below.
Alaska Federal Savings Bank
2094 Jordan Ave
Juneau, AK 99801
907-789-4844
Plan Year - means the twelve month period ending on 06-30.
SECTION TWO: ELIGIBILITY AND PARTICIPATION
ELIGIBLE CLASSES OF EMPLOYEES
You will generally be eligible to become a Participant in the Plan after having
satisfied the age and service requirements. Even if you satisfy the eligibility
criteria, however, you are not eligible to participate if you are covered by a
collective bargaining agreement (e.g., union agreement) unless the agreement
requires you to be eligible.
AGE AND SERVICE REQUIREMENTS
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Employee 401(k) and Matching Contributions
You will become eligible to enter the Plan, make Employee 401(k) Contributions
and receive Matching Contributions after you have completed .25 year(s) of
service for Alaska Federal Savings Bank and attained the age of 18.
Profit Sharing Contributions
You will become eligible to enter the Plan and receive profit sharing
contributions after you have performed .25 year(s) of service for Alaska Federal
Savings Bank and attained the age of 18.
HOW HOURS OF SERVICE ARE COUNTED
Your hours of service are generally counted on the basis of the actual number of
hours you work or for which you are entitled to Compensation. Instead of
counting hours of service for purposes of determining your number of Years of
Eligibility Service, however, you will receive credit for the period of time
during which you are paid or entitled to pay from Alaska Federal Savings Bank
for each type of contribution for which you are required to perform a fractional
Year of Eligibility Service.
However, since this is an amendment and restatement of an existing Plan, you
will not be required to satisfy the eligibility requirements stated above if you
were a Participant in the prior Plan.
WHEN YOU CAN PARTICIPATE IN THE PLAN
After you have met the eligibility requirements, you will become a Participant
in the Plan on the applicable entry date(s). During each Plan Year there are
generally at least two entry dates. Alaska Federal Savings Bank has designated
Quarterly as the entry date(s) for this Plan.
You will continue to participate in the Plan as long as you do not incur a break
in service. A break in service is a period of at least 12 consecutive months
during which you do not perform services for Alaska Federal Savings Bank.
However, no break in service will occur if the reason you did not work was
because of certain absences due to birth, pregnancy or adoption of children,
military service or other service during a national emergency during which your
re-employment under a federal or state law is protected and you do, in fact,
return to work within the time required by law.
SECTION THREE: PLAN FUNDING AND ADMINISTRATION
PLAN CONTRIBUTION SOURCES, ALLOCATIONS AND LIMITATIONS
Employee 401(k) Contributions
Effective 05-01-1999 (or the date you begin participating in the Plan, if
later), you may make before-tax contributions to the Plan through payroll
deduction. Such contributions are called Employee 401(k) Contributions.
To begin making Employee 401(k) Contributions, you must complete and sign a
Payroll Deduction Form. Once you become eligible to participate in the Plan,
Alaska Federal Savings Bank will provide you with such form.
For example, assume your compensation is $15,000. For Plan Year 1999, you wish
to make an Employee 401(k) Contribution to the Plan and sign a Payroll Deduction
Form authorizing an Employee 401(k) Contribution of 5% of your Compensation. As
a result, Alaska Federal Savings Bank will pay you $14,250 as gross taxable
income and will deposit your 5% Employee 401(k) Contribution (i.e., $750) into
the Plan for you.
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Limits on Employee 401(k) Contributions
Federal tax laws and plan documents govern the amount of Employee 401(k)
Contributions which you may make. Specifically, federal law places two annual
limits on the amount you may defer into a 401(k) plan - an individual limit and
an average limit.
Individual Limit
Federal tax law limits the amount you can put into the Plan during each of your
tax years (generally, a calendar year). For 1999, the limit is $10,000. This
amount is indexed periodically for changes in the cost-of-living index. This
limit applies to all Employee 401(k) Contributions you make during your tax year
to any 401(k) plans maintained by your present or former employers.
If you defer more than you are allowed, you must submit in writing for the
return of the excess to Alaska Federal Savings Bank no later than March 1.
The excess amount and any earnings you may have received on the excess must be
taken out of the Plan by April 15 of the year following the year the money went
into the Plan. The excess amounts will appear on your Form W-2 and will be
taxable income for the year in which you put the excess into the Plan. If the
excess is not removed from the Plan by April 15, you will have to pay additional
income tax.
EXAMPLE: You deferred $100 more than the law allows in 1998 and you had earnings
of $10 on the excess. You removed your $100 excess and the $10 earnings by April
15, 1999. The excess will be reported on your 1998 Form W-2 and you will pay
income tax on that amount.
Average Limits
Tax law defines a group of an employer's employees known as highly compensated
employees. Highly compensated employees making Employee 401(k) Contributions are
limited in the percent of their compensation which they defer based on the
average percent of compensation deferred by the non-highly compensated group of
employees during the Plan Year. If these limits apply to you, Alaska Federal
Savings Bank can give you additional information about them.
Plan Specific Limitations
Upon completion of a Payroll Deduction Form, your compensation will be reduced
each pay period by the percent you specify. Alaska Federal Savings Bank permits
you to defer a percentage of your Compensation from 1% to 17% in increments of
1% each Plan Year.
To change the amount of your Employee 401(k) Contributions, you must complete
and sign a revised Payroll Deduction Form and return it to Alaska Federal
Savings Bank at least 30 days before the change will take effect or a lesser
number of days if Alaska Federal Savings Bank permits. Alaska Federal Savings
Bank will establish uniform and nondiscriminatory rules regarding when you may
change your Payroll Deduction form.
To discontinue making Employee 401(k) Contributions, you must complete and sign
a revised Payroll Deduction Form.
Alaska Federal Savings Bank will establish uniform and nondiscriminatory rules
regarding when you may resume making deferrals if you stop.
Matching Contributions
Individual Limits
Matching Contributions are Employer Contributions which are contributed to the
Plan based on your Employee 401(k) Contributions. Effective 05-01-1999 (or the
date you begin participating in the Plan, if later), Alaska Federal Savings Bank
will make Matching Contributions to the Plan equal to 50% of your Employee
401(k) Contributions.
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However, Matching Contributions will not be made with respect to your
contributions in excess of $1,000.00.
To share in the Matching Contribution, you must be a Participant in the Plan on
at least one day of the Plan Year and make Employee 401(k) Contributions.
Average Limits
Tax law defines a group of an employer's employees known as highly compensated
employees. Highly compensated employees receiving Matching Contributions are
limited in the amount of Matching Contributions which they may receive based on
the average Matching Contribution (as a percent of compensation) received by the
non-highly compensated group of employees during the Plan Year. If these limits
apply to you, Alaska Federal Savings Bank can give you additional information
about them.
Profit Sharing Contributions
Each year, the managing body of Alaska Federal Savings Bank will determine the
amount, if any, which it will contribute to the Plan. Employer Contributions to
a profit sharing plan in general can range from 0% to 15% of participants'
compensation each year.
If you satisfy the requirements and are entitled to a profit sharing
contribution, you will receive a pro rata allocation based on your Compensation
in relation to the Compensation of all Participants entitled to profit sharing
contributions.
For example, assume you are one of 10 Participants in the Plan and your
Compensation is $10,000. Assume further the Compensation of all Participants
when added together equals $100,000. The ratio of your Compensation ($10,000) to
that of all Participants ($100,000) is 1/10. Therefore, 1/10 of the contribution
made by your Employer to the Plan will be allocated to your account.
Qualified Nonelective Contributions (QNECs) and Qualified Matching Contributions
(QMACs)
QNECs and QMACs may be made by Alaska Federal Savings Bank to satisfy special
nondiscrimination rules which apply to the Plan. These contributions are fully
vested when made and are subject to the same restrictions on withdrawals
applicable to Employee 401(k) Contributions.
Rollover and Transfer Contributions
Alaska Federal Savings Bank allows you to make rollover contributions,
regardless of whether you have become a Participant in the Plan. You are 100%
vested in your rollover contributions at all times and may withdraw them from
the Plan at any time.
Alaska Federal Savings Bank allows you to make transfer contributions,
regardless of whether you have become a Participant in the Plan. You are 100%
vested in your transfer contributions and may withdraw them from the Plan at any
time. However, assets transferred from a money purchase pension plan to this
Plan may not be distributed before your retirement, death, disability or
severance from employment or prior to plan termination.
Annual Additions Limitation
In spite of the contribution/allocation formulas described earlier, federal law
limits the annual amount which may be allocated to your account to the lesser of
$30,000 or 25% of your Compensation.
COMPENSATION
The definition of compensation for plan purposes can vary for many reasons. For
example, federal tax law may require use of one definition of compensation for
nondiscrimination testing and another definition for contribution allocation
purposes.
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In addition, federal tax law permits employers such as Alaska Federal Savings
Bank to choose the definition of compensation which will be used for other
purposes. Regardless of the various definitions of compensation which may be
required or allowed, however, in the event your Compensation exceeds $160,000
per year, only the first $160,000 will be counted as Compensation under the
Plan. This $160,000 cap will be adjusted periodically by the Internal Revenue
Service for increases in the cost-of-living.
Also, if you satisfy the eligibility requirements and enter the Plan on a date
other than the first day of the year over which your Compensation is to be
determined, the Compensation earned during the year, but prior to your entry
into the Plan, will be excluded.
Alaska Federal Savings Bank has elected to use your Plan Year W-2 compensation
for purposes of this Plan. Your Compensation, however, will be adjusted as
described below.
For purposes of determining your Compensation, elective deferrals you make to
Alaska Federal Savings Bank cafeteria, 401(k), salary deferral SEP or tax
sheltered annuity plan will be included.
PLAN ADMINISTRATION AND MANAGEMENT
All contributions made to the Plan on your behalf will be placed in a trust fund
established to hold dollars for the benefit of all Participants. Alaska Federal
Savings Bank will establish and maintain an Individual Account for you and all
Participants. Your Individual Account will be used to track your share in the
total trust fund.
This Plan allows you to direct the investment of the assets in your Individual
Account. Alaska Federal Savings Bank will establish uniform and
nondiscriminatory policies describing how and when you may provide investment
directions. You will be responsible for any expenses and losses resulting from
your choice of investments.
SECTION FOUR: DISTRIBUTION OF BENEFITS AND VESTING
BENEFIT ELIGIBILITY
Certain events must occur before you can withdraw money from the Plan. In
general, benefits may be withdrawn upon termination of employment after
attaining normal retirement age or upon Plan termination.
Normal retirement age under this Plan is age 60.
You may withdraw all or a portion of the vested Employer Contributions if you:
terminate employment before attaining normal retirement age
become disabled
qualify for in-service distributions
In addition, you may withdraw your Employee 401(k) Contributions if you:
attain age 59 1/2 but continue to work
incur a financial hardship
Under your Plan, the only financial needs which are considered to meet the
financial hardship requirements are the following items: deductible medical
expenses for you or your immediate family, purchase of your principal residence,
payment of tuition for the next quarter or semester for you or your immediate
family, or to prevent eviction from your home or foreclosure upon your principal
residence. A hardship distribution cannot exceed the amount of your immediate
and heavy financial need and you must have obtained all distributions and all
nontaxable loans from all Plans maintained by Alaska
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Federal Savings Bank prior to qualifying for a hardship distribution. Hardship
distributions are subject to a 10% penalty tax if received before you reach age
59 1/2.
Form of Payment
Payments from the Plan that are eligible rollover distributions can be taken in
two ways. You may have all or any portion of your eligible rollover distribution
either (1) paid in a direct rollover to an IRA or another employer plan or (2)
paid to you. If you choose to have your Plan benefits paid to you, you will
receive only 80% of the payment, because Alaska Federal Savings Bank is required
to withhold 20% of the payment and send it to the IRS as income tax withholding
to be credited against your taxes.
Alaska Federal Savings Bank will give you more information about your options
around the time you request your payout from the Plan. That information will,
among other things, define an eligible rollover distribution.
If your vested Individual Account (i.e., the amount of money in the Plan you are
entitled to) is no more than $5,000, your benefits will be paid, either directly
to you or as a direct rollover to an IRA or another plan, in a single lump sum
payment. If your vested Individual Account is more than $5,000, your benefits
under the Plan will be made in a form other than an annuity.
Timing of Benefit Payments
If the value of your Individual Account is no more than $5,000, Alaska Federal
Savings Bank may direct that your benefits be paid within 90 days after the end
of the Plan Year in which you become eligible to receive them.
If your account is more than $5,000, your funds may be left in the Plan until
you submit a written request to Alaska Federal Savings Bank for payment.
However, you must begin taking required minimum distributions at age 70 1/2 if
you are a five percent or more owner of your Employer. If you are not a five
percent or more owner, you must begin taking required minimum distributions from
the Plan by April 1 of the year after the year in which you turn age 70 1/2 or ,
if later, April 1 of the year after the year in which you separate from service.
Alaska Federal Savings Bank can provide you with the proper request forms. Once
you have returned the completed request to Alaska Federal Savings Bank, payment
will be made no later than 90 days after the close of the Plan Year in which
Alaska Federal Savings Bank received your request.
Required Minimum Distributions
The tax laws and regulations require you to start taking minimum distributions
from the Plan by April 1 of the year after the year in which you turn 70 1/2
years of age if you are a five percent or more owner of your Employer. If you
are not a five percent or more owner, you must begin taking minimum
distributions from the Plan by April 1 of the year after the year in which you
turn age 70 1/2 or, if later, April 1 of the year after the year in which you
separate from service. Minimum distributions must continue every year thereafter
and must be taken by December 31. In general, the amount of the annual minimum
distribution is determined by dividing the balance in your Individual Account by
your life expectancy or the joint life expectancy of you and your Plan
beneficiary.
DETERMINING YOUR VESTED AMOUNT
Amount of Benefit
Whether you receive the full value of your account(s) depends on the reason you
are receiving the distribution and your vested percentage in your contributions.
Your distribution will be the full value of your Individual Account (that is,
you will be 100% vested) if you reach normal retirement age, Alaska Federal
Savings Bank terminates this Plan, there is a complete discontinuance of
contributions to the Plan, you die, become disabled or you satisfy the early
retirement age provisions.
However, if you terminate employment and thus become eligible for a distribution
from the Plan, your distribution will be only the vested amount in your
Individual Account. Loss, denial or reduction of anticipated benefits may occur
if you terminate employment before becoming fully vested, or if all or a portion
of your benefit is set aside for an alternate payee
A-9
<PAGE>
under a qualified domestic relations order (QDRO). You may also lose your
benefit if you cannot be located when a benefit becomes payable to you.
However, the vested amount of your Individual Account will depend upon the types
of contributions made to your account. You will be fully vested at all times in
all Employee 401(k) Contributions, Qualified Nonelective Contributions and
Qualified Matching Contributions.
Your vested amount is determined by multiplying the value of your Individual
Account subject to the plan's vesting schedule by the applicable percentage from
the vesting schedule. The vesting schedule determines how rapidly your
Individual Account balance becomes nonforfeitable based on years of service.
EXAMPLE: Assume you have $10,000 in your Individual Account and you terminate
employment when you are 40% vested. Your vested amount would be $4,000 (.40 x
$10,000).
You will generally be vested in your Individual Account derived from profit
sharing contributions and forfeitures according to the following schedule.
Years of Vesting Service Vested Percentage
- ------------------------ -----------------
1 20%
2 40%
3 60%
4 80%
5 100%
6 100%
7 100%
You will generally be vested in your Individual Account derived from Matching
Contributions and forfeitures according to the following schedule.
Years of Vesting Service Vested Percentage
- ------------------------ -----------------
1 20%
2 40%
3 60%
4 80%
5 100%
6 100%
7 100%
Years of Vesting Service
You must provide a minimum of 1000 hours of service to complete a year of
vesting service. In addition, you must exceed 500 Hours of service to avoid a
break in vesting service.
All of your years of service with Alaska Federal Savings Bank are counted for
the purpose of determining your vested percentage. In addition, you will receive
credit for vesting purposes for hours of service with .
Profit Sharing Contribution Forfeitures
If you are not 100% vested and receive a distribution of your profit sharing
contributions, the dollars left in the Plan are called forfeitures. In your
Plan, forfeitures are used to reduce profit sharing contributions. If you return
to work for Alaska Federal Savings Bank before incurring five consecutive one
year breaks in service, you may recapture the forfeited benefit.
A-10
<PAGE>
Generally, your forfeited benefit will be restored immediately by Alaska Federal
Savings Bank if you have not incurred five consecutive one year breaks in
service, and if you pay back to the Plan the distribution which you received.
Matching Contribution Forfeitures
If you are not 100% vested and receive a distribution of your Matching
Contributions, the dollars left in the Plan are called forfeitures. In your
Plan, forfeitures are used to reduce matching contributions. If you return to
work for Alaska Federal Savings Bank before incurring five consecutive one year
breaks in service, you may recapture the forfeited benefit. Generally, your
forfeited benefit will be restored immediately by Alaska Federal Savings Bank if
you have not incurred five consecutive one year breaks in service, and if you
pay back to the Plan the distribution which you received.
RESTRICTIONS OR PENALTIES ON DISTRIBUTIONS
If you receive a distribution before reaching age 59 1/2, you must pay an
additional 10% penalty tax on dollars included in income. There are, however,
exceptions to the 10% early distribution penalty. Your tax advisor can assist
you in determining if one of the exceptions applies to your distribution.
PAYOUTS TO YOUR BENEFICIARIES
Your beneficiary will receive the total value of your Individual Account when
you die. If you are married, your spouse will automatically be your beneficiary.
To choose another beneficiary, you must sign a written form listing a nonspouse
beneficiary. Your spouse must give written consent to this in the presence of a
notary public. Contact Alaska Federal Savings Bank if you wish to choose a
nonspouse beneficiary. If the vested value of your Individual Account is no more
than $5,000, your beneficiary will receive a lump sum payment of the entire
amount.
If the value of your Individual Account is greater than $5,000, your beneficiary
will receive a payout(s) in a form other than an annuity.
SECTION FIVE: CLAIMS PROCEDURE
WHAT TO DO TO RECEIVE BENEFITS
You or your beneficiary must file a written request with the Plan Administrator
in order to start receiving benefits when you become eligible for them or when
you die.
HOW TO FILE A CLAIM
A claim should be filed with Alaska Federal Savings Bank. You may claim a
benefit to which you think you are entitled by filing a written request with
Alaska Federal Savings Bank. The claim must set forth the reasons you believe
you are eligible to receive benefits and authorize Alaska Federal Savings Bank
to conduct such examinations and take such steps as may be necessary to evaluate
the claim.
If your claim is turned down, Alaska Federal Savings Bank will provide you or
your beneficiary with a written notice of the denial within 60 days of the date
your claim was filed. This notice will give you the specific reasons for the
denial, the specific provisions of the Plan upon which the denial is based, and
an explanation of the procedures for appeal. You or your beneficiary will have
60 days from receipt of the notice of denial in which to make written
application for review by Alaska Federal Savings Bank. You may request that the
review be in the nature of a hearing. You may be represented by an attorney if
you so desire. Alaska Federal Savings Bank will issue a written decision on this
review within 60 days after receipt of the application for review.
A-11
<PAGE>
SECTION SIX: MISCELLANEOUS
BORROWING FROM THE PLAN
Effective Date
As a Participant in this Plan, you may be able to borrow a portion of your
vested account balance. The loan program adopted by Alaska Federal Savings Bank
is available on a uniform basis to all parties in interest to the Plan who meet
loan qualification requirements.
Loan Program Administrator
If you have questions regarding the loan program you should contact Karen
Livingston, the person responsible for administering your loan program. You may
reach Karen Livingston, the loan program administrator, at 907-789-4844.
Loan Application Procedure
To apply for a loan under this Plan, you must complete and return to Karen
Livingston a Loan Application Form, furnishing all information requested and pay
any required loan application processing fees.
Collateral Pledge
A percentage of your vested account balance equal to the amount borrowed divided
by your vested account balance is pledged as security for repayment of loans
under this program.
Default Provisions
You will be deemed to have defaulted on your loan if you fail to remit payment
in a timely manner as required under the Loan Agreement, breach any of your
obligations or duties under the Loan Agreement, or terminate employment.
Upon default, Alaska Federal Savings Bank is entitled to foreclose its security
interest in your vested account balance pledged for repayment upon the
occurrence of an event which triggers a distribution of your benefits. In
addition, Alaska Federal Savings Bank will report as taxable any amounts which
are deemed distributed as a result of failing to make loan payments.
Employer Securities
Alaska Federal Savings Bank is offering a one time option to purchase Company
Stock. Once Company Stock is purchased the dollar amount per plan participant
will be provided to Delaware for liquidation of least aggressive fund to the
most aggressive fund to satisfy the request. If you want to purchase company
shares, but want to maintain their current investment portfolio mix within the
Delaware mutual funds, you can rebalance their Delaware accounts shortly after
the purchase is executed.
You will be able to transfer out of company stock and back into the Delaware
mutual funds. However, you will not be able to transfer into the company stock
fund. To execute a transfer out of the stock fund, you must call our customer
service center at 800-510-401(k). Our customer service rep will document the
request in writing to First Bankers Trust and will batch all requests to the
trustee on the 10th of each month. Transfers among the Delaware funds will be
executed through our phone system/customer service lines and will transact as of
the close of the business the request is received. The request should be
communicated by 4:00 P.M. EST.
PLAN TERMINATION
Alaska Federal Savings Bank expects to continue the Plan indefinitely. However,
in the unlikely event Alaska Federal Savings Bank must terminate the Plan, you
will become 100% vested in the aggregate value of your Individual Account
regardless of whether your vesting years of service are sufficient to make you
100% vested under the vesting schedule(s).
A-12
<PAGE>
If the Plan terminates, benefits are not insured by the Pension Benefit Guaranty
Corporation (PBGC). Under the law, PBGC insurance does not cover the type of
plans called defined contribution plans. This Plan is a defined contribution
plan and, therefore, is not covered.
BREAK IN SERVICE SITUATIONS
If you quit your job, incur a break in service and then return to work, your
date of participation depends on whether you had a vested interest in
contributions (other than your Employee 401(k) Contributions) at the time you
quit and incurred a break in service.
If you had a vested interest, you will participate again upon your return to
employment. In addition, your vesting years of service accumulated prior to the
time you quit and incurred a break in service will be counted in figuring your
vested interest.
If you did not have a vested interest, any eligibility years of service
occurring before the break in service will be taken into account and you will
begin to participate again upon your return to service unless the number of
consecutive one year breaks in service equals or exceeds the greater of five
years, or the aggregate number of eligibility years of service preceding the
breaks in service. If your period of consecutive breaks in service exceeds your
period of prior service, you will be treated as a new employee and will
participate again when you satisfy the Plan's eligibility requirements. In
addition, any vesting years of service occurring before the break in service
will be taken into account in computing your vested interest under the Plan
unless the number of consecutive one year breaks in service equals or exceeds
the greater of five years or the aggregate number of vesting years of service
preceding the breaks in service. For example, if you work for two years, quit
without being vested, and then return to employment after a break of two years
or more, the Plan will give you vesting credit for the initial two year period.
SECTION SEVEN: RIGHTS UNDER ERISA
THE RIGHTS AND PROTECTIONS A PLAN PARTICIPANT IS ENTITLED TO UNDER THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT
As a Participant in this Plan, you are entitled to certain rights and
protections under the Employee Retirement Income Security Act of 1974 (ERISA).
ERISA provides that all Plan Participants shall be entitled to do the following:
1. Examine, without charge, at the Plan Administrator's office and at
other specified locations, such as worksites and union halls, all Plan
documents, including insurance contracts, collective bargaining
agreements and copies of all documents filed by Alaska Federal Savings
Bank with the U.S. Department of Labor, such as detailed annual reports
and Plan descriptions.
2. Obtain copies of all Plan documents and other Plan information upon
written request to Alaska Federal Savings Bank. Alaska Federal Savings
Bank may make a reasonable charge for the copies.
3. Receive a summary of the Plan's annual financial report. Alaska Federal
Savings Bank is required by law to furnish each participant with a copy
of this Summary Annual Report.
4. Obtain, once a year, a statement of the total pension benefits accrued
and the nonforfeitable (vested) pension benefits (if any) or the
earliest date on which benefits will become nonforfeitable (vested).
The Plan may require a written request for this statement, but it must
provide the statement free of charge.
In addition to creating rights for Plan Participants, ERISA imposes duties upon
the people who are responsible for the operation of the employee benefit plan.
The people who operate your Plan, called fiduciaries of the Plan, have a duty to
do so prudently and in the interest of you and other Plan Participants and
beneficiaries. No one, including Alaska Federal Savings Bank, your union, or any
other person, may fire you or otherwise discriminate against you in any way to
prevent you from obtaining a pension benefit or exercising your rights under
ERISA.
If your claim for a benefit is denied in whole or in part, you must receive a
written explanation of the reason for the denial. You have the right to have
Alaska Federal Savings Bank review and reconsider your claim. Under ERISA, there
are steps
A-13
<PAGE>
you can take to enforce the above rights. For instance, if you request materials
from Alaska Federal Savings Bank and do not receive them within 30 days, you may
file suit in a federal court. In such a case, the court may require Alaska
Federal Savings Bank to provide the materials and pay you up to $100 a day until
you receive the materials, unless the materials were not sent because of reasons
beyond the control of Alaska Federal Savings Bank. If you have a claim for
benefits which is denied, or ignored, in whole or in part, you may file suit in
a state or federal court. If it should happen that Plan fiduciaries misuse the
Plan's money, or if you are discriminated against for asserting your rights, you
may seek assistance from the U.S. Department of Labor, or you may file suit in a
federal court. The court will decide who should pay court costs and legal fees.
If you are successful, the court may order the person you have sued to pay the
costs and fees. If you lose, the court may order you to pay these costs and
fees. For example, if the court finds your claim is frivolous, expenses may be
assessed against you.
If you have any questions about your Plan, you should contact Alaska Federal
Savings Bank. If you have any questions about this statement or about your
rights under ERISA, you should contact the nearest area office of the U.S.
Labor- Management Services Administration, Department of Labor.
Further, if this Plan is maintained by more than one employer, you can obtain,
in writing, information as to whether a particular employer is participating in
this Plan and, if so, the participating Employer's address. In addition, you may
request, in writing, a complete list of Employers participating in this Plan.
You may obtain such information by making a written request to Alaska Federal
Savings Bank. Alaska Federal Savings Bank is the most significant (parent)
employer of the group of employers maintaining this Plan.
Employer Information
- --------------------
Name: Alaska Federal Savings Bank
Address: 2094 Jordan Ave
Juneau, AK 99801
Business Telephone: 907-789-4844
Employer Identification Number: 92-0005106
Employer's Income Tax Year End: 06-30
Agent for Service of Legal Process
- ----------------------------------
The Agent for Service of Legal Process is the person upon whom any legal papers
can be served. Service of legal process may be made upon a Plan Trustee, the
Employer or the Plan Administrator.
Name: Alaska Federal Savings Bank
Address: 2094 Jordan Avenue
Juneau, AK 99801
Trustee(s)
- ----------
Name: Delaware Management Trust Company
Business Address: 1818 Market Street
Philadelphia, PA 19103
A-14
<PAGE>
ALASKA FEDERAL SAVINGS BANK
401(k) PLAN FINANCIALS
(AS REPORTED ON THE PLAN'S FORM 5500)
Year Ended
December 31, 1997
-----------------
Assets:
Cash ....................................................... $ --
Receivables ................................................ --
Investments: ............................................... --
U.S. Government securities .............................. --
Corporate debt and equity instruments ................... --
Real estate and mortgages (other than to participants) .. --
Loans to participants: .................................. --
Mortgages ......................................... --
Other ............................................. --
Other ................................................... --
----------
Total investments ................................. 1,399,055
Buildings and other property used in plan operations ....... --
Other assets ............................................... --
----------
Total assets ............................................ 1,399,005
Liabilities:
Payables ................................................... --
Acquisition indebtedness ................................... --
Other liabilities .......................................... --
----------
Total liabilities .......................................... --
----------
Net assets ................................................. 1,399,055
Income:
Contributions received or receivable in cash from:
Employer(s) ............................................. --
Employees ............................................... 76,393
Other ................................................... --
----------
Total ............................................. 76,393
Noncash contributions ...................................... --
Earnings from investments .................................. 203,413
Net realized gain (loss) on sale or exchange
of assets ................................................. --
Other income ............................................... --
----------
Total income ............................................ 203,413
Expenses:
Distribution of benefits and payments to
provide benefits: ......................................... --
Directly to participants or their beneficiaries ......... --
Other ................................................... --
----------
Total distribution of benefits and payments to
provide benefits ....................................... 18,422
Administrative expense ..................................... --
Other expenses ............................................. --
----------
Total expenses .......................................... 18,422
----------
Net income (loss) ................................. $ 184,676
B-1
<PAGE>
THE ALASKA FEDERAL SAVINGS BANK
401(k) PROFIT SHARING PLAN
PARTICIPANT ELECTION TO INVEST IN HOLDING COMPANY STOCK
<TABLE>
<CAPTION>
1. PARTICIPANT DATA
__________________________________________________________________________________________________
<S> <C> <C>
Print your full name above (Last, first, middle initial) Social Security Number
__________________________________________________________________________________________________
Street Address City State Zip
$______________________________________________________________ _____________ ____________
Balance of Participant's Plan Accounts at Date of this Election Date of Birth Date of Hire
</TABLE>
2. INVESTMENT DIRECTION
The Plan is giving participants a special opportunity to invest their
account balances in common stock issued by Alaska Pacific Bancshares, Inc. in
connection with the conversion of Alaska Federal Savings Bank from the mutual to
the stock form. This election may be made during the Subscription and Community
Offering, with respect to the balance in your accounts under the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan (hereinafter referred to as your
"Accounts") as of the date of this election. Please review the Subscription and
Community Prospectus dated May 14, 1999 (the "Prospectus") and the Prospectus
Supplement (the "Supplement") dated May 14, 1999 before making any decision.
Investing in Alaska Pacific Bancshares, Inc. common stock entails some
risks, and we encourage you to discuss this investment decision with your spouse
and your investment advisor. Delaware Group Finanical Services, the Trustee of
the Alaska Federal Savings Bank 401(k) Profit Sharing Plan, First Banker's Trust
Company, N.A., the trustee of the Employer Stock Fund under the Alaska Federal
Savings Bank 401(k) Profit Sharing Plan and the Alaska Federal Savings Bank
401(k) Profit Sharing Plan Administrator are not authorized to make any
representations about this investment other than what appears in the Prospectus
and Supplement, and you should not rely on any information other than what is
contained in the Prospectus and Supplement.
Any shares purchased by the Alaska Federal Savings Bank 401(k) Profit
Sharing Plan pursuant to your election will be subject to the conditions or
restrictions otherwise applicable to Alaska Pacific Bancshares, Inc. common
stock, as discussed in the Prospectus and Supplement. In addition, once you have
elected to have your Accounts invested in Alaska Pacific Bancshares, Inc. common
stock, you may have limited opportunities to change this investment decision.
Any part of your Accounts invested in Alaska Pacific Bancshares, Inc. common
stock may be changed to an alternative authorized investment under the Alaska
Federal Savings Bank 401(k) Profit Sharing Plan only during an "Investment
Change Period."
An "Investment Change Period" opens at the beginning of the third
business day after Alaska Pacific Bancshares, Inc. issues a "Quarterly Earnings
Release" and closes at the end of the twelfth business day after such release.
The term "Quarterly Earnings Release" means any press release issued by Alaska
Pacific Bancshares, Inc. for general distribution which announces, for the first
time, Alaska Pacific Bancshares, Inc.'s results of operations for a particular
fiscal quarter. The Bank anticipates these opportunities will occur four times
per year. The Bank will attempt to notify participants of the commencement of
each Investment Change Period but will not assume responsibility for doing so.
<PAGE>
[ ] I hereby direct the trustee of the Employer Stock Fund to obtain the
funds necessary to purchase such shares of Alaska Pacific Bancshares,
Inc. common stock by using funds in my current Accounts from among the
following Investment Options in the following percentages (in not less
than 10% increments):
[ ] Cash Reserve _____%
[ ] U.S. Government Fund _____%
[ ] Delaware Fund _____%
[ ] Growth & Income Fund _____%
[ ] International Equity Fund _____%
[ ] DEVON _____%
[ ] Small Cap Value _____%
[ ] DELCAP _____%
[ ] TREND _____%
[ ] I choose not to invest any of my Accounts in Alaska Pacific Bancshares,
Inc. common stock.
3. PARTICIPANT SIGNATURE AND ACKNOWLEDGMENT - REQUIRED
By signing this PARTICIPANT INVESTMENT ELECTION, I authorize and direct the
Alaska Federal Savings Bank 401(k) Profit Sharing Plan Administrator and Trustee
to carry out my instructions. I acknowledge that I have been provided with and
read a copy of the Prospectus and Supplement relating to the issuance of Alaska
Pacific Bancshares, Inc. common stock, and I have read the explanation provided
in Part 2 of this form. I am aware of the risks involved in the investment in
Alaska Pacific Bancshares, Inc. common stock, and understand that the trustees
of the Alaska Federal Savings Bank 401(k) Profit Sharing Plans and the Employer
Stock Fund and the Plan Administrator are not responsible for my choice of
investment. In addition I understand if my order for Alaska Pacific Bancshares,
Inc. common stock is unable to be fulfilled either partially or in full, any
remaining funds will be allocated to my existing investment options.
________________________________________________________________________________
Participant's Signature Date Signed
Signed before me this ________ day of ________, 1999 __________________________
Notary Public
My Commission Expires _____________________________
PLEASE COMPLETE AND RETURN BY JUNE 8, 1999
IF YOU HAVE ANY QUESTIONS, PLEASE CALL THE STOCK INFORMATION
CENTER TOLL FREE AT (888) 277-8625.
<PAGE>
PROSPECTUS
[LOGO]
ALASKA PACIFIC BANCSHARES, INC.
(PROPOSED HOLDING COMPANY FOR ALASKA FEDERAL SAVINGS BANK)
925,750 SHARES OF COMMON STOCK
Alaska Federal Savings Bank is converting from the mutual form to the stock form
of organization and becoming a wholly-owned subsidiary of Alaska Pacific
Bancshares, Inc. As part of the conversion, Alaska Federal will change its name
to Alaska Pacific Bank. Alaska Pacific Bancshares, Inc. is offering its common
stock to the public as part of its conversion. The conversion must be approved
by a majority of the votes eligible to be cast by the members of Alaska Federal.
OFFERING SUMMARY
Price Per Share: $10.00
Proposed trading symbol: OTC Bulletin Board
<TABLE>
<CAPTION>
Maximum Maximum
Without Further Subject to Further
Minimum Midpoint Regulatory Approval Regulatory Approval
------- -------- ------------------- -------------------
<S> <C> <C> <C> <C>
Number of shares: 595,000 700,000 805,000 925,750
Gross offering proceeds: $5,950,000 $7,000,000 $8,050,000 $9,257,500
Estimated underwriting commissions
and other offering expenses: $480,150 $494,640 $509,130 $525,794
Estimated net proceeds: $5,469,850 $6,505,360 $7,540,870 $8,731,706
Estimated net proceeds per share: $9.19 $9.29 $9.37 $9.43
</TABLE>
For a discussion of certain risks that you should consider, see "Risk
Factors" beginning on page 1.
With the approval of the Office of Thrift Supervision, Alaska Pacific Bancshares
may increase the maximum number of shares by up to 15% to 925,750 shares.
Alaska Pacific Bancshares intends to list the common stock through the OTC
Bulletin Board or the National Daily Quotation System "Pink Sheets" published by
the National Quotation Bureau, Inc. Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc., will use its best efforts to assist Alaska Pacific
Bancshares in selling at least the minimum number of shares but does not
guarantee that this number will be sold. Charles Webb is not obligated to
purchase any shares of common stock in the offering. Keefe, Bruyette & Woods
intends to make a market in the common stock.
- --------------------------------------------------------------------------------
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
For additional information about the conversion and the stock offering, please
refer to the more detailed information in this prospectus. For assistance,
please contact the stock information center toll free at (888) 277-8625.
CHARLES WEBB & COMPANY, a
Division of Keefe, Bruyette & Woods, Inc.
The date of this prospectus is May 14, 1999
<PAGE>
WHO IS ELIGIBLE TO PURCHASE STOCK?
o First Priority: Depositors of Alaska Federal with at least $50 on
deposit on December 31, 1997.
o Second Priority: Alaska Pacific Bancshares' employee stock
ownership plan.
o Third Priority: Depositors of Alaska Federal with at least $50 on
deposit on March 31, 1999.
o Fourth Priority: Depositors of Alaska Federal on April 30, 1999
and borrowers of Alaska Federal on October 20, 1993 whose loans
were still outstanding on April 30, 1999.
o Fifth Priority: Residents of the communities of Juneau,
Ketchikan, Sitka and Wrangell, Alaska.
o Sixth Priority: All other people.
For additional information regarding eligibility, see "Alaska Federal's
Conversion - The Subscription, Direct Community and Syndicated Community
Offerings."
The subscription offering will end at 12:00 Noon, Alaska Time, on August 16,
1999. If the conversion is not completed by June 16, 1999, and the Office of
Thrift Supervision gives Alaska Federal more time to complete the conversion,
Alaska Pacific Bancshares will give all subscribers the opportunity to increase,
decrease or cancel their orders. All extensions may not go beyond June 21, 2001.
Alaska Pacific Bancshares will hold all funds received from subscribers in an
interest-bearing savings account at Alaska Federal until the conversion is
completed or terminated. Alaska Pacific Bancshares will return all funds
promptly with interest if the conversion is terminated.
<PAGE>
[Map of State of Alaska with Alaska Federal's Market Area and Offices depicted]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................................. (i)
Risk Factors............................................................................. 1
Selected Financial Information.......................................................... 5
How Alaska Pacific Bancshares Intends to Use the Conversion Offering Proceeds ........... 7
Alaska Pacific Bancshares' Dividend Policy............................................... 9
Market for Alaska Pacific Bancshares' Common Stock....................................... 10
Capitalization........................................................................... 11
Historical and Pro Forma Regulatory Capital Compliance................................... 13
Pro Forma Data........................................................................... 14
Shares to be Purchased by Management with Subscription Rights............................ 19
Alaska Federal Savings Bank Statements of Income......................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations.... 21
Recent Developments of Alaska Federal.................................................... 36
Business of Alaska Pacific Bancshares.................................................... 41
Business of Alaska Federal............................................................... 41
Management of Alaska Pacific Bancshares.................................................. 69
Management of Alaska Federal............................................................. 69
Regulation............................................................................... 79
Taxation................................................................................. 87
Alaska Federal's Conversion.............................................................. 91
Restrictions on Acquisition of Alaska Pacific Bancshares................................. 105
Description of Capital Stock of Alaska Pacific Bancshares ............................... 110
Registration Requirements................................................................ 111
Legal and Tax Opinions................................................................... 111
Experts.................................................................................. 111
Where You Can Find More Information...................................................... 112
Index to Financial Statements............................................................ 113
</TABLE>
<PAGE>
SUMMARY
Because this is a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus carefully,
including the financial statements and notes to financial statements found at
the back of this prospectus, before you decide to invest. For assistance, please
contact the stock information center toll free at (888) 277-8625.
The Companies
Alaska Pacific Bancshares, Inc. Alaska Federal formed Alaska Pacific
2094 Jordan Avenue Bancshares to be its holding company. To
Juneau, Alaska 99801 date, Alaska Pacific Bancshares has only
(907) 789-4844 conducted organizational activities. After
the conversion, Alaska Pacific Bancshares
will own all of Alaska Federal's capital
stock and will direct, plan and coordinate
Alaska Federal's business activities. After
the conversion, Alaska Pacific Bancshares
might become an operating company or acquire
or organize other operating subsidiaries,
including other financial institutions,
although it currently has no specific plans
or agreements to do so.
Alaska Federal Savings Bank Alaska Federal's business strategy is to
2094 Jordan Avenue operate as a community-oriented bank
Juneau, Alaska 99801 dedicated to financing home ownership and
(907) 789-4844 providing quality customer service. Alaska
Federal operates out of six full service
offices in Southeast Alaska with two offices
located in Juneau, two offices located in
Ketchikan, one office located in Sitka and
one office located in Wrangell. Alaska
Federal considers the communities of Juneau,
Ketchikan, Sitka and Wrangell, as its
primary market area for making loans and
attracting deposits.
Alaska Federal's principal business is
attracting deposits from the general public
and using those funds to originate
residential mortgage loans and in recent
years has placed increased emphasis on
commercial and consumer lending. At December
31, 1998, Alaska Federal had total assets of
$110.8 million, deposits of $101.9 million
and total equity of $7.3 million.
For a discussion of Alaska Federal's
business strategy and recent results of
operations, see "Management's Discussion and
Analysis of Financial Condition and Results
of Operations." For a discussion of Alaska
Federal's business activities, see "Business
of Alaska Federal."
(i)
<PAGE>
The Conversion
What is the Conversion (page 91) The conversion is a change in Alaska
Federal's legal form of organization. As a
federal mutual savings bank, Alaska Federal
currently has no stock or stockholders.
Instead, Alaska Federal operates for the
mutual benefit of its depositors and
borrowers who elect its directors and vote
on other important matters. Through the
conversion, Alaska Federal will become a
stock savings bank, change its name to
Alaska Pacific Bank, and will be owned and
controlled by the holder of its stock,
Alaska Pacific Bancshares. Stockholders of
Alaska Pacific Bancshares will have voting
rights stockholders.
Alaska Federal is conducting the conversion
under the terms of its plan of conversion.
The Office of Thrift Supervision has
approved the conversion with the condition
that Alaska Federal's members approve the
conversion. Alaska Federal has called a
special meeting of its members for June 21,
1999 to vote on the conversion.
Alaska Federal's Reasons for By converting to the stock form of
Conversion (page 92) organization, Alaska Federal will be
structured in the form used by commercial
banks, most business entities and a large
number of savings institutions. The
conversion will be important to Alaska
Federal's future growth and performance by:
o providing a larger capital base
which will permit Alaska Federal
to increase the number and
amount of loans it can make to
the people and businesses in its
market area,
o providing Alaska Federal the
ability to expand its financial
services through the addition of
new branch offices, the
expansion of the automated
teller machine network, and the
implementation of electronic
banking services via the
internet,
o providing for the renovation of
existing facilities,
specifically the main office in
Juneau,
o enhancing its ability to attract
and retain qualified management
through stock-based compensation
plans,
o providing Alaska Federal's
customers and the community the
ability to own stock in a local
community oriented financial
institution, and
o enhancing its ability to expand
its financial services.
Presently, Alaska Federal does not have
any specific plans or arrangements for
diversification or expansion.
(ii)
<PAGE>
Benefits of the Conversion to Alaska Pacific Bancshares and Alaska Federal
Management of Alaska Pacific intend to adopt the following benefit plans
Bancshares and Alaska Federal and executive officer severance agreements:
(pages 72- 74)
o Employee Stock Ownership Plan.
This plan intends to purchase 8%
of the shares issued in the
conversion. This would range
from 47,600 shares, assuming
595,000 shares are issued in the
conversion, to 64,4007 shares,
assuming 805,000 shares are
issued in the conversion. Alaska
Federal will allocate these
shares to employees over a
period of years in proportion to
their compensation.
o Stock Option Plan. Under this
plan, Alaska Pacific Bancshares
may award stock options to key
employees and directors. The
number of options available
under this plan will be equal to
10% of the number of shares sold
in the conversion. This would
range from 59,500 shares,
assuming 595,000 shares are
issued in the conversion, to
80,500 shares, assuming
805,000920,000 shares are issued
in the conversion. This plan
will require shareholder
approval.
o Management Recognition and
Development Plan. Under this
plan, Alaska Pacific Bancshares
may award shares of restricted
stock to key employees and
directors at no cost to the
recipient. The number of shares
available under this plan will
equal 4% of the number of shares
sold in the conversion. This
would range from 23,800 shares,
assuming 595,000 shares are
issued in the conversion, to
32,200 shares, assuming 805,000
shares are issued in the
conversion. This plan will
require shareholder approval.
o Employment Agreement with Alaska
Federal's and Alaska Pacific
Bancshares' President and Chief
Executive Officer. The
employment agreement will
provide for severance benefits
if the President and Chief
Executive Officer is terminated
following a change in control of
Alaska Pacific Bancshares of
Alaska Federal. Assuming that a
change in control had occurred
at December 31, 1998, the
President and Chief Executive
Officer would be entitled to a
lump sum cash payment of
approximately $343,605.
o Severance Agreements with Alaska
Federal's, Senior Vice President
and Chief Financial Officer, and
Senior Vice President and Chief
Operating Officer and five other
senior officers. These
agreements will provide for
severance benefits if the
executive is terminated
following a change in control of
Alaska Pacific
(iii)
<PAGE>
Bancshares or Alaska Federal.
Assuming that a change in
control had occurred at December
31, 1998, the aggregate amount
payable to these executive and
senior officers would have been
approximately $803,567.
o Employee Severance Compensation
Plan. This plan will provide
severance benefits to eligible
employees if there is a change
in control of Alaska Pacific
Bancshares or Alaska Federal. In
the event the provisions of the
severance plan are triggered,
the total amount of payments due
would be approximately $130,000.
The following table summarizes the total
number and dollar value of the shares of
common stock, assuming 700,000 shares are
issued in the conversion, which the employee
stock ownership plan would acquire and the
total value of all shares available for
award under the stock option plan and the
management development and recognition plan.
The table assumes the value of the shares is
$10.00 per share. The table does not include
a value for the options because their value
would be equal to the fair market value of
the common stock on the day that the options
are granted. As a result, the employee stock
ownership plan would only realize financial
gains if the market price of common stock
increases.
<TABLE>
<CAPTION>
Percentage
Number Estimated of Shares
of Value of Issued in the
Shares Shares Conversion
------ ------ ----------
<S> <C> <C> <C>
Employee stock
ownership plan........... 56,000 $560,000 8.0%
Management recognition and
develoment-plan awards... 28,000 280,000 4.0
Stock options............. 70,000 -- 10.0
------- -------- ----
Total.................... 154,000 $840,000 22.0%
======= ======== ====
</TABLE>
For a discussion of certain risks associated
with these plans and agreements, see "Risk
Factors -- Implementation of Benefit Plans
Will Increase Future Compensation Expense
and May Lower Alaska Federal's Net Income"
and "-- Employment Agreement, Severance
Agreements and Severance Plan Could Make
Takeover Attempts More Difficult to
Achieve."
(iv)
<PAGE>
The Offering
Subscription Offering (page 95) Alaska Federal has granted subscription
rights in the following order of priority
to:
1. Persons with $50 or more on
deposit at Alaska Federal as of
December 31, 1997.
2. The Alaska Pacific Bancshares'
employee stock ownership plan.
3. Persons with $50 or more on
deposit at Alaska Federal as of
March 31, 1999.
4. Alaska Federal's depositors as
of April 30, 1999 and borrowers
of Alaska Federal as of October
20, 1993 whose loans continue to
be outstanding as of April 30,
1999.
To ensure that Alaska Federal properly
identifies your subscription rights, you
must list all of your deposit accounts and
loans as of the eligibility dates on the
stock order form. If you fail to do so, your
subscription may be reduced or rejected.
The subscription offering will end at 12:00
Noon, Alaska Time, on June 16, 1999. If the
offering is oversubscribed, Alaska Pacific
Bancshares will allocate shares in order of
the priorities described above under a
formula contained in the plan of conversion.
Subscription Rights Are Not You may not transfer your sSubscription
Transferable (page 96) rights or use these for the benefit of any
one else person. If you violate this
prohibition, you may lose your right to
purchase shares and may face criminal
prosecution and other sanctions.
Community Offering (page 97) Alaska Pacific Bancshares may offer shares
not sold in the subscription offering to the
general public in a community offering.
People who are residents of the communities
of Juneau, Ketchikan, Sitka and Wrangell,
Alaska will have first preference to
purchase shares in a community offering. If
shares are available, Alaska Pacific
Bancshares expects to offer them to the
general public immediately after the end of
the subscription offering, but may begin a
community offering at any time during the
subscription offering.
(v)
<PAGE>
Alaska Pacific Bancshares and Alaska Federal
may reject orders received in the community
offering either in whole or in part. If your
order is rejected in part, you cannot cancel
the remainder of your order.
Purchase Price of the The independent appraisal by RP Financial,
Common Stock (page 101) LC., dated as of April 16, 1999, established
the offering range. This appraisal was based
on Alaska Federal's financial condition and
operations and the effect of the additional
capital raised in the offering. The purchase
price is $10.00 per share. The Boards of
Directors of Alaska Pacific Bancshares and
Alaska Federal consulted with Charles Webb
in determining it. You will not pay a
commission to buy any shares in the
conversion.
After completion of the conversion and the
offering, each share of Alaska Pacific
Bancshares common stock will have a book
value of $17.18, at the maximum of the
offering range. This means the price paid
for each share sold in this offering will be
58.21% of the book value. In addition, the
price to earnings ratio at the maximum of
the offering range will be 14.93 times.
These ratios are important factors used by
RP Financial in determining the appraised
value of Alaska Federal. Alaska Federal's
price to book ratio is lower than its peer
group of publicly traded thrift institutions
of 109.19% and its price to earnings ratio
is lower to this same peer group of 15.02
times.
Number of Shares to be Issued Alaska Pacific Bancshares will sell between
in the Conversion (page 101) 595,000 and 805,000 shares of its common
stock in this offering. With regulatory
approval, Alaska Pacific Bancshares may
increase the number of shares to 925,750
without giving you further notice.
The amount of common stock that Alaska
Pacific Bancshares will offer in the
conversion is based on an independent
appraisal of the estimated market value of
Alaska Pacific Bancshares and Alaska Federal
as if the conversion had occurred as of the
date of the appraisal.
RP Financial, L.C., the independent
appraiser, has estimated that, in its
opinion, as of April 16, 1999, the estimated
market value ranged between $5,950,000 and
$8,050,000 with a midpoint of $7,000,000. RP
Financial based its appraisal in part on
Alaska Federal's financial condition and
operations and the effect on Alaska Federal
of the additional capital raised by the
sale of common stock in this offering. RP
Financial will update the appraisal before
the conversion is completed.
(vi)
<PAGE>
Limitations on the Purchase The minimum purchase is 25 shares.
of Common Stock in the
Conversion (page 103)
The maximum purchase in the subscription
offering by any person or group of persons
through a single deposit account is $125,000
of common stock, which equals 12,500 shares.
The maximum purchase by any person in the
community offering is $125,000 of common
stock, which equals 12,500 shares.
The maximum purchase in the subscription
offering and community offering combined by
any person, related persons or persons
acting together is $250,000 of common stock,
which equals 25,000 shares.
How to Purchase Common Stock If you want to subscribe for shares, you
(page 99) must complete an original stock order form
and send it together with full payment to
Alaska Federal in the postage-paid envelope
provided. You must sign the certification
that is part of the stock order form. Alaska
Federal must receive your stock order form
before the end of the subscription offering.
You may pay for shares in any of the
following ways:
o In Cash if delivered in person
at any branch of Alaska Federal,
although Alaska Federal requests
that you exchange cash for a
check with any Alaska Federal
teller.
o By Check or Money Order made
payable to Alaska Pacific
Bancshares, Inc.
o By Withdrawal from an account at
Alaska Federal. To use funds in
an IRA at Alaska Federal you
must transfer your account to an
unaffiliated institution or
broker. Please contact the stock
information center at least one
week before the end of the
subscription offering for
assistance.
Alaska Federal will pay interest on your
subscription funds at the rate it pays on
passbook accounts from the date it receives
your funds until the conversion is completed
or terminated. All funds authorized for
withdrawal from deposit accounts with Alaska
Federal will earn interest at the applicable
account rate until the conversion is
completed. There will be no early withdrawal
penalty for subscriptions paid for by
withdrawal from certificates of deposit.
After Alaska Federal receives your order,
you cannot cancel or change it without
Alaska Federal's consent. If Alaska Pacific
Bancshares will notify all subscribers if it
intends to sell fewer
(vii)
<PAGE>
than 595,000 shares or more than 925,750
shares, and give them the opportunity to
change or cancel their orders.
Alaska Pacific Bancshares' Alaska Pacific Bancshares will use the
and Alaska Federal's greater of 50% of the net conversion
Use of Proceeds From the proceeds, or that portion of the net
Sale of Common Stock in proceeds which would increase Alaska
the Conversion (page 7) Federal's fully phased-in tangible capital
to at least 10% of adjusted total assets, to
buy all of the common stock of Alaska
Federal.
Alaska Pacific Bancshares intends to use
the net proceeds received from the stock
offering as follows:
$1.5 million 21.0% Retained by Alaska
Pacific Bancshares in
short-term investments
for general corporate
purposes
560,000 8.0 Employee stock ownership
plan loan
5.1 million 71.0 Used to buy the stock of
----------- ----- Alaska Federal
$7.1 million 100.0% Net proceeds from stock
============ ===== offering at the midpoint
of the offering range
The funds retained by Alaska Pacific
Bancshares will be used as follows:
o to loan an amount equal to 8% of
the gross proceeds of the
offering to the employee stock
ownership plan to fund its
purchase of common stock;
o for general corporate purposes,
which may include, for example,
paying cash dividends or buying
back shares of its common stock;
and
o to expand operations through
acquiring or establishing
additional branch offices or
acquiring other financial
institutions, although it has no
specific plans, arrangements,
agreements or understandings,
written or oral, regarding these
activities.
Pending such use, Alaska Pacific Bancshares
will invest the net proceeds in investment
securities with short intermediate terms or
in a deposit account at Alaska Federal.
Alaska Federal will use the net proceeds
received from the offering as follows:
o a portion of the net proceeds
may be used to expand its
automated teller machine network
by adding two machines in 1999
and one in 2000, which is
estimated to cost $75,000.
(viii)
<PAGE>
o a portion of the net proceeds
may be used to renovate its main
office in Juneau, which is
estimated to cost up to
$500,000, and for leasehold
improvements of approximately
$235,000 for its proposed office
in Auke Bay; and
o in the short term, to invest in
short and intermediate term U.S.
Government and agency
obligations and ultimately to
originate or participate in loan
originations with other local,
state-wide regional banks,
subject to Alaska Federal's
policies, procedures and
underwriting criteria;
Purchases of Common Alaska Federal's directors and executive
Stock by Alaska Federal's officers intend to subscribe for 66,000
Officers and Directors shares regardless of the number of shares
(page 19) issued in the conversion. This number equals
7.9% of the 805,000 shares that would be
issued at the maximum of the offering
range. If fewer shares are issued in the
conversion, then officers and directors may
own a greater percentage of Alaska Pacific
Bancshares. Directors and executive officers
will pay the same $10.00 per share price as
everyone else who purchases shares in the
conversion.
Plans to List the Common Stock Alaska Pacific Bancshares intends to list
Over the Counter through the OTC the common stock through the OTC Bulletin
Bulletin Board or the National Board or the National Daily Quotation System
Daily Quotation System "Pink Sheets" published by the National
"Pink Sheets" (page 10) Quotation Bureau, Inc. Keefe Bruyette &
Woods, Inc. intends to be a market maker in
the common stock. After shares of the common
stock begin trading, you may contact a stock
broker to buy or sell shares. Alaska Pacific
Bancshares cannot assure you that there will
be an active trading market for the common
stock, that you will be able to sell the
shares when you want to, or at a price equal
to or above $10.00. See "Risk Factors --
Possible Limited Market for Alaska Pacific
Bancshares' Common Stock May Lower Market
Price."
Alaska Pacific Bancshares' Alaska Pacific Bancshares intends to pay a
Plans to Pay Quarterly Cash quarterly cash dividend with an annualized
Dividends (page 9) rate of $0.20 per share, starting after the
completion of the first full quarter after
the conversion. Alaska Pacific Bancshares
does not guarantee that it will pay
dividends in the future.
Additionally, in connection with the
conversion, Alaska Pacific Bancshares and
Alaska Federal have committed to the Office
of Thrift Supervision that during the
one-year period following consummation of
the conversion, Alaska Pacific Bancshares
will not take any action to declare an
extraordinary dividend to stockholders that
would be treated by recipients as a tax-free
return of capital for federal income tax
purposes.
(ix)
<PAGE>
RISK FACTORS
Before investing in Alaska Pacific Bancshares' common stock please
carefully consider the matters discussed below. Alaska Pacific Bancshares'
common stock is not a savings account or deposit and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
Alaska Federal's Business Depends Heavily on the Economic Condition of its
Primary Market Area and Weak Market Area Demographics has Hurt Core Earnings and
Limits Growth Prospects
Because Alaska Federal operates in an isolated area with generally
small increases in population and where opportunities for growth are limited,
Alaska Federal's core earnings, which are earnings from lending, investment and
deposit activities, have been lower than its peers. The geographic limitations
and low growth characteristics of Alaska Federal's primary market area also
limits its ability to increase its loan and deposit base. Additionally, because
a substantial portion of Alaska Federal's borrowers and depositors and
substantially all of Alaska Federal's real estate collateral is located in this
market area, a downturn in the economy of the primary market area could increase
the risk of loan losses.
Alaska Federal focuses on serving customers in the Southeast Alaska
communities of Juneau, Ketchikan, Sitka, and Wrangell. These areas are
relatively isolated from one another as Southeastern Alaska consists primarily
of islands, along with a stretch of mainland along the coast. Generally, the
individual communities are accessible only by the Alaska Marine Highway System,
requiring transportation by ferries, or by air, making travel difficult,
particularly during the winter months.
The State of Alaska enjoyed a period of prosperity and economic
expansion during the late 1970s and early 1980s as a result of the boom in the
oil industry and the construction of the Alaska pipeline. The plummeting oil
prices in the mid-1980s resulted in a severe recession throughout Alaska. The
Southeast region, where Alaska Federal is located, recovered from this economic
downturn through greater reliance on tourism and natural resource industries,
such as timber, mining and fishing. The economy of Southeast Alaska also depends
on government employment, with the Capital of Alaska located in Juneau. However,
Juneau is experiencing a slow-down in its growth in government employment as the
city of Anchorage's government employment continues to grow rapidly. The
recurring possibility of the relocation of the state capital from Juneau to
Anchorage further complicates this situation. Alaskans have voted on this
proposal in 1974 and 1994 and defeated it each time. Although Juneau remains the
state capital, rapid government employment in Anchorage continues to pose a
threat to Juneau. The relocation of the state capital would have a serious
adverse effect on the Juneau economy and the economy of Southeast Alaska. See
"Business of Alaska Federal -- Market Area."
Alaska Federal's Recent Growth in Commercial Business and Consumer Lending Poses
Greater Risks Than Residential Lending
Commercial and consumer loans involve more risk than residential
lending and are subject to a greater extent to adverse conditions in the
economy. Alaska Federal operates as a community bank, and has implemented a
lending strategy that has involved a shift from a primary focus on residential
lending to the increased origination of commercial business and consumer loans.
After the conversion, Alaska Federal intends to continue its efforts to increase
its volume of commercial business and consumer loans. There can be no assurances
that Alaska Federal will meet its objective in increasing the volume of its
commercial business and consumer loan portfolios. Factors that may affect the
ability of Alaska Federal to increase its originations of such loans include the
demand for such loans, interest rates and the state of the local and national
economy. See "Business of Alaska Federal -- Lending Activities -- Commercial
Business Lending" and "-- Consumer Lending."
1
<PAGE>
Loss of Key Personnel May Hurt Alaska Federal's Operations
The loss of Craig E. Dahl, Alaska Federal's Chief Executive Officer and
President, Lisa Corrigan Bell, Alaska Federal's Senior Vice President and Chief
Operating Officer, and Roger K. White, Alaska Federal's Senior Vice President
and Chief Financial Officer, could have a material adverse impact on the
operations of Alaska Federal. Since 1993, these executive officers have been
instrumental in managing the business affairs of Alaska Federal. The loss of any
of these individuals could have a material adverse impact on the operations of
Alaska Federal. Alaska Federal does not have an established management
succession plan. Accordingly, should Alaska Federal lose the services of Mr.
Dahl, Ms. Bell or Mr. White, the Board of Directors would have to search outside
of Alaska Federal for qualified, permanent replacements. This search may be
prolonged and Alaska Federal cannot assure you that it will be able to locate
and hire qualified replacements. Neither Alaska Federal nor Alaska Pacific
Bancshares has any plans to obtain a "key man" life insurance policy for any
individual. For a discussion of Alaska Federal's management, see "Management of
Alaska Federal."
Possible Loss of a Tax Benefit in the Form of Net Operating Loss Carryforwards
If a change in ownership in Alaska Federal occurs as a result of the
conversion under Section 382 of the Internal Revenue Code, Alaska Federal may
lose a portion of, or all of, the net operating loss carryforwards available as
of the date of the close of the conversion. At December 31, 1998, Alaska Federal
had $3.9 million of net operating loss carryforwards for federal and state
income tax purposes which will expire in 2002 to 2012 if not utilized to offset
taxable income. Alaska Pacific Bancshares may use net operating loss
carryforwards to offset future taxable income. This is a tax benefit to Alaska
Federal. See "Taxation -- Federal Taxation -- Net Operating Loss Carryforwards"
and Note 11 of Notes to the Financial Statements included at the back of this
prospectus.
Implementation of Benefit Plans Will Increase Future Compensation Expense and
May Lower Alaska Federal's Net Income
Alaska Federal will recognize additional material employee compensation
and benefit expenses that stem from the shares purchased or granted to employees
and executives under new benefit plans. Alaska Federal cannot predict the actual
amount of these new expenses because applicable accounting practices require
that they be based on the fair market value of the shares of common stock at
specific points in the future. Alaska Pacific Bancshares would recognize
expenses for its employee stock ownership plan when it releases shares to
participants' accounts and would recognize expenses for the management
recognition and development plan over the vesting period of awards made to
recipients. These expenses are reflected in the pro forma financial information
under "Pro Forma Data" assuming the $10.00 per share purchase price as fair
market value. Actual expenses, however, may be higher or lower. Recently
proposed accounting rules would also require Alaska Pacific Bancshares to
recognize compensation expense for stock options awarded to non-employee
directors. For further discussion of these plans, see "Management of Alaska
Federal -- Benefits."
Issuance of Shares for Benefit Programs May Lower Your Ownership Interest
If Alaska Pacific Bancshares issues the shares for the management
recognition and development plan from authorized but unissued stock, your
ownership interest could be reduced by up to approximately 3.9%. If Alaska
Pacific Bancshares issues the shares for the stock option plan from authorized
but unissued stock, your ownership interest could be reduced by up to
approximately 9.1%. Alaska Pacific Bancshares intends to issue shares to its
officers and directors through these new stock based benefit programs, if
stockholders approve these plans. See "Pro Forma Data."
2
<PAGE>
Possible Voting Control by Management and Employees May Make Takeover Attempts
More Difficult to Achieve
The shares of common stock that Alaska Federal's directors and
executive officers intend to purchase in the conversion, when combined with the
shares that may be awarded or sold to participants under the Alaska Pacific
Bancshares' employee stock ownership plan and Alaska Pacific Bancshares'
stock-based benefit plans, could ultimately result in management and employees
controlling a significant percentage of Alaska Pacific Bancshares' common stock.
If these individuals were to act together, they could have significant influence
over the outcome of any stockholder vote. This voting power may discourage
takeover attempts that you would like to see happen and reduce the likelihood
that you will receive a takeover premium. In addition, the total voting power of
management and employees could reach in excess of 20% of Alaska Pacific
Bancshares' outstanding stock, if 805,000 shares are issued at the maximum of
the range. That level would enable management and employees as a group to defeat
any stockholder matter that requires an 80% vote. For information about
management's intended stock purchases and the number of shares that may be
awarded under new benefit plans, see "Shares to be Purchased by Management With
Subscription Rights," "Management of Alaska Federal -- Executive Compensation"
and "--Benefits" and "Restrictions on Acquisition of Alaska Pacific Bancshares."
Provisions in Alaska Pacific Bancshares' Articles of Incorporation and Statutory
Provisions that Could Discourage Takeover Attempts by Other Parties
Provisions in Alaska Pacific Bancshares' Articles of Incorporation and
Bylaws, the corporation law of the State of Alaska, and federal regulations may
make it difficult and expensive to pursue a takeover attempt that management
opposes. These provisions may discourage or prevent takeover attempts that you
would like to see happen and reduce the likelihood that you will receive a
takeover premium. These provisions will also make the removal of the current
board of directors or management of Alaska Pacific Bancshares, or the
appointment of new directors, more difficult. For further information about
these provisions, see "Restrictions on Acquisition of Alaska Pacific
Bancshares."
Employment Agreement, Severance Agreements and Severance Plan Could Make
Takeover Attempts More Difficult to Achieve
The employment agreement for the President and Chief Executive Officer,
the severance agreements for executive and senior officers and the severance
plan may increase the costs of acquiring Alaska Pacific Bancshares, thereby
discouraging future attempts to take over Alaska Pacific Bancshares or Alaska
Federal. The employment agreement and the severance agreements of executive and
senior officers of Alaska Pacific Bancshares and Alaska Federal provide for cash
severance payments and/or the continuation of health, life and disability
benefits if the officer is terminated following a change in control of Alaska
Pacific Bancshares or Alaska Federal. If a change in control had occurred at
December 31, 1998, the aggregate value of the severance benefits available to
the executive and senior officers under the agreements would have been
approximately $344,000, $531,000 and $272,000, respectively. In addition, if a
change in control had occurred at December 31, 1998 and all eligible employees
had been terminated, the aggregate payment due under the severance plan would
have been approximately $130,000. For information about the proposed severance
agreements and severance plan, see "Management of Alaska Federal -- Executive
Compensation."
Limited and Inactive Market for Alaska Pacific Bancshares' Common Stock May
Lower Market Price
Because Alaska Pacific Bancshares has never issued capital stock,
Alaska Pacific Bancshares does not know whether an active trading market will
develop. Because of the relatively small size of the offering, it is highly
unlikely that an active and liquid market for the common stock will develop. As
a result, you may not be able to sell all of your shares on short notice and the
sale of a large number of shares all at once could temporarily lower the market
price. Therefore, you should consider the potentially illiquid and long-term
nature of an investment in the common stock. Furthermore, Alaska Pacific
Bancshares cannot guarantee anyone who purchases shares in the
3
<PAGE>
conversion will be able to sell their shares at or above the $10.00 purchase
price. For further information on the expected trading market for Alaska Pacific
Bancshares' common stock, see "Market for Alaska Pacific Bancshares' Common
Stock."
Your Subscription Funds Could be Held for an Extended Time Period If Completion
of the Conversion Is Delayed
Your subscription funds could be held for an extended time period if
the conversion is not completed by August 16, 1999 and the Office of Thrift
Supervision gives Alaska Federal more time to complete this conversion. If this
occurs, Alaska Pacific Bancshares will contact everyone who subscribed for
shares to see if they still want to purchase stock. This is commonly referred to
as a "resolicitation offering." A material change in the independent appraisal
of Alaska Pacific Bancshares and Alaska Federal would be the most likely, but
not necessarily the only, reason for a delay in completing the conversion.
Federal regulations permit the Office of Thrift Supervision to grant one or more
time extensions, none of which may exceed 90 days. Extensions may not go beyond
June 21, 2001. In the resolicitation offering, Alaska Pacific Bancshares would
mail a supplement to this prospectus to you if you subscribed for stock to let
you confirm, modify or cancel your subscription. If you fail to respond to the
resolicitation offering, it would be as if you had canceled your order and all
subscription funds, together with accrued interest, would be returned to you. If
you authorized payment by withdrawal of funds on deposit at Alaska Federal, that
authorization would terminate. If you affirmatively confirm your subscription
order during the resolicitation offering, Alaska Pacific Bancshares and Alaska
Federal would continue to hold your subscription funds until the end of the
resolicitation offering. Your resolicitation order would be irrevocable without
the consent of Alaska Pacific Bancshares and Alaska Federal until they complete
the conversion.
Rising Interest Rates Could Hurt Alaska Federal's Profits
If interest rates rise, Alaska Federal anticipates that its net
interest income would decline as interest paid on deposits would increase more
quickly than the interest earned on loans and investment securities. In
addition, rising interest rates may adversely affect Alaska Federal's earnings
because rising rates may cause a decrease in customer demand for loans and a
reduction in value of Alaska Federal's securities available for sale. For
further discussion of how changes in interest rates could impact Alaska Federal,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset and Liability Management and Market Risk."
Alaska Federal's Return on Equity Will Be Below Average After Conversion Because
of High Capital Levels
In recent years, Alaska Federal's return on average equity has been
below the average return on equity for publicly held savings associations and
banks of comparable size. As a result of the additional capital that will be
raised in this offering, Alaska Pacific Bancshares expects that its return on
average equity will continue to be below average after the offering. In
addition, compensation expense will increase as a result of the new benefit
plans. Over time, Alaska Pacific Bancshares intends to use the net proceeds from
this offering to increase earnings per share and book value per share, without
assuming undue risk, with the goal of achieving a return on equity competitive
with other publicly traded financial institutions. It could take a number of
years to achieve this goal, and Alaska Pacific Bancshares cannot assure you that
it can attain this goal. Consequently, you should not expect a competitive
return on equity in the near future. See "Pro Forma Data" for an illustration of
the financial effects of this stock offering.
4
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables contain certain information concerning the
financial position and results of operations of Alaska Federal at the dates and
for the periods indicated. Selected financial information for 1998 and 1997 was
derived from the audited financial statements. Selected financial information
for 1996 is derived from unaudited financial statements. Prior to December 31,
1997, Alaska Federal's fiscal year ended June 30, and all audits performed prior
to December 31, 1997, were as of June 30. You should read this information in
conjunction with the Financial Statements and related Notes thereto included at
the back of this prospectus.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
FINANCIAL CONDITION DATA:
<S> <C> <C> <C>
Total assets.................................... $110,806 $114,476 $109,287
Loans, net...................................... 70,836 78,720 76,611
Loans held for sale............................. 899 440 181
Investment securities available for sale........ 18,176 13,334 16,860
Investment securities held to maturity.......... -- 6,196 6,874
Cash, due from banks, and interest-
bearing deposits with banks.................... 14,584 10,130 3,195
Deposits........................................ 101,945 96,959 96,810
Federal Home Loan Bank of Seattle advances...... -- 9,000 4,800
Total equity capital............................ 7,250 7,140 6,358
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
OPERATING DATA:
<S> <C> <C> <C>
Interest income................................. $ 8,218 $ 8,479 $7,970
Interest expense................................ 3,807 4,031 3,667
Net interest income ............................ 4,411 4,448 4,303
Provision for loan losses....................... 60 25 176
Net interest income
after provision for loan losses................ 4,351 4,423 4,127
Noninterest income.............................. 888 796 955
Noninterest expense............................. 4,903 4,620 5,226
Income before income tax........................ 336 599 (144)
Income tax benefit.............................. -- (100) (200)
Net income...................................... $ 336 $ 699 $ 56
</TABLE>
5
<PAGE>
At December 31,
------------------------------
1998 1997 1996
OTHER DATA:
Number of:
Real estate loans outstanding ............. 720 931 880
Deposit accounts .......................... 12,508 12,735 12,923
Full service offices ...................... 6 6 5
Year Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets(1) .................. 0.31% 0.63% 0.05%
Return on average equity(2) .................. 4.67 10.36 0.81
Interest rate spread(3) ...................... 3.99 4.02 4.16
Net interest margin(4) ....................... 4.01 3.99 4.36
Average interest-earning assets to
average interest-bearing liabilities ....... 108.11 106.29 105.68
Noninterest expense as a
percent of average total assets ............. 4.45 4.15 4.88
Asset Quality Ratios:
Nonaccrual and 90 days or more past
due loans as a percent of total
loans, net ................................. -- 0.18 --
Nonperforming assets as a
percent of total assets ..................... 0.28 0.13 --
Allowance for losses as a percent
of gross loans receivable ................... 0.94 0.94 0.95
Allowance for losses as a percent
of nonperforming loans ..................... -- 514.38 --
Net charge-offs to average
outstanding loans ........................... 0.19 -- 0.02
Capital Ratios:
Total equity to assets ....................... 6.54 6.24 5.82
Average equity to average assets ............. 6.54 6.06 6.43
- ---------------
(1) Net income divided by average total assets.
(2) Net income divided by average equity capital.
(3) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
6
<PAGE>
HOW ALASKA PACIFIC BANCSHARES
INTENDS TO USE THE CONVERSION OFFERING PROCEEDS
Alaska Pacific Bancshares estimates the net proceeds from the sale of
the common stock being offered in the conversion will range from $5.5 million to
$7.5 million, or up to $8.7 million if the estimated valuation range is
increased by 15%. See "Pro Forma Data" for the assumptions used to arrive at
such amounts.
The following table presents the estimated net proceeds of the
offering, the amounts contributed to Alaska Federal, and the amount of Alaska
Pacific Bancshares' loan to the employee stock ownership plan. See "Pro Forma
Data" for the assumptions used to arrive at these amounts. The Office of Thrift
Supervision must approve the issuance of up to 925,750 shares in the conversion.
<TABLE>
<CAPTION>
925,750
595,000 700,000 805,000 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Offering Range
Offering Range) Offering Range) Offering Range) As Adjusted)
--------------- --------------- --------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Gross proceeds........................... $5,950 $7,000 $8,050 $9,258
Less: estimated underwriting commissions
and other offering expenses........... (480) (495) (509) (526)
------ ------ ------ ------
Net proceeds............................. $5,470 $6,505 $7,541 $8,732
====== ====== ====== ======
Amount to be retained by Alaska
Pacific Bancshares.................... 558 1,451 2,360 3,388
Amount to be contributed to Alaska
Federal............................... 4,912 5,055 5,181 5,344
Amount of loan by Alaska Pacific
Bancshares to the employee stock
ownership plan........................ (476) (560) (644) (741)
</TABLE>
The Office of Thrift Supervision has given Alaska Pacific Bancshares
conditional approval to use the greater of 50% of the net conversion proceeds,
and that portion of the net proceeds which would increase Alaska Federal's fully
phased-in tangible capital to at least 10% of adjusted total assets, to purchase
all of the capital stock of Alaska Federal to be issued in the conversion. In
addition, Alaska Pacific Bancshares will use these funds as follows:
o to loan the employee stock ownership plan the amount necessary to
purchase 8% of the shares sold in the conversion. The employee stock
ownership plan purchases would range between 47,600 shares, or
$476,000, at the minimum of the offering range and 64,400 shares, or
$644,000, at the maximum of the offering range.
At the midpoint of the offering range, the employee stock ownership
plan would purchase 56,000 shares, or $560,000. If 925,750 shares are
issued in the conversion, the employee stock ownership plan would
purchase 74,060 shares, or $741,000. It is anticipated that the
employee stock ownership plan loan will have a 10-year term with
interest payable at the prime rate as published in The Wall Street
Journal on the closing date of the conversion. The loan will be repaid
principally from Alaska Federal's contributions to the employee stock
ownership plan and from any dividends paid on shares of common stock
held by the employee stock ownership plan.
7
<PAGE>
o for additional contributions to Alaska Federal in the form of debt or
equity, to support future diversification or acquisition activities.
o for general corporate purposes, which may include, for example, paying
cash dividends to the stockholders of Alaska Pacific Bancshares and
for future repurchases of common stock to the extent permitted under
Alaska law and federal regulations.
o to expand operations through acquiring or establishing additional
branch offices or acquiring other financial institutions, although it
has no specific plans, arrangements, agreements or understandings,
written or oral, regarding these activities.
Pending such use, Alaska Pacific Bancshares will invest the remainder
of the net proceeds in investment securities with short intermediate terms or in
a deposit account at Alaska Federal.
Receipt of the net proceeds of the sale of the common stock will
increase Alaska Federal's capital and will provide it with the ability to expand
its financial services through the addition of new branch offices, the expansion
of the automated teller machine network, and the implementation of electronic
banking services via the internet. Alaska Federal will use the net proceeds
received from the offering as follows:
o to expand its automated teller machine network by adding two machines
in 1999 and one in 2000, which is estimated to cost $75,000.
o to renovate its main office in Juneau, which is estimated to cost up
to $500,000, and for leasehold improvements of approximately $235,000
for its proposed office in Auke Bay; and
o in the short term, to invest in short and intermediate term U.S.
Government and agency obligations and ultimately to originate or
participate in loan originations with other local, state-wide regional
banks, subject to Alaska Federal's policies, procedures and
underwriting criteria;
Except as described above, neither Alaska Pacific Bancshares nor Alaska
Federal has specific plans for the investment of the proceeds of this offering.
Although Alaska Federal's capital currently exceeds regulatory requirements, it
is converting to stock form to structure itself in the form of organization used
by commercial banks and most other financial services companies. For a
discussion of management's business reasons for undertaking the conversion, see
"Alaska Federal's Conversion -- Reasons for the Conversion."
Following the conversion, the Board of Directors will have the
authority to adopt plans for repurchases of common stock, subject to statutory
and regulatory requirements. Since Alaska Pacific Bancshares has not yet issued
stock, it does not have enough information to make a decision on whether or not
to repurchase stock. The Board of Directors will consider many facts and
circumstances in determining whether to repurchase stock in the future. These
factors include:
o market and economic factors such as the price at which the stock is
trading in the market,
o the volume of trading,
o the attractiveness of other investment alternatives in terms of the
rate of return and risk involved in the investment,
o the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and
8
<PAGE>
o the ability to improve Alaska Pacific Bancshares' return on equity.
The Board will also consider 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 as another factor. In addition, the
Board of Directors will consider any other circumstances in which repurchases
would be in the best interests of Alaska Pacific Bancshares and its
stockholders. Before any stock repurchases, the Board of Directors must
determine that both Alaska Pacific Bancshares and Alaska Federal will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases and that capital will be adequate, taking into account, among other
things, Alaska Federal's level of nonperforming and classified assets, Alaska
Pacific Bancshares' and Alaska Federal's current and projected results of
operations and asset/liability structure, the economic environment and tax and
other regulatory considerations. For a discussion of the regulatory limitations
applicable to stock repurchases, see "Alaska Federal's Conversion --
Restrictions on Repurchase of Stock."
ALASKA PACIFIC BANCSHARES' DIVIDEND POLICY
General
Alaska Pacific Bancshares intends to pay a quarterly cash dividend with
an annualized rate of $0.20 per share, starting after the completion of the
first full quarter after the conversion. In addition, the Board of Directors may
declare and pay periodic special cash dividends in addition to, or in lieu of,
regular cash dividends. Alaska Pacific Bancshares' Board of Directors will
determine declarations or payments of any dividends, whether regular or special.
The Board of Directors will take into account the amount of the net proceeds
retained by Alaska Pacific Bancshares, Alaska Pacific Bancshares' financial
condition, results of operations, tax considerations, capital requirements,
industry standards, and economic conditions. The Board will also consider the
regulatory restrictions that affect the payment of dividends by Alaska Federal
to Alaska Pacific Bancshares discussed below. Alaska law prohibits Alaska
Pacific Bancshares from paying a dividend if, prior to the payment of a
dividend, the amount of its retained earnings is less than the amount of the
distribution, or immediately after payment of a dividend its liabilities would
exceed its assets. In order to pay such cash dividends, however, Alaska Pacific
Bancshares must have available cash either from the net proceeds raised in the
conversion and retained by Alaska Pacific Bancshares, borrowings by Alaska
Pacific Bancshares, dividends received from Alaska Federal, or earnings on
Alaska Pacific Bancshares' assets. Alaska Pacific Bancshares can give no
assurances that any dividends, either regular or special, will be declared or
paid, or if declared and paid, what the amount of dividends will be or whether
they will continue uninterrupted.
Current Restrictions
Dividends from Alaska Pacific Bancshares may depend, in part, upon
receipt of dividends from Alaska Federal because Alaska Pacific Bancshares
initially will have no source of income other than dividends from Alaska Federal
and earnings from the investment of the net proceeds from the offering retained
by Alaska Pacific Bancshares. The Office of Thrift Supervision imposes certain
limitations on the payment of dividends from Alaska Federal to Alaska Pacific
Bancshares which utilize a three-tiered approach that permits various levels of
distributions based primarily upon a savings association's capital level. Alaska
Federal currently meets the criteria to be designated a Tier 1 association and
consequently could distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year. In addition, Alaska
Federal may not declare or pay a cash dividend on its capital stock if it would
reduce the regulatory capital of Alaska Federal below the amount required for
its liquidation account. The liquidation account is required to be established
in connection with the conversion. See "Regulation -- Federal Regulation of
Savings Associations -- Limitations on Capital Distributions," "Alaska Federal's
Conversion-- Effects of Conversion to Stock Form on Depositors and Borrowers of
Alaska Federal -- Liquidation Account" and Note 14 of the Notes to Financial
Statements included in the back of this prospectus.
9
<PAGE>
Additionally, in connection with the conversion, Alaska Pacific
Bancshares and Alaska Federal have committed to the Office of Thrift Supervision
that during the one-year period following consummation of the conversion, Alaska
Pacific Bancshares will not take any action to declare an extraordinary dividend
to stockholders that would be treated by recipients as a tax-free return of
capital for federal income tax purposes.
Tax Considerations
In addition to the above restrictions, Alaska Federal cannot use its
retained earnings appropriated to 1988 base year bad debt reserves and deducted
for federal income tax purposes to pay cash dividends to Alaska Pacific
Bancshares without paying federal income taxes at the then current income tax
rate on the amount deemed distributed, which would include the amounts of any
federal income taxes attributable to the distribution. See "Taxation -- Federal
Taxation" and Note 11 of the Notes to Financial Statements included in the back
of this prospectus. Alaska Pacific Bancshares does not contemplate any
distribution by Alaska Federal that would result in a recapture of Alaska
Federal's 1988 base year bad debt reserve for income tax purposes or create the
above-mentioned federal tax liabilities.
MARKET FOR ALASKA PACIFIC BANCSHARES' COMMON STOCK
Alaska Pacific Bancshares was recently formed and has never issued
capital stock. Alaska Federal, as a mutual institution, has never issued capital
stock. Alaska Pacific Bancshares intends to list the common stock
over-the-counter through either the National Daily Quotation System "Pink
Sheets" published by the National Quotation Bureau, Inc. or the OTC Bulletin
Board and to request Keefe, Bruyette & Woods, Inc. to agree to match buy and
sell orders for the shares. Keefe, Bruyette & Woods, Inc. has agreed to make a
market in the common stock following the conversion, although it has no
obligation to do so. However, Alaska Pacific Bancshares cannot assure that
timely and accurate quotations will be regularly available. The development of a
liquid public market depends on the existence of willing buyers and sellers and
their existence is not within the control of Alaska Pacific Bancshares, Alaska
Federal or any market maker. Because of the small size of the offering, it is
highly unlikely that an active and liquid market for the common stock will
develop and the number of active buyers and sellers at any particular time is
expected to be limited. Under these circumstances, investors in the common stock
could have difficulty disposing of their shares on short notice and should not
view the common stock as a short-term investment. Furthermore, Alaska Pacific
Bancshares cannot assure that purchasers will be able to sell their shares at or
above the $10.00 per share purchase price or that published quotations will be
regularly available.
10
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of Alaska
Federal at December 31, 1998, and the pro forma consolidated capitalization of
Alaska Pacific Bancshares after giving effect to the assumptions under "Pro
Forma Data," based on the sale of the number of shares indicated in the table.
The issuance of 925,750 shares would require Office of Thrift Supervision
approval of an updated appraisal confirming that valuation. A change in the
number of shares to be issued in the conversion may materially affect pro forma
consolidated capitalization.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
----------------------------------------------------------------------
925,750
595,000 700,000 805,000 Shares Sold
Shares Sold Shares Sold Shares Sold at $10.00
Capitalization at $10.00 at $10.00 at $10.00 Per Share(2)
as of Per Share(1) Per Share(1) Per Share(1) (Maximum of
December 31, (Minimum of (Midpoint of (Maximum of Offering Range
1998 Offering Range) Offering Range) Offering Range) as Adjusted)
---- --------------- --------------- --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3).......................... $101,945 $101,945 $101,945 $101,945 $101,945
Federal Home Loan Bank of
Seattle advances.................. -- -- -- -- --
-------- -------- -------- -------- --------
Total deposits and borrowed funds.... $101,945 $101,945 $101,945 $101,945 $101,945
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
1,000,000 shares, $.01 par value
per share, authorized; none
issued or outstanding........... $ -- $ -- $ -- $ -- $ --
Common stock:
20,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4)................. -- 6 7 8 9
Additional paid-in capital........ -- 5,464 6,498 7,533 8,722
Retained earnings,
substantially restricted(5).... 7,548 7,548 7,548 7,548 7,548
Unrealized gain on securities,
net of tax..................... (298) (298) (298) (298) (298)
Less:
Common Stock to be acquired
by employee stock ownership
plan(6)....................... -- (476) (560) (644) (741)
Common Stock to be acquired
by management recognition
and development plan(7)....... -- (238) (280) (322) (370)
------ ------- ------- ------- -------
Total stockholders' equity........... $7,250 $12,006 $12,915 $13,825 $14,870
====== ======= ======= ======= =======
</TABLE>
(footnotes on following page)
11
<PAGE>
- ------------
(1) Does not reflect the possible increase in the estimated valuation range to
reflect material changes in the financial condition or results of
operations of Alaska Federal or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the stock option plan.
(2) This column represents the pro forma capitalization of Alaska Pacific
Bancshares in the event the aggregate number of shares of common stock
issued in the conversion is 15% above the maximum of the estimated
valuation range. See "Pro Forma Data" and footnote 1 to the table under
"Pro Forma Data."
(3) This does not reflect withdrawals from deposit accounts for the purchase of
common stock. Withdrawals will reduce pro forma deposits by the amounts of
the withdrawals.
(4) Alaska Federal's authorized capital will consist solely of 1,000 shares of
common stock, par value $1.00 per share, 1,000 shares of which will be
issued to Alaska Pacific Bancshares, and 9,000 shares of preferred stock,
no par value per share, none of which will be issued in connection with the
conversion.
(5) Applicable regulatory capital requirements substantially restrict total
equity. Additionally, Alaska Federal is prohibited from paying any dividend
that would reduce its regulatory capital below the amount in the
liquidation account, which will be established for the benefit of Alaska
Federal's eligible account holders and supplemental eligible account
holders at the time of the conversion and adjusted downward thereafter as
such account holders reduce their balances or when they are no longer
depositors. See "Alaska Federal's Conversion -- Effects of Conversion to
Stock Form on Depositors and Borrowers of Alaska Federal -- Liquidation
Account."
(6) Assumes that the employee stock ownership plan will acquire 8% of the
common stock sold in the conversion with funds borrowed from Alaska Pacific
Bancshares. This would range between 47,600 shares, assuming 595,000 shares
are issued in the conversion, to 74,060 shares, assuming 925,750 shares are
issued in the conversion. The employee stock ownership plan will repay the
loan principally from Alaska Federal's contributions to the employee stock
ownership plan and dividends payable on the common stock held by the
employee stock ownership plan over the anticipated 10-year term of the
loan. Under generally accepted accounting principles, the amount of common
stock to be purchased by the employee stock ownership plan represents
unearned compensation and is, accordingly, reflected as a reduction of
capital. The release of shares to employee stock ownership plan
participants' accounts will result in a corresponding reduction in the
charge against capital. Since the funds are borrowed from Alaska Pacific
Bancshares, the borrowing will be eliminated in consolidation and no
liability or interest expense will be reflected in the consolidated
financial statements of Alaska Pacific Bancshares. See "Management of
Alaska Federal -- Benefits -- Employee Stock Ownership Plan."
(7) Assumes the purchase in the open market at $10.00 per share of a number of
shares equal to 4% of the shares of common stock issued in the conversion
at the minimum, midpoint, maximum and 15% above the maximum of the
estimated valuation range. This would range between 23,800 shares, assuming
595,000 shares are issued in the conversion, to 37,030 shares, assuming
925,750 shares are issued in the conversion. The issuance of an additional
4% of the shares of common stock for the management recognition and
development plan from authorized but unissued shares would dilute the
ownership interest of stockholders by 3.9%. The shares are reflected as a
reduction of stockholders' equity. See "Risk Factors -- Issuance of Shares
for Benefit Programs May Lower Your Ownership Interest," "Pro Forma Data"
and "Management of Alaska Federal -- Benefits -- Management Recognition and
Development Plan." The management recognition and development plan is
requires stockholder approval, which is expected to be sought at a meeting
to be held no earlier than six months following the conversion.
12
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At December 31, 1998, Alaska Federal exceeded each of the three Office
of Thrift Supervision capital requirements. The following table presents Alaska
Federal's historical and pro forma capital position relative to its capital
requirements at December 31, 1998. The amount of capital infused into Alaska
Federal is based on achieving a tangible capital ratio for Alaska Federal of at
least 10.0% of adjusted total assets at the minimum, midpoint, maximum and 15%
above the maximum of the estimated valuation range, in dollars and as a
percentage of applicable assets. For purposes of the table below, the amount the
employee stock ownership plan expects to borrow and the cost of the shares the
management recognition and development plan expects to acquire is deducted from
pro forma regulatory capital. For a discussion of the assumptions underlying the
pro forma capital calculations, see "How Alaska Pacific Bancshares Intends to
Use the Conversion Offering Proceeds," "Capitalization" and "Pro Forma Data."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the Office of Thrift Supervision. For a discussion of the
capital standards applicable to Alaska Federal, see "Regulation -- Federal
Regulation of Savings Associations -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1998
-------------------------------------------------------------------------
Minimum of Estimated Midpoint of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range
---------------------- ------------------------ ----------------------
595,000 Shares 700,000 Shares 805,000 Shares
December 31, 1998 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
---------------------- ---------------------- ------------------------ ----------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets(1) Amount Assets(1)(2) Amount Assets(1)(2) Amount Assets(1)(2)
------ --------- ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Generally accepted accounting
principles capital......... $7,250 6.54% $11,448 10.00% $11,465 10.00% $11,483 10.00%
Tangible capital............ $7,548 6.85% $11,746 10.23% $11,763 10.24% $11,781 10.23%
Tangible capital requirement 1,652 1.50 1,722 1.50 1,724 1.50 1,727 1.50
------ ---- ------- ----- ------- ----- ------- -----
Excess...................... $5,896 5.35% $10,024 8.73% $10,039 8.74% $10,054 8.73%
====== ==== ======= ===== ======= ===== ======= =====
Core capital................ $7,548 6.85% $11,746 10.23% $11,763 10.24% $11,781 10.23%
Core capital requirement (3) 3,304 3.00 3,444 3.00 3,447 3.00 3,453 3.00
------ ---- ------- ----- ------- ----- ------- -----
Excess...................... $4,244 3.85% $ 8,302 7.23% $ 8,316 7.24% $ 8,328 7.23%
====== ==== ======= ===== ======= ===== ======= =====
Total capital (4)........... $8,222 12.35% $12,420 18.40% $12,437 18.42% $12,455 18.44%
Risk-based
capital requirement........ 5,325 8.00 5,400 8.00 5,401 8.00 5,405 8.00
------ ---- ------- ----- ------- ----- ------- -----
Excess...................... $2,897 4.35% $ 7,020 10.40% $ 7,036 10.42% $ 7,050 10.44%
====== ==== ======= ===== ======= ===== ======= =====
</TABLE>
<PAGE>
PRO FORMA AT DECEMBER 31, 1998
------------------------------
15% above
Maximum of Estimated
Valuation Range
------------------------
925,750 Shares
at $10.00 Per Share
------------------------
Percent of
Adjusted
Total
Amount Assets(1)(2)
------ ------------
(Dollars in thousands)
Generally accepted accounting
principles capital......... $11,490 10.00%
Tangible capital............ $11,788 10.23%
Tangible capital requirement 1,728 1.50
------- -----
Excess...................... $10,060 8.73%
======= =====
Core capital................ $11,788 10.23%
Core capital requirement (3) 3,457 3.00
------- -----
Excess...................... $ 8,331 7.23%
======= =====
Total capital (4)........... $12,462 18.44%
Risk-based
capital requirement........ 5,406 8.00
------- -----
Excess...................... $ 7,056 10.44%
======= =====
- -------------
(1) Based upon total adjusted assets of $110.1 million at December 31, 1998 and
$114.5 million, $114.6 million, $114.7 million and $114.8 million at the
minimum, midpoint, maximum and maximum, adjusted, of the estimated
valuation range, respectively, for purposes of the tangible and core
capital requirements, and upon risk-weighted assets of $66.6 million at
December 31, 1998 and $67.5 million, $67.5 million, $67.5 million and $67.6
million at the minimum, midpoint, maximum, and maximum, as adjusted, of the
estimated valuation range, respectively, for purposes of the risk-based
capital requirement.
(2) Assumes that Alaska Federal will receive the greater of 50% of the net
conversion proceeds, or that portion of the net conversion proceeds which
would increase its tangible capital to at least 10% of adjusted total
assets. Also reflects a deduction from capital for unearned employee stock
ownership plan shares equal to 8% of the shares offered and unearned
management recognition plan shares equal to 4% of the shares offered. The
remainder of the net conversion proceeds will be retained by Alaska Pacific
Bancshares with a reduction for the anticipated loan payable to Alaska
Pacific Bancshares by the employee stock ownership plan.
(3) The current Office of Thrift Supervision core capital requirement for
savings associations is 3% of total adjusted assets. The Office of Thrift
Supervision has proposed core capital requirements which would require a
core capital ratio of 3% of total adjusted assets for thrifts that receive
the highest supervisory rating for safety and soundness and a core capital
ratio of 4% to 5% for all other thrifts. At December 31, 1998, Alaska
Federal was categorized as "well capitalized" under the prompt corrective
action regulations of the Office of Thrift Supervision. See "Regulation --
Federal Regulation of Savings Associations -- Prompt Corrective Action."
(4) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
13
<PAGE>
PRO FORMA DATA
The conversion requires that the common stock must be sold at a price
equal to the estimated market value of Alaska Pacific Bancshares and Alaska
Federal as converted, based upon an independent valuation. The estimated
valuation range as of April 16, 1999 is from a minimum of $5,950,000 to a
maximum of $8,050,000 with a midpoint of $7,000,000. At a price per share of
$10.00, this results in a minimum number of shares of 595,000 a maximum number
of shares of 805,000 and a midpoint number of shares of 700,000.
Alaska Pacific Bancshares cannot determine the actual net proceeds from
the sale of the common stock until the conversion is completed. However, net
proceeds indicated on the following table are based upon the following
assumptions:
1. Charles Webb will receive a management fee of $25,000 and a
success fee of 1.5% of the aggregate purchase price of the shares
of common stock sold in the subscription offering and direct
community offerings as discussed under "Alaska Federal's
Conversion -- Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings."
2. All of the common stock will be sold in the subscription and
direct community offerings.
3. Conversion expenses, including the fees paid to Charles Webb,
will range from approximately $480,150 to $509,130 if a minimum
number of shares, 595,000 shares, to the maximum number of
shares, 805,000 shares, are sold, and $494,640 if a midpoint
number of shares, 700,000 shares, are sold.
Actual expenses may vary from this estimate, and the fees paid will
depend upon the percentages and total number of shares sold in the subscription
offering, direct community offering and syndicated community offering and other
factors.
Alaska Pacific Bancshares and Alaska Federal prepared the pro forma
data that follows with the assistance of RP Financial. The following table
summarizes the historical net income and retained earnings of Alaska Federal and
the pro forma consolidated net income and stockholders' equity of Alaska Pacific
Bancshares at and for the year ended December 31, 1998. Pro forma consolidated
net income has been calculated as if the conversion was completed on January 1,
1998 and the estimated net proceeds had been invested at 4.52% beginning on that
date. That percentage yield represents the one-year U.S. Treasury Bill yield as
of December 31, 1998. While Office of Thrift Supervision regulations call for
the use of a yield equal to the arithmetic average of the weighted average yield
earned by Alaska Federal on its interest-earning assets and the rates paid on
its deposits, Alaska Pacific Bancshares believes that the one-year U.S. Treasury
Bill yield is a more realistic yield on the investment of the conversion
proceeds.
A pro forma after-tax return of 4.52% is used for both Alaska Pacific
Bancshares and Alaska Federal, after giving effect to no federal and state
income tax as a result of net operating loss carryforwards. See "Taxation --
Federal Taxation." Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the number of shares
of common stock indicated in the footnotes to the table. Per share amounts have
been computed as if the common stock had been outstanding at January 1, 1998 or
at December 31, 1998, but without any adjustment of historical or pro forma
stockholders' equity per share to reflect the earnings on the estimated net
proceeds.
Alaska Pacific Bancshares and Alaska Federal did not figure into this
calculation the following four items:
1. the shares to be reserved for issuance under the stock option
plan, which is expected to be voted upon by stockholders at a
meeting to be held no earlier than six months following the
conversion;
14
<PAGE>
2. withdrawals from deposit accounts to purchase common stock in the
conversion;
3. the issuance of shares from authorized but unissued shares to the
management development and recognition plan, which is expected to
be voted upon by stockholders at a meeting to be held no earlier
than six months following the conversion; or
4. the liquidation account that Alaska Federal will establish for
the benefit of eligible account holders and supplemental eligible
account holders. See "Alaska Federal's Conversion -- Effects of
Conversion to Stock Form on Depositors and Borrowers of Alaska
Federal -- Liquidation Account."
The following pro forma data, which is based on Alaska Federal's
retained earnings at December 31, 1998 and net income for the year ended
December 31, 1998, may not represent the actual financial effects of the
conversion or the operating results of Alaska Pacific Bancshares after the
conversion. The pro forma data relies exclusively on the assumptions outlined
above. The pro forma data does not represent the fair market value of Alaska
Pacific Bancshares' common stock, the current fair market value of Alaska
Federal's or Alaska Pacific Bancshares' assets or liabilities, or the amount of
money that would be available for distribution to shareholders if Alaska Pacific
Bancshares is liquidated.
15
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1998
----------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
----- ----- ----- ---------------
595,000 700,000 805,000 925,750(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds.................................. $ 5,950 $ 7,000 $ 8,050 $ 9,258
Less: estimated underwriting
commissions and other
offering expenses .............................. (480) (495) (509) (526)
Estimated net proceeds .......................... 5,470 6,505 7,541 8,732
Less: Common stock acquired by
employee stock ownership plan .................. (476) (560) (644) (741)
Less: Common stock to be
acquired by management
recognition and development
plan ........................................... (238) (280) (322) (370)
--------- --------- --------- ---------
Net investable proceeds .................. $ 4,756 $ 5,665 $ 6,575 $ 7,621
========= ========= ========= =========
Consolidated net income:
Historical .................................. $ 336 $ 336 $ 336 $ 336
Pro forma income on net
proceeds(2) ................................ 215 256 297 344
Pro forma employee stock
ownership plan adjustments(3) .............. (48) (56) (64) (74)
Pro forma management
recognition and development
plan adjustments(4) ........................ (48) (56) (64) (74)
--------- --------- --------- ---------
Pro forma net income ...................... $ 455 $ 480 $ 505 $ 532
========= ========= ========= =========
Consolidated net income
per share (5)(6):
Historical .................................. $ 0.61 $ 0.52 $ 0.45 $ 0.39
Pro forma income on net
proceeds ................................... 0.39 0.39 0.40 0.40
Pro forma employee stock
ownership plan adjustments(3) .............. (0.09) (0.09) (0.09) (0.09)
Pro forma management
recognition and development
plan adjustments(4) ........................ (0.09) (0.09) (0.09) (0.09)
--------- --------- --------- ---------
Pro forma net income
per share ................................ $ 0.82 $ 0.73 $ 0.67 $ 0.61
========= ========= ========= =========
Shares used in earnings per share
calculations ................................... 552,160 649,600 747,040 859,096
Purchase price as a multiple of
pro forma net income per share ................. 12.20x 13.70x 14.93x 16.39x
Consolidated stockholders' equity
(book value):
Historical.................................. $ 7,250 $ 7,250 $ 7,250 $ 7,250
Estimated net proceeds ...................... 5,470 6,505 7,541 8,732
Less: Common stock acquired
by employee stock ownership
plan ....................................... (476) (560) (644) (741)
Less: Common stock to be
acquired by management
recognition and development
plan(4) .................................... (238) (280) (322) (370)
--------- --------- --------- ---------
Pro forma stockholders'
equity(7) .............................. $ 12,006 $ 12,915 $ 13,825 $ 14,871
========= ========= ========= =========
Consolidated stockholders' equity
per share(6)(8):
Historical(6) ............................... $ 12.18 $ 10.36 $ 9.01 $ 7.83
Estimated net proceeds ...................... 9.19 9.29 9.37 9.43
Less: Common stock acquired
by employee stock ownership
plan ....................................... (0.80) (0.80) (0.80) (0.80)
Less: Common stock to be
acquired by management
recognition and development
plan(4) .................................... (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma stockholders'
equity per share(9) ..................... $ 20.17 $ 18.45 $ 17.18 $ 16.06
========= ========= ========= =========
Shares used in book value
calculations ................................... 595,000 700,000 805,000 925,750
Purchase price as a percentage
of pro forma stockholders'
equity per share ............................... 49.58% 54.20% 58.21% 62.27%
</TABLE>
(footnotes on following page)
16
<PAGE>
- -----------------
(1) Gives effect to the sale of an additional 120,750 shares in the conversion,
which may be issued to cover an increase in the pro forma market value of
Alaska Pacific Bancshares and Alaska Federal as converted, without the
resolicitation of subscribers or any right of cancellation. The issuance of
such additional shares will be conditioned on a determination by RP
Financial that such issuance is compatible with its determination of the
estimated pro forma market value of Alaska Pacific Bancshares and Alaska
Federal as converted. See "Alaska Federal's Conversion -- Stock Pricing and
Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing common stock in the conversion. Since purchasers may
withdraw funds on deposit at Alaska Federal to purchase shares of common
stock, which will reduce deposits by the amount of such purchases, the
net amount of funds available to Alaska Federal for investment following
receipt of the net proceeds of the conversion will be reduced by the amount
of the withdrawals.
(3) The employee stock ownership plan will borrow the funds used to acquire the
shares at an interest rate equal to the prime rate as published in The Wall
Street Journal on the closing date of the conversion, which rate is
currently 7.75%, from the net proceeds from the conversion retained by
Alaska Pacific Bancshares. The amount of this borrowing has been reflected
as a reduction from gross proceeds to determine estimated net investable
proceeds. Alaska Federal intends to make contributions to the employee
stock ownership plan in amounts at least equal to the principal and
interest requirement of the debt. As the debt is paid down, stockholders'
equity will be increased. Alaska Federal's payment of the employee stock
ownership plan debt is based upon equal installments of principal over a
10-year period, assuming a combined federal and state income tax rate of
0.0%. Interest income earned by Alaska Federal on the employee stock
ownership plan debt offsets the interest it will pay on the employee stock
ownership plan loan. No reinvestment is assumed on proceeds contributed to
fund the employee stock ownership plan. Applicable accounting practices
require that compensation expense for the employee stock ownership plan be
based upon shares committed to be released and that unallocated shares be
excluded from earnings per share computations. The valuation of shares
committed to be released would be based upon the average market value of
the shares during the year, which, for purposes of this calculation, was
assumed to be equal to the $10.00 per share purchase price. See "Management
of Alaska Federal -- Benefits --Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the management recognition and
development plan, it is assumed that the required stockholder approval has
been received, that the shares were acquired at the beginning of the period
presented in open market purchases at the $10.00 per share purchase price,
that 20% of the amount contributed was an amortized expense during the
period, and that the combined federal and state income tax rate is 0.0%.
The issuance of authorized but unissued shares of the common stock instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 3.9% and pro forma net income per share would
be $0.86, $0.78, $0.72 and $0.67 at the minimum, midpoint, maximum and 15%
above the maximum of the estimated valuation range for the year ended
December 31, 1998, respectively, and pro forma stockholders' equity per
share would be $19.79, $18.13, $16.90 and $15.83 at the minimum, midpoint,
maximum and 15% above the maximum of the estimated valuation range at
December 31, 1998, respectively. Shares issued under the management
recognition and development plan vest 20% per year and for purposes of this
table compensation expense is recognized on a straight-line basis over each
vesting period. In the event the fair market value per share is greater
than $10.00 per share on the date shares are awarded, total management
recognition and development plan expense would increase. The total
estimated expense was multiplied by 20% (the total percent of shares for
which expense is recognized in the first year) resulting in pre-tax
management recognition and development plan expense of $47,600, $56,000,
$64,000 and $74,060 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range for the year ended December 31,
1998, respectively. No effect has been given to the shares reserved for
issuance under the proposed stock option plan.
(5) Per share amounts are based upon shares outstanding of 595,000, 700,000,
805,000 and 925,750 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range for the year ended December 31,
1998, respectively, which includes the shares of common stock sold in the
conversion
17
<PAGE>
less the number of shares assumed to be held by the employee stock
ownership plan not committed to be released within the first year following
the conversion.
(6) Historical per share amounts have been computed as if the shares of common
stock expected to be issued in the conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment of
historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
conversion, the additional employee stock ownership plan expense or the
proposed management recognition and development plan expense, as described
above.
(7) "Book value" represents the difference between the stated amounts of Alaska
Federal's assets and liabilities. The amounts shown do not reflect the
liquidation account which will be established for the benefit of eligible
account holders and supplemental eligible account holders in the
conversion, or the federal income tax consequences of the restoration to
income of Alaska Federal's special bad debt reserves for income tax
purposes which would be required in the unlikely event of liquidation. See
"Alaska Federal's Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Alaska Federal" and "Taxation." The amounts
shown for book value do not represent fair market values or amounts
distributable to stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 595,000, 700,000,
805,000 and 925,750 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the common stock.
18
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT WITH SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the
approximate purchases of common stock by each director and executive officer of
Alaska Federal, including their associates, as defined by applicable
regulations. No individual has entered into a binding agreement with respect to
these intended purchases, and, therefore, actual purchases could be more or less
than indicated below. Directors and officers of Alaska Federal and their
associates may not purchase in excess of 33% of the shares sold in the
conversion. For purposes of the following table, it has been assumed that
sufficient shares will be available to satisfy subscriptions in all categories.
Directors, officers, their associates and employees will pay the same price as
all other subscribers for the shares for which they subscribe.
<TABLE>
<CAPTION>
Percent of Percent of
Anticipated Anticipated Shares at the Shares at the
Number of Dollar Minimum of Maximum of
Shares to be Amount to be the Estimated the Estimated
Name and Position Purchased(1) Purchased Valuation Range Valuation Range
- ----------------- ------------ --------- --------------- ---------------
<S> <C> <C> <C> <C>
Craig E. Dahl 5,000 $50,000 0.8% 0.6%
President, Chief Executive
Officer and Director
Lisa Corrigan Bell 5,000 50,000 0.8 0.6
Senior Vice President and
Chief Operating Officer
Roger K. White 5,000 50,000 0.8 0.6
Senior Vice President and
Chief Financial Officer
Avrum M. Gross 10,000 100,000 1.7 1.2
Chairman of the Board
Roger Grummett 10,000 100,000 1.7 1.2
Director
Hugh N. Grant 10,000 100,000 1.7 1.2
Director
Deborah Marshall 6,000 60,000 1.0 0.7
Director
D. Eric McDowell 5,000 50,000 0.8 0.6
Director
William J. Schmitz 10,000 100,000 1.7 1.2
Director ------ -------- ---- ---
Total 66,000 $660,000 11.0% 7.9%
====== ======== ==== ===
</TABLE>
- -----------------
(1) Does not include any shares to be awarded pursuant to the employee stock
ownership plan and management recognition and development plan or options
to acquire shares pursuant to the stock option plan.
19
<PAGE>
ALASKA FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of Alaska Federal Savings Bank for
the fiscal years ended December 31, 1998 and 1997 have been audited by Deloitte
& Touche LLP, independent auditors. The report of independent auditors is
included in the back of this prospectus. These statements should be read in
conjunction with the Financial Statements and related Notes included in the back
of this prospectus.
Years Ended December 31,
------------------------
1998 1997
---- ----
(In thousands)
Interest Income
Loans .................................................. $ 6,653 $ 7,014
Investment securities .................................. 1,039 1,324
Interest-bearing deposits with banks ................... 526 141
------- -------
Total interest income ................................ 8,218 8,479
Interest Expense
Deposits ............................................... 3,642 3,564
Federal Home Loan Bank advances ........................ 165 467
------- -------
Total interest expense ............................... 3,807 4,031
------- -------
Net Interest Income .................................... 4,411 4,448
Provision for loan losses ................................. 60 25
------- -------
Net interest income after provision for loan losses .... 4,351 4,423
Noninterest Income
Mortgage servicing income .............................. 232 259
Service charges on deposit accounts .................... 195 249
Other service charges and fees ......................... 129 133
Gain on sale of mortgage loans ......................... 332 155
------- -------
Total noninterest income ............................. 888 796
Noninterest Expense
Compensation and benefits .............................. 2,538 2,353
Occupancy .............................................. 1,105 1,064
Data processing ........................................ 317 306
Professional and consulting fees ....................... 158 141
Marketing and public relations ......................... 143 123
Cost of operations of foreclosed properties ............ 13 --
Other .................................................. 629 633
------- -------
Total noninterest expense ............................ 4,903 4,620
------- -------
Income before income tax .......................... 336 599
Income tax benefit ........................................ -- (100)
------- -------
Net Income ............................................. $ 336 $ 699
======= =======
See Notes to Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is intended to assist in understanding the
financial condition and results of operations of Alaska Federal. The discussion
and analysis does not include any comments relating to Alaska Pacific Bancshares
since it has no significant operations. You should read the information
contained in this section should be read in conjunction with the Financial
Statements and the accompanying Notes in the back of this prospectus, as well as
the other sections of this prospectus.
Alaska Federal's results of operations depend primarily on its net
interest income, which is the difference between the income earned on its
interest-earning assets, consisting of loans and investments, and the cost of
its interest-bearing liabilities, consisting of deposits and Federal Home Loan
Bank of Seattle borrowings. Among other things, fee income, provisions for loan
losses, operating expenses and income tax provisions also affect Alaska
Federal's net income. General economic and competitive conditions, particularly
changes in market interest rates, government legislation and policies concerning
monetary and fiscal affairs, housing and financial institutions and the
attendant actions of the regulatory authorities also significantly affect Alaska
Federal's results of operations.
Forward-Looking Statements
This prospectus contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of Alaska
Federal. These forward-looking statements are generally identified by use of the
word "believe," "expect," "intend," anticipate," "estimate," "project," or
similar words. Alaska Federal's ability to predict results of the actual effect
of future plans or strategies is uncertain. Factors which could have a material
adverse effect on our operations include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in our market areas and accounting
principles and guidelines. You should consider these risks and uncertainties in
evaluating forward-looking statements and you should not rely too much on these
statements.
Operating Strategy
Alaska Federal's strategy is to operate a community-oriented financial
institution devoted to serving the needs of its customers. Alaska Federal's
business consists primarily of attracting retail deposits from the general
public and using those funds to originate one- to four-family residential loans
in its primary market area. To a lesser but growing extent, Alaska Federal also
originates commercial business loans, consumer loans, construction loans, and
commercial real estate loans. See "Business of Alaska Federal -- Lending
Activities."
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Total assets of Alaska Federal were $110.8 million at December 31, 1998
compared to $114.5 million at December 31, 1997. An $8.0 million decline in the
loan portfolio, including loans and loans held for sale, which was partially
offset by an increase in investments in deposits in other institutions, was the
primary cause of this decrease.
Loans were $71.5 million at December 31, 1998 compared to $79.5 million
at December 31, 1997, a 10.1% decrease. The decrease was primarily the result of
significant mortgage refinancing during 1998 while a large proportion of the
mortgages originated by Alaska Federal were sold in the secondary market. In
addition, between December 31, 1997 and December 31, 1998 Alaska Federal had
continued growth in its commercial
21
<PAGE>
business loan portfolio as it emphasized the origination of loans with higher
yields and shorter maturities for asset liability management purposes. See "--
Asset and Liability Management and Market Risk." A substantial portion of Alaska
Federal's loan portfolio is secured by real estate, either as primary or
secondary collateral, located in its primary market area. There are certain
risks associated with this credit concentration. See "Risk Factors -- Alaska
Federal's Business Depends Heavily on the Economic Condition of its Primary
Market Area and Weak Market Area Demographics has Hurt Core Earnings and Limits
Growth Prospects."
Loans held-for-sale were $899,000 at December 31, 1998 compared to
$440,000 at December 31, 1997. To mitigate interest rate risk, Alaska Federal
designates all or a portion of its mortgage originations, depending on current
yields and its interest rate risk position, as held for sale. Such loans are
generally fixed-rate one- to four-family mortgage loans that conform to
secondary market standards and have terms of 15 years or more. Alaska Federal
generally sells such loans to the Federal Home Loan Mortgage Corporation, Alaska
Housing Finance Corporation and similar agencies and retains related servicing
rights. See "-Asset and Liability Management and Market Risk."
Cash and cash equivalents were $14.6 million at December 31, 1998
compared to $10.1 million at December 31, 1997. The increase between December
31, 1997 and December 31, 1998 primarily reflects the increase in liquidity as
the result of mortgage prepayments.
Available-for-sale securities were $18.1 million at December 31, 1998,
compared to $13.3 million at December 31, 1997. This increase primarily resulted
from transferring $5.7 million of securities from held-to- maturity to the
available-for-sale category during the fourth quarter of 1998 concurrent with
adopting Statement of Financial Accounting Standards Number 133, "Accounting for
Derivative Instruments and Hedging Activities." The transfer did not indicate an
intention to sell specific securities but rather was done to provide more
flexibility in managing the entire investment portfolio. In total, investment
securities decreased $1.4 million in 1998 due primarily to principal reductions
and maturities of approximately $7.0 million in long-term mortgage-backed and
other securities, offset by the addition of $6.0 million on short-term agency
securities. The shift to short-term securities, as well as interest-earning
deposits in banks, was made because of historically low long-term interest rates
concurrent with relatively high short-term rates during much of 1998.
Premises and equipment increased moderately to $3.3 million at December
31, 1998 from $3.2 million at December 31, 1997, primarily as a result of new
additions which exceeded depreciation. Management is considering a plan to sell
Alaska Federal's building in Ketchikan. If the building were sold in 1999,
management estimates that a loss of up to $170,000 could be realized. In
addition, Alaska Federal has plans to open a new office in the Juneau area in
leased premises, which consists of approximately 1,000 square feet. Alaska
Federal has an option for 60 days and is preparing a study of the feasibility
regarding the opening of this office as a new full service branch of Alaska
Federal. However, as of December 31, 1998 Alaska Federal had made no specific
commitments. See "Business of Alaska Federal -- Properties" and Note 6 of Notes
to the Financial Statements.
Total deposits were $101.9 million at December 31, 1998 an increase of
approximately $5.0 million or 5.1%, compared to $97.0 million at December 31,
1997. Management attributes the increase primarily to increased market share
resulting from its marketing efforts.
There were no Federal Home Loan Bank of Seattle advances outstanding at
December 31, 1998, compared to $9.0 million at December 31, 1997, as deposit
growth and funds generated from maturing loans and mortgage-backed securities
and retained earnings were sufficient to meet liquidity needs. Subject to market
conditions, Alaska Federal intends to engage in "wholesale leveraging" by
investing Federal Home Loan Bank of Seattle advances in investment securities of
the type in which Alaska Federal currently invests, with the goal of recognizing
income on the difference between the interest rate paid on the advances and the
interest rate earned on the securities. Accordingly, Federal Home Loan Bank
advances might increase to approximately $30 million to $40 million to support
this "wholesale leveraging," which may commence prior to the consummation of the
conversion. To the
22
<PAGE>
extent any Federal Home Loan Bank advances would be outstanding before the
consummation of the conversion, Alaska Federal may use a portion of the net
proceeds to repay them. See "How Alaska Pacific Bancshares Intends to Use the
Conversion Offering Proceeds," "Business of Alaska Federal -- Investment
Activities" and "-- Deposit Activities and Other Sources of Funds --
Borrowings."
Total equity capital was $7.3 million at December 31, 1998 and $7.1
million at December 31, 1997.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. During fiscal 1998 interest rates declined resulting in a
rapid refinancing of outstanding mortgage loans. Alaska Federal was not willing
to increase its interest rate risk by retaining in its portfolio the lower
yielding fixed rate loans it was originating and as a result its loan portfolio
declined which reduced interest income. The yield on long-term securities was
only slightly higher than the yields available on overnight funds and other
short-term investments. As a result, Alaska Federal invested its surplus funds
in overnight deposits, short-term certificates of deposit and short-term
investment securities.
Net Income. Net income was $336,000 for the year ended December 31,
1998, compared to $699,000 for the year ended December 31, 1997. Higher
noninterest expense in 1998 compared to 1997, specifically higher compensation
and benefits, partially offset by an increase in gain on sale of mortgage loans,
was the primary reason for the decline in pretax income. In addition, there was
no tax provision in 1998 compared with a tax benefit of $100,000 recognized in
1997.
Net Interest Income. Net interest income was virtually unchanged at
$4.4 million for both years. Interest income decreased from $8.5 million for the
year ended December 31, 1997, compared to $8.2 million for the year ended
December 31, 1998, primarily as a result of lower average balances of loans and
investment securities. This was partially offset by an increase in the average
balance of interest-earning assets in banks but the interest income received on
these investments is significantly less than the amount earned on loans and many
investment securities. Interest expense decreased 5.0% from $4.0 million for the
year ended December 31, 1997 to $3.8 million for the year ended December 31,
1998 as a result of a decrease in the average balance of outstanding borrowings.
The average cost of deposits was 3.94% for both periods and the average balance
of deposits increased 2.1%. Alaska Federal has been able to maintain its deposit
base without resorting to aggressive deposit pricing. The average rate paid on
Federal Home Loan Bank of Seattle advances increased from 6.06% for the year
ended December 31, 1997 to 6.22% for the year ended December 31, 1998, however,
this was more than offset by a decline in the average balance of borrowings as a
result of the repayment of all outstanding advances during 1998. The interest
rate spread decreased to 3.99% for the year ended December 31, 1998 from 4.02%
for the year ended December 31, 1997.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for known and inherent risks in the loan
portfolio, including management's continuing analysis of factors underlying the
quality of the loan portfolio. These factors include changes in portfolio size
and composition, actual loan loss experience, current economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value of the
collateral and guarantees securing the loans. See "Business of Alaska Federal --
Lending Activities -- Nonperforming Assets and Delinquencies" and Note 1 of
Notes to the Financial Statements.
The provision for loan losses was $60,000 for the year ended December
31, 1998 compared to $25,000 for the year ended December 31, 1997. The increase
in the provision reflects the impact on the allowance for loan losses of loans
charged-off ($141,000 in 1998 compared to charge-offs of $1,000 in 1997), which
were in excess of the allowance for loan losses allocated for those loan
categories ($54,000 as of December 31, 1997). Due to these charge-offs, a larger
provision was required to increase the allowance for loan losses to a level
determined by management to be acceptable. The increase in the provision was
partially reduced by the effect of a change in loan volume and mix in 1998,
which led to an overall improvement in loan quality. For further information,
see the
23
<PAGE>
discussion on the allowance and related methodology contained in "Business of
Alaska Federal -- Allowance for Loan Losses."
Noninterest Income. Noninterest income was $888,000 for the year ended
December 31, 1998 compared to $796,000 for the year ended December 31, 1997.
This 11.6% increase resulted primarily from a general increase in Alaska
Federal's gain on sale of mortgage loans which increased $177,000 from the year
ended December 31, 1997 to $332,000 for the year ended December 31, 1998. This
increase was the result of the significant increase in refinances as well as the
decision to sell in the secondary market a significant amount of the loan
production. Noninterest income also includes charges on deposit accounts, fees
for travelers checks, official checks, safe deposit boxes and overdrafts. In
fiscal 1998 service charges on deposit accounts declined $54,000 as a result of
the growth of Northstar checking accounts which include many services in the
monthly service charge. Certain of these accounts do not carry a monthly service
charge if a minimum balance is maintained. Overdraft fees were raised
significantly to market levels late in 1998.
Noninterest Expenses. Noninterest expenses were $4.9 million for the
year ended December 31, 1998, compared to $4.6 million for the year ended
December 31, 1997. This increase resulted primarily from an increase in
compensation and benefits of $185,000 as a result of several pay increases, the
addition of a marketing coordinator position, increased benefit costs including
a higher matching level for 401(k) accounts, and staffing of the new branch in
Ketchikan in December 1997. Occupancy expenses increased $41,000 for the year
ended December 31, 1998 compared to the year ended December 31, 1997 as a result
of opening the new branch. Other noninterest expense remained virtually
unchanged at $629,000 for the year ended December 31, 1998 compared to $633,000
for the year ended December 31, 1997. Included in other noninterest expense is
office supplies ($77,000 in 1998), mailing expense ($80,000 in 1998), employee
and director expenses for food and travel ($88,000 in 1998), recruiting and
education ($61,000 in 1998), deposit insurance premiums ($59,000 in 1998), other
dues and assessments ($68,000 in 1998), software costs ($53,000 in 1998), and
other miscellaneous noninterest expenses. Alaska Federal anticipates that other
expenses will increase in subsequent periods following the consummation of the
conversion as a result of increased costs associated with operating as a public
company and increased compensation expense as a result of the implementation of
the management recognition and development plan, if approved by Alaska Pacific
Bancshares' stockholders. See "Risk Factors -- Alaska Federal's Return on Equity
Will Be Below Average After Conversion Because of High Capital Levels," and "--
Implementation of Benefit Plans Will Increase Future Compensation Expense and
May Lower Alaska Federal's Net Income."
Income Taxes. Alaska Federal did not recognize any tax on current
income for the years ended December 1998 or 1997 because of the existence of
$3.9 million in net operating loss carryforwards, which expire in various years
beginning in 2002 through 2012. At December 31, 1998, Alaska Federal had $1.6
million in deferred tax assets, which were offset by a valuation allowance of
$1.3 million. Net deferred tax assets of $300,000, have been recognized in
income, and are included in other assets as of December 31, 1998, including
$100,000 recognized in 1997.
Average Balances, Interest and Average Yields/Cost
The earnings of Alaska Federal depend largely on the spread between the
yield on interest-earning assets, which consist primarily of loans and
investments, and the cost of interest-bearing liabilities, which consist
primarily of deposit accounts and borrowings, as well as the relative size of
Alaska Federal's interest-earning assets and interest-bearing liabilities.
24
<PAGE>
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resultant yields, interest rate
spread, net interest margin, and ratio of average interest-earning assets to
average interest-bearing liabilities. Average balances for a period have been
calculated using the average of daily balances during this period.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1998 1997
----------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1).................................. $ 73,988 $ 6,653 8.99% $ 78,947 $ 7,014 8.88%
Investment securities....................... 18,855 1,039 5.51 22,953 1,324 5.77
Interest-earning deposits in banks.......... 10,021 526 5.24 2,548 141 5.53
-------- ------- ---- -------- ------- ----
Total interest-earning assets............ 102,864 8,218 7.99 104,448 8,479 8.12
Allowance for loan losses................... (700) (729)
Cash and due from banks..................... 3,174 3,066
Other assets................................ 4,730 4,516
-------- --------
Total assets............................. $110,068 $111,301
======== ========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand..................... $ 23,848 529 2.22 $ 24,716 552 2.23
Money market ............................... 13,862 520 3.75 13,318 520 3.90
Savings .................................... 18,118 586 3.23 17,559 575 3.27
Certificates of deposit..................... 36,664 2,007 5.47 34,972 1,917 5.49
-------- ----- ---- -------- ------ ----
Total interest-bearing deposits........... 92,492 3,642 3.94 90,565 3,564 3.94
Borrowings..................................... 2,654 165 6.22 7,702 467 6.06
-------- ----- ---- -------- ------ ----
Total interest-bearing liabilities.......... 95,146 3,807 4.00 98,267 4,031 4.10
Noninterest-bearing demand deposits......... 4,740 3,558
Other liabilities and capital............... 10,182 9,476
-------- --------
Total liabilities and capital............. $110,068 $111,301
======== ========
Interest-earning assets:
Net interest income............................ $ 4,411 $4,448
======= ======
Interest rate spread........................... 3.99% 4.02%
==== ====
Net interest margin on average total assets.... 4.01% 3.99%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities...... 108.11% 106.29%
====== ======
</TABLE>
- ------------
(1) Average loans includes non-performing loans and loans held for sale.
Interest income does not include interest on loans 90 days or more past
due.
25
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of Alaska Federal. Information is provided with
respect to effects on interest income attributable to changes in volume, which
are changes in volume multiplied by prior rate; effects on interest income
attributable to changes in rate, which are changes in rate multiplied by prior
volume; and changes in rate/volume, which is a change in rate multiplied by
change in volume.
Year Ended December 31, 1998
Compared to Year Ended
December 31, 1997
Increase (Decrease) Due to
---------------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ -----
(In thousands)
Interest-earning assets:
Loans .................................... $ 85 $(441) $ (5) $(361)
Investment securities .................... (59) (236) 10 (285)
Interest-earning deposits
in banks ................................ (8) 414 (22) 384
----- ----- ----- -----
Total net change in income
on interest-earning assets ........... 21 (266) (17) (262)
Interest-bearing liabilities:
Interest-bearing demand accounts ......... (4) (19) -- (23)
Money market savings accounts ............ (20) 21 (1) --
Savings accounts ......................... (8) 18 -- 10
Certificates of deposit .................. (5) 93 -- 88
Borrowings .............................. 12 (306) (8) (302)
----- ----- ----- -----
Total net change in expense
on interest-bearing liabilities ...... (25) (193) (9) (227)
----- ----- ----- -----
Net change in net interest income .......... $ 46 $ (73) $ (8) $ (35)
===== ===== ===== =====
26
<PAGE>
Yields Earned and Rates Paid
The following table sets forth, at the date and for the periods
indicated, the weighted average yields earned on Alaska Federal's assets and the
weighted average interest rates paid on Alaska Federal's liabilities, together
with the net yield on interest-earning assets.
For the Year
Ended December 31,
At December 31, ------------------
1998 1998 1997
---- ---- ----
Weighted average yield on:
Loans, net ................................. 8.67% 8.99% 8.88%
Investment securities ...................... 5.60 5.51 5.77
Interest-earning deposits in banks ......... 4.80 5.24 5.53
Total interest-earning assets ............ 7.69 7.99 8.12
Weighted average rate paid on:
Interest-bearing demand accounts .......... 2.15 2.22 2.23
Money market savings accounts .............. 3.74 3.75 3.90
Savings accounts ........................... 3.01 3.23 3.27
Certificates of deposit .................... 5.16 5.47 5.49
Total interest-bearing deposits .......... 3.72 3.94 3.94
Borrowings .................................. -- 6.22 6.06
Total interest-bearing liabilities ...... 3.72 4.00 4.10
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all interest-
bearing liabilities) ........................ 3.97 3.99 4.02
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets) ................... -- 4.29 4.26
Asset and Liability Management and Market Risk
Qualitative Analysis - Alaska Federal's Risks When Interest Rates
Change. Alaska Federal's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolios and its cost of funds, which consists of interest paid on
deposits and borrowings. The relative amounts of interest-earning assets and
interest-bearing liabilities also affect net interest income. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Alaska
Federal's profitability is also affected by the level of income and expenses.
Non-interest income includes service charges and fees and gain on sale of
investments. Non-interest expenses primarily include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums and data processing
expenses. General economic and competitive conditions, particularly changes in
market interest rates, government legislation and regulation and monetary and
fiscal policies also significantly affect Alaska Federal's results of
operations.
Quantitative Analysis - How Alaska Federal Measures Its Risk of
Interest Rate Changes. Alaska Federal does not maintain a trading account for
any class of financial instrument nor does it engage in hedging activities or
purchase high-riskderivative instruments. Furthermore, Alaska Federal has no
foreign currency exchange rate risk or commodity price risk. For information
regarding the sensitivity to interest rate risk of Alaska
27
<PAGE>
Federal's interest-earning assets and interest-bearing liabilities, see the
tables under "Business of Alaska Federal -- Lending Activities -- Loan Maturity
and Repricing," "-- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds -- Deposit Accounts -- Time Deposits by Maturities."
Alaska Federal has sought to reduce the exposure of its earnings to
changes in market interest rates by attempting to manage the mismatch between
asset and liability maturities and interest rates. The principal element in
achieving this objective is to increase the interest-rate sensitivity of Alaska
Federal's interest-earning assets by originating for its portfolio loans with
interest rates that periodically adjust to market conditions. Alaska Federal
relies on retail deposits as its primary source of funds. Management believes
retail deposits, compared to brokered deposits, reduce the effects of interest
rate fluctuations because they generally represent a more stable source of
funds.
In order to encourage institutions to reduce their interest rate risk,
the Office of Thrift Supervision adopted a rule incorporating an interest rate
risk component into the risk-based capital rules. Using data compiled by the
Office of Thrift Supervision, Alaska Federal receives a report which measures
interest rate risk by modeling the change in net portfolio value over a variety
of interest rate scenarios. The Office of Thrift Supervision developed this
procedure for measuring interest rate risk to replace the "gap" analysis, which
is the difference between interest-earning assets and interest-bearing
liabilities that mature or reprice within a specific time period. Net portfolio
value is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The calculation is intended to illustrate the
change in net portfolio value that will occur upon an immediate change in
interest rates of at least 200 basis points with no effect given to any steps
that management might take to counter the effect of that interest rate movement.
Under Office of Thrift Supervision regulations, an institution with a greater
than "normal" level of interest rate risk take a deduction from total capital
for purposes of calculating its risk-based capital. The Office of Thrift
Supervision, however, has delayed the implementation of this regulation. An
institution with a "normal" level of interest rate risk is defined as one whose
"measured interest rate risk" is less than 2.0%. Institutions with assets of
less than $300 million and a risk-based capital ratio of more than 12.0% are
exempt. Alaska Federal is exempt because of its asset size. Based on Alaska
Federal's regulatory capital levels at December 31, 1998, Alaska Federal
believes that, if the proposed regulation was implemented at that date, Alaska
Federal's level of interest rate risk would not have caused it to be treated as
an institution with greater than "normal" interest rate risk.
The following table is provided by the Office of Thrift Supervision
which illustrates the change in net portfolio value at December 31, 1998, based
on Office of Thrift Supervision assumptions, that would occur in the event of an
immediate change in interest rate, with no effect given to any steps which
management might take to counter the effect of that interest rate movement.
<TABLE>
<CAPTION>
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
------------------------------------- ---------------------------
Basis Point ("bp") Net Portfolio
Change in Rates $ Amount $ Change(1) % Change Value Ratio(2) Change(3)
--------------- -------- ----------- -------- -------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 bp $ 9,470 $(1,181) (11)% 8.50% (89) bp
300 10,002 (648) (6) 8.92 (47)
200 10,457 (193) (2) 9.27 (12)
100 10,695 44 -- 9.45 5
0 10,651 9.39
(100) 10,723 72 1 9.43 4
(200) 11,169 519 5 9.77 37
(300) 12,241 1,591 15 10.58 119
(400) 13,380 2,729 26 11.43 204
</TABLE>
(footnotes on following page)
28
<PAGE>
- -------------
(1) Represents the increase (decrease) of the estimated net portfolio value at
the indicated change in interest rates compared to the net portfolio value
assuming no change in interest rates.
(2) Calculated as the estimated net portfolio value divided by the portfolio
value of total assets.
(3) Calculated as the increase (decrease) of the net portfolio value ratio
assuming the indicated change in interest rates over the estimated net
portfolio value ratio assuming no change in interest rates.
This table illustrates, for example, that at December 31, 1998 an
instantaneous 200 basis point increase in market interest rates would reduce
Alaska Federal's net portfolio value by approximately $193,000, or (2)%, and an
instantaneous 200 basis point decrease in market interest rates would increase
Alaska Federal's net portfolio value by approximately $519,000 or 5%.
The following summarizes key exposure measures for the dates indicated.
They measure the change in net portfolio value ratio for a 200 basis point
adverse change in interest rates.
<TABLE>
<CAPTION>
December 31, September 30, December 31,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pre-shock net portfolio value ratio 9.39% 10.31% 10.16%
Post-shock net portfolio value ratio 9.27 10.27 7.96
Decline in net portfolio value ratio 12 bp 4 bp 36 bp
</TABLE>
The Office of Thrift Supervision uses certain assumptions in assessing
the interest rate risk of savings associations. These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
Alaska Federal's primary sources of funds are deposits and proceeds
from principal and interest payments on loans and mortgage-backed securities,
and Federal Home Loan Bank of Seattle advances. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The primary investing activity of Alaska Federal is the origination of
one- to four-family mortgage loans. During the years ended December 31, 1998 and
1997, Alaska Federal originated $27.9 million and $13.6 million of these loans,
respectively. However, Alaska Federal increased significantly its originations
of commercial business loans, land loans and multi-family real estate loans.
Between December 31, 1997 and 1998, commercial business loans increased by $1.7
million (64.0%), land loans increased by $1.5 million (137.0%), and multi-family
real estate loans increased by $200,000 (9.0%). See "Risk Factors -- Alaska
Federal's Recent Growth in Commercial Business and Consumer Lending Poses
Greater Risks Than Residential Lending" and "Business of Alaska Federal --
Lending Activities." Other investing activities during these periods include the
purchase of $6.0 million in callable
29
<PAGE>
agency securities in 1998. There were no purchases of investment securities in
1997. Principal repayments on loans, mortgage-backed securities and deposits
were the primary means for funding these activities.
Alaska Federal must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. Alaska Federal's sources of funds include deposits and
principal and interest payments from loans and mortgage-backed securities and
investments, and Federal Home Loan Bank of Seattle advances. During fiscal years
1998 and 1997, Alaska Federal used its sources of funds primarily to fund loan
commitments and to pay maturing savings certificates and deposit withdrawals. At
December 31, 1998, Alaska Federal had loan commitments (excluding loans in
process), including unused portions of commercial business lines of credit, of
$1.5 million.
At December 31, 1998, Alaska Federal had $290,000 of unrealized losses
on mortgage-backed securities classified as available-for-sale, which amount
represented 2.7% of the amortized cost basis ($10.7 million) of the related
securities. Movements in market interest rates will affect the unrealized gains
and losses in these securities. However, assuming that the securities are held
to their individual dates of maturity, even in periods of increasing market
interest rates, as the securities approach their dates of maturity, the
unrealized loss will begin to decrease and eventually be eliminated.
At December 31, 1998, certificates of deposit amounted to $36.8
million, or 36.1%, of Alaska Federal's total deposits, including $29.0 million
which were scheduled to mature by December 31, 1999. Historically, Alaska
Federal has been able to retain a significant amount of its deposits as they
mature. Management of Alaska Federal believes it has adequate resources to fund
all loan commitments by deposits and, if necessary, Federal Home Loan Bank of
Seattle advances and sale of mortgage loans and that it can adjust the offering
rates of savings certificates to retain deposits in changing interest rate
environments.
The Office of Thrift Supervision requires a savings institution to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4.0% of the average daily balance of its net
withdrawable deposits and short-term borrowings. In addition, short-term liquid
assets currently must constitute 1.0% of the sum of net withdrawable deposit
accounts plus short-term borrowings. Alaska Federal's actual short-and long-term
liquidity ratios at December 31, 1998 and 1997 were 32.6% and 21.9%,
respectively. Alaska Federal has consistently maintained liquidity levels in
excess of regulatory requirements.
Alaska Federal is required to maintain specific amounts of capital
pursuant to Office of Thrift Supervision requirements. As of December 31, 1998,
Alaska Federal was in compliance with all regulatory capital requirements which
were effective as of this date with tangible, core and risk-based capital ratios
of 6.85%, 6.85% and 12.35%, respectively. For a detailed discussion of existing,
future, proposed and certain to-be-proposed regulatory capital requirements, see
"Regulation -- Federal Regulation of Savings Associations - Capital
Requirements." See "Historical and Pro Forma Capital Compliance" for a numerical
presentation of Alaska Federal's historical and pro forma capital levels at
December 31, 1998 relative to regulatory requirements.
Year 2000 Readiness Disclosure
Alaska Federal is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be effected by the year 2000 issue.
The year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
30
<PAGE>
Ms. Lisa Bell, Alaska Federal's Chief Operating Officer, chairs Alaska
Federal's Y2K Task Force, which includes a cross-section of bank managers and
the internal auditor. The Audit Committee of the Board of Directors oversees the
Y2K readiness effort. Ms. Bell makes a quarterly progress report to the Board of
Directors. Management has been active in promoting customer confidence and
public education on Y2K issues. The Mayor of Juneau has appointed Mr. Craig E.
Dahl, President and Chief Executive Officer of Alaska Federal, to the City's Y2K
Task Force and Mr. Dahl has appeared on television and radio panel discussions.
The Y2K Task Force has developed and is implementing a comprehensive
plan to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and
concerns. This phase is complete.
2. Assessment - Develop a plan, identify and evaluate all vital
systems of Alaska Federal. This phase was completed as of June
30, 1998.
3. Renovation - Upgrade or replace any critical system that is
non-year 2000 compliant. This phase was substantially completed
as of December 31, 1998.
4. Validation - Testing all critical systems and third-party vendors
for year 2000 compliance. The validation phase was substantially
complete as of March 16, 1999 and will be complete by June 30,
1999. Alaska Federal has replaced all in-house equipment (teller
station equipment, etc.) with year 2000 compliant equipment. A
third-party service bureau processes all customer transactions
and has completed upgrades to its systems to be year 2000
compliant. Alaska Federal is relying on the results of proxy
testing by its third-party service bureau for certain date
sensitive testing. The proxy testing, which involved the use of
live client data, tested the results of transactions at various
test dates before and after the year 2000 date change and covered
all of the applications used by Alaska Federal. This proxy
testing was completed in December 1998. Alaska Federal, along
with 165 other financial institutions on the Vision System,
successfully conducted connectivity testing during December 1998.
Connectivity testing, which lasted approximately eight hours,
involved Alaska Federal and its third-party service bureau each
rolling forward their computer systems to January 3, 2000 so that
Alaska Federal could process its own data files under simulated
year 2000 conditions using all applications. Alaska Federal
participated actively in follow-up testing conducted on April 25
and April 28, 1999 to further increase management confidence in
the integrity of the Fiserve system. Results in the form of paper
output reports will be made available by Fiserve for review and
certification in early May. Other parties whose year 2000
compliance may effect Alaska Federal include the Federal Home
Loan Bank of Seattle, brokerage firms, the operator of Alaska
Federal's automated teller machine network and Alaska Federal's
pension plan administrator. These third parties have indicated
their compliance or intended compliance. Where it is possible to
do so, Alaska Federal has scheduled testing with these third
parties. Where testing is not possible, Alaska Federal will rely
on certifications from vendors and service providers.
5. Implementation - Placement of renovated systems on-line. As
Alaska Federal completes the validation phase, Alaska Federal
expects to determine any necessary remaining remedial actions and
provide for their implementation. Alaska Federal has already
implemented a new year 2000 compliant computerized teller system
and has verified the year 2000 compliance of its computer
hardware and other equipment containing embedded microprocessors.
Alaska Federal's plan provides for year 2000 readiness to be
completed by June 30, 1999.
Alaska Federal estimates its total cost to identify, fix and replace
computer equipment, software programs or other equipment containing embedded
microprocessors that were not year 2000 compliant, exclusive of internal
31
<PAGE>
labor costs to be $600,000, of which $211,000 has been incurred as of December
31, 1998. Alaska Federal charges system maintenance or modification costs to
expense as incurred, but capitalizes and amortizes the cost of new hardware,
software or other equipment over their estimated useful lives. Alaska Federal
does not separately track the internal costs and time that its own employees
spend on year 2000 issues, which are principally payroll costs.
Because Alaska Federal depends substantially on its computer systems
and those of third parties, the failure of these systems to be year 2000
compliant could cause substantial disruption of Alaska Federal's business and
could have a material adverse financial impact on Alaska Federal. Failure to
resolve year 2000 issues presents the following risks to Alaska Federal: (1)
Alaska Federal could lose customers to other financial institutions, resulting
in a loss of revenue, if Alaska Federal's third party service bureau is unable
to properly process customer transactions; (2) governmental agencies, such as
the Federal Home Loan Bank of Seattle, and correspondent institutions could fail
to provide funds to Alaska Federal, which could materially impair Alaska
Federal's liquidity and affect Alaska Federal's ability to fund loans and
deposit withdrawals; (3) concern on the part of depositors that year 2000 issues
could impair access to their deposit account balances could result in Alaska
Federal experiencing deposit outflows prior to December 31, 1999; and (4) Alaska
Federal could incur increased personnel costs if additional staff is required to
perform functions that inoperative systems would have otherwise performed.
Alaska Federal has developed a Y2K Contingency Master Plan to minimize
disruption of service and risk of loss from safety and soundness, profitability
and customer confidence concerns. The Contingency Master Plan is further defined
in two specific types of contingency plans: the Business Resumption Plan and the
Remediation Contingency Plan.
The Business Resumption Contingency Plan addresses the actions Alaska
Federal would take if core business processes, such as paying and receiving,
cannot be carried out in the normal manner through the century date change due
to system or vendor failure. Alaska Federal's Business Resumption Contingency
Plan follows an industry-recognized four phase approach:
o Organization Planning
o Business Impact Analysis
o Contingency Planning
o Validation
The first two phases are complete and the contingency planning and
validation phases will be complete by June 30, 1999. The Continuity Control
Group, which is comprised of members of the Y2K Task Force and the existing
Disaster Recovery Control Group, has identified the interdependency between the
six critical systems and the four core business processes, and has completed a
risk assessment of possible failure scenarios. An individual business resumption
plan has been drafted for each core business process under every failure
scenario rated medium or high risk.
Alaska Federal has developed a Remediation Contingency Plan, which will
be implemented in the event that a critical system will not meet regulatory
deadlines for renovation, validation or implementation. Management is confident
that it will not need to implement the Remediation Contingency Plan, as all
critical systems have been renovated, validated and implemented within required
time frames.
Management believes that it is not possible to estimate the potential
lost revenue due to the year 2000 issue, as the extent and longevity of any
potential problem cannot be predicted. Because substantially all of Alaska
Federal's loan portfolio consists of loans to individuals rather than commercial
enterprises, management believes that year 2000 issues will not impair the
ability of Alaska Federal's borrowers to repay their debt.
There can be no assurances that Alaska Federal's year 2000 plan will
effectively address the year 2000 issue, that Alaska Federal's estimates of the
timing and costs of completing the plan will ultimately be accurate or
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that the impact of any failure of Alaska Federal or its third-party vendors and
service providers to be year 2000 compliant will not have a material adverse
effect on Alaska Federal's business, financial condition or results of
operations. However, management of Alaska Federal is confident of its ability to
complete the transition into the next century with minimal disruption of normal
service levels.
The Office of Thrift Supervision conducted a Y2K Examination on March
23, 1999. Management of Alaska Federal is satisfied with the results of this
examination.
Impact of Accounting Pronouncements and Regulatory Policies
Accounting For Stock-based Compensation. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
establishes financial accounting and reporting standards for stock-based
employee compensation plans. This statement encourages all entities to adopt a
new method of accounting to measure compensation cost of all employee stock
compensation plans based on the estimated fair value of the award at the date it
is granted (the fair value based method). Companies may, however, continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting method must disclose in a footnote to the financial statements pro
forma net income and, if presented, earnings per share, as if this statement had
been adopted. The accounting requirements of this statement are effective for
fiscal years that begin after December 15, 1995; however, companies that elect
to continue to measure compensation using the intrinsic value based method are
required to disclose information for awards granted in their first fiscal year
beginning after December 15, 1994. Management expects to use the intrinsic value
based method upon consummation of the conversion and the adoption of stock based
benefit plans.
Accounting For Transfers And Servicing of Financial Assets And
Extinguishment of Liabilities. Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996, and is to be applied prospectively. This statement does not permit earlier
or retroactive application. Statement of Financial Accounting Standards No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. The standards are based on
consistent application of a financial-components approach that focuses on a
control period. Under the approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. Statement of
Financial Accounting Standards No. 125 provides consistent standards
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. Adoption of this statement on January 1, 1997 did not
have a material impact on Alaska Federal's financial position or results of
operations.
Earnings Per Share. Statement of Financial Accounting Standards No.
128, "Earnings Per Share," issued in February 1997, establishes standards for
computing and presenting earnings per share and applies to entities with
publicly-held common stock or potential common stock. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share and requires the dual presentation of basic and diluted earnings per
share on the face of the income statement. This statement is effective for
financial statements issued for periods ending after December 15, 1997 including
interim periods; earlier applications are not permitted. This statement requires
restatement of all prior period earnings per share data presented.
Disclosure of Information About Capital Structure. Statement of
Financial Accounting Standards No. 129, "Disclosure of Information About Capital
Structure," establishes standards for disclosing information about an
entity's capital structure, including information about securities, liquidation,
preference or preferred stock and redeemable stock. The statement is effective
for Alaska Federal's financial statements as of December 31, 1998. Alaska
Federal is prepared to comply with the additional reporting requirements of this
statement, and does not
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anticipate that the implementation of this statement will have a material impact
on Alaska Federal's consolidated financial statements.
Comprehensive Income. Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," issued in June 1997, establishes
standards for reporting and presenting of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. Statement of Financial
Accounting Standards No. 130 requires that companies classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial condition. Statement of Financial Accounting Standards No. 130 is
effective for fiscal years beginning after December 15, 1997. This statement
requires reclassification of financial statements for earlier periods provided
for comparative purposes. Alaska Federal adopted this Statement in 1998.
Disclosure About Segments. Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related Information,"
issued in June 1997, establishes standards for disclosure about operating
segments in annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement of
Financial Accounting Standards No. 131 supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." Statement of Financial Accounting Standards No. 131 became
effective for Alaska Federal's fiscal year ended December 31, 1998, and requires
that comparative information from earlier years be restated to conform to its
requirements. However, Alaska Federal has no separately identifiable operating
segments under this Statement.
Employers' Disclosures About Pensions And Other Postretirement
Benefits. Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," issued in
February 1998, standardizes disclosure requirements for pensions and other
postretirement benefits and requires additional disclosure on changes in benefit
obligations and fair values of plan assets in order to facilitate financial
analysis. Statement of Financial Accounting Standards No. 132 is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. The adoption of Statement of Financial Accounting Standards No. 132
will have no impact on Alaska Federal's results of operations and financial
condition as this statement relates to disclosure requirements. Alaska Federal
adopted Statement of Financial Accounting Standards No. 132 on January 1, 1998,
and its adoption did not significantly affect Alaska Federal's financial
reporting.
Accounting For Derivative Instruments And Hedging Activities. Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," issued in June 1998, standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under Statement of Financial Accounting Standards
No. 133, entities are required to carry all derivative instruments in the
statement of financial position at fair value. The accounting for changes in the
fair value (i.e., gains and losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, on the reasons for holding it. If certain conditions are met,
entities may elect to designate a derivative instrument as a hedge of exposures
to changes in fair value, cash flows or foreign currencies. See Notes 1 and 3 of
the Notes to Financial Statements included in the back of this prospectus for
further information. Statement of Financial Accounting Standards No. 133 is
effective for financial statements issued for periods beginning after June 15,
1999, although earlier adoption is permitted. Alaska Federal adopted this
Statement effective October 1, 1998. Its adoption did not result in a material
impact on its operations, financial position or liquidity.
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Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," issued in October 1998, amends
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities," and Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," for
years beginning after December 15, 1998. Currently, neither Alaska Pacific
Bancshares nor Alaska Federal conduct any mortgage banking activities.
Effect of Inflation and Changing Prices
The Financial Statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which generally require the measurement of financial position and operating
results in terms of historical dollars, without considering the changes in
relative purchasing power of money over time due to inflation. The primary
impact of inflation is reflected in the increased cost of Alaska Federal's
operations. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
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RECENT DEVELOPMENTS
The following tables set forth certain information concerning the
financial position and results of operations of Alaska Federal at the dates and
for the periods indicated. Information at March 31, 1999 and for the three
months ended March 31, 1999 and 1998 are unaudited, but, in the opinion of
management, contain all adjustments (none of which were other than normal
recurring entries) necessary for a fair presentation of the results of
operations for such periods. Information at December 31, 1998 and for the year
then ended was derived from the audited financial statements, included at the
back of this prospectus. The selected operating data for the three months ended
March 31, 1999 are not necessarily indicative of the results of operations for
the entire fiscal year. This information should be read in conjunction with the
Financial Statements and Notes thereto, included at the back of this prospectus.
At At
March 31, December 31,
1999 1998
---- ----
(Unaudited)
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets ..................................... $ 111,781 $ 110,806
Loans, net ....................................... 75,697 70,836
Loans held for sale .............................. 939 899
Allowance for loan losses ........................ (688) (674)
Investment securities available-for-sale ......... 17,332 18,176
Cash, due from banks, and interest-
bearing deposits with banks ................... 11,271 14,584
Deposits ......................................... 99,729 101,945
Federal Home Loan Bank of Seattle advances ....... 2,100 --
Total equity capital ............................. 7,311 7,250
Three Months
Ended March 31,
----------------------
1999 1998
---- ----
(Unaudited)
(In Thousands)
OPERATING DATA:
Interest income .............................. $1,989 $2,151
Interest expense ............................. 867 1,060
------ ------
Net interest income .......................... 1,122 1,091
Provision for loan losses .................... 15 15
------ ------
Net interest income after
provision for loan losses ................... 1,107 1,076
Noninterest income ........................... 160 226
Noninterest expense .......................... 1,214 1,198
Income before income tax ..................... 53 104
Income tax benefit ........................... -- --
------ ------
Net income ................................... $ 53 $ 104
====== ======
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Three Months
Ended March 31,
---------------------
1999 1998
---- ----
Number of:
Real estate loans outstanding ................. 724 720
Deposit accounts .............................. 12,605 12,508
Full service offices .......................... 6 6
At or For the
Three Months
Ended March 31,
--------------------
1999 1998
---- ----
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (1) ......................... 0.19% 0.36%
Return on average equity (2) ......................... 2.92 5.75
Interest rate spread (3) ............................. 4.14 3.76
Net interest margin (4) .............................. 4.10 3.78
Average interest-earning assets to
average interest-bearing liabilities ................ 107.23 106.75
Noninterest expense as a
percent of average assets ........................... 4.43 4.16
Asset Quality Ratios:
Nonaccrual and 90 days or more past
due loans as a percent of total loans, net ........ --% 0.43%
Nonperforming assets as a
percent of total assets ............................ 0.14 0.43
Allowance for losses as a percent of gross
loans receivable .................................... 0.90 1.00
Allowance for losses as a percent
of nonperforming loans .............................. -- 154.81
Net charge-offs to average
outstanding loans .................................. -- 0.01
Capital Ratios:
Total equity to assets ............................... 6.54 6.48
Average equity to average assets ..................... 6.63 6.27
- --------------
(1) Annualized net income divided by average total assets.
(2) Annualized net income divided by average equity capital.
(3) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(4) Annualized net interest income as a percentage of average interest-earning
assets.
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Regulatory Capital
The table below sets forth Alaska Federal's capital position relative
to its Office of Thrift Supervision capital requirements at the date indicated.
The definitions of the terms used in the table are those set forth in the Office
of Thrift Supervision capital regulations. See "Regulation -- Federal Regulation
of Savings Associations -- Capital Requirements."
At March 31, 1999
-----------------------------------------
Percent of Adjusted Total
Amount or Risk-Weighted Assets(1)
------ --------------------------
(In Thousands)
Tangible capital level ................ $7,601 6.87%
Tangible capital requirement .......... 1,660 1.50
------ -----
Excess ................................ $5,941 5.37%
====== =====
Core capital level .................... $7,601 6.87%
Core capital requirement .............. 3,321 3.00
------ -----
Excess ................................ $4,280 3.87%
====== =====
Risk-based capital level .............. $8,289 12.36%
Risk-based capital requirement ........ 5,363 8.00
------ -----
Excess ................................ $2,926 4.36%
====== =====
- ------------
(1) Based upon adjusted total assets for purposes of the tangible and core
capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement.
Non-Performing Assets and Delinquencies
Alaska Federal had no loans accounted for on a non-accrual basis at
March 31, 1999 or December 31, 1998. Classified loans at March 31, 1999 totaled
$756,000 compared to $773,000 at December 31, 1998. Foreclosed properties
amounted to $155,000 at March 31, 1999, compared to $311,000 at December 31,
1998. At March 31, 1999, Alaska Federal had no accruing loans that were
contractually past due 90 days or more and had no restructured loans.
The allowance for loan losses was $688,000 at March 31, 1999 compared
to $674,000 at December 31, 1998. Charge-offs totaled $1,000 for the three
months ended March 31, 1999, compared to $10,000 for the three months ended
March 31, 1998. There were no recoveries for the three months ended March 31,
1999 compared to $1,000 for the three months ended March 31, 1998.
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The following table sets forth the breakdown of the allowance for loan
losses by category at March 31, 1999.
Percent of
Loans in Each
Category to
Amount Total Loans
------ -----------
(In thousands)
Real estate loans:
Permanent:
One- to four-family ..................... $148 49.97%
Multi-family ............................ 14 3.04
Commercial .............................. 124 13.67
Land .................................... 33 3.66
Construction:
One- to four-family ..................... 8 1.91
Multi-family ............................ 2 0.07
Commercial .............................. 7 0.75
Commercial ................................ 90 8.04
Consumer:
Home equity .............................. 28 10.22
Boat ..................................... 65 7.15
Automobile ............................... 32 1.24
Other .................................... 7 0.28
Unallocated ............................... 130 --
---- ------
Total allowance for loan losses ......... $688 100.00%
==== ======
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
Total assets were $111.8 million at March 31, 1999 compared to $110.8
million at December 31, 1998. This increase resulted primarily from an increase
in loans, funded by Federal Home Loan Bank advances and reductions in short-term
investments and interest-earning deposits in banks.
Cash, due from banks, and interest-bearing deposits with banks were
$11.3 million at March 31, 1999 compared to $14.6 million at December 31, 1998.
Investment securities available-for-sale were $17.3 million at March 31, 1999
compared to $18.2 million at December 31, 1998. These decreases primarily
reflect the decrease in liquidity as a result of increased loans and decreased
deposits.
The Office of Thrift Supervision requires a savings institution to
maintain an average daily balance of liquid assets, which are cash and eligible
investments, equal to at least 4.0% of the average daily balance of its net
withdrawable deposits and short-term borrowings. Alaska Federal's actual
liquidity ratios were 29.2% and 32.6% at March 31, 1999 and December 31, 1998,
respectively. Alaska Federal has consistently maintained liquidity levels in
excess of regulatory requirements.
Loans, net, were $75.7 million at March 31, 1999 compared to $70.8
million at December 31, 1998, a 6.9% increase. This increase resulted primarily
from increased originations of both mortgage and nonmortgage loans, as well as
retaining the majority of mortgage loans originated during the quarter, rather
than selling them in the secondary market.
Deposits were $99.7 million at March 31, 1999 compared to $101.9
million at December 31, 1998, a 2.2% decrease. A moderate decline in deposit
levels is considered normal during the first quarter of the year due to seasonal
fluctuations in the local economy.
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Advances from the Federal Home Loan Bank of Seattle increased to $2.1
million at March 31, 1999 from none outstanding at December 31, 1998 to fund
loan demand.
Net income of $53,000 and a decrease in unrealized losses on securities
of $8,000 for the three months ended March 31, 1999 resulted in comprehensive
income of $61,000, which increased total equity to $7.3 million at March 31,
1999.
Comparison of Operating Results for the Three Months Ended March 31, 1999 and
1998
General. During the three months ended March 31, 1999, Alaska Federal
began to reverse a decline in total loans by increasing loan originations and by
retaining a substantial portion of mortgage loan production. Mortgage and
nonmortgage loans are added to the portfolio to increase net interest income,
while maintaining interest-rate risk at acceptable levels.
Net Income. Net income for the three months ended March 31, 1999 was
$53,000 compared to $104,000 for the three months ended March 31, 1998, a
decrease of $51,000. The decrease resulted primarily from a decrease in
noninterest income, particularly in gains on sale of mortgage loans.
Net Interest Income. Net interest income increased 2.8% to $1.12
million for the first quarter of 1999, compared with $1.09 million for the same
period in 1998. In comparing the two periods, both interest income and interest
expense were lower in 1999 due to a lower interest rate level in general, but a
moderately higher long term rate which tended to reduce deposit rates to a
relatively greater extent than loan and investment rates.
Provision for Loan Losses. The provision for loan losses remained level
at $15,000 for the three months ended March 31, 1999, unchanged from the same
period in 1998.
Noninterest Income. Noninterest income declined 29.0% to $160,000 in
the three months ended March 31, 1999 compared with $226,000 for the three
months ended March 31, 1998. The decline resulted primarily from a $70,000
decrease in gain on sale of mortgage loans. The majority of mortgage loans
originated during the first quarter of 1999 were retained in the loan portfolio,
rather than being sold in the secondary market, as was the case during the first
quarter of 1998. Despite selling mortgage loans, and retaining the related
servicing rights, during much of 1998, mortgage servicing income has declined
gradually due to rapid prepayments in the servicing portfolio in 1998, as well
as increasing amortization expense on capitalized mortgage servicing rights. As
a result, mortgage servicing income declined to $52,000 for the first quarter of
1999 compared with $59,000 in the first quarter of 1998.
Offsetting the declines in mortgage-related income was a 14% increase
in service charges on deposit accounts and other service charges and fees, which
amounted to $102,000 in the first quarter of 1999, compared to $90,000 in the
first quarter of 1998. This increase resulted from increases in both the number
of accounts and the rates charged.
Noninterest Expenses. Noninterest expense remained approximately
unchanged at $1.2 million for each of the three month periods ended March 31,
1999 and 1998. Moderate increases in compensation and benefits (2.2%), data
processing charges (3.0%) and other expenses (1.8%) were partially offset by an
11.2% decrease in marketing and related expenses.
Income Taxes. No income tax expense was recognized for each of the
three month periods ended March 31, 1999 or 1998 due to net operating loss
carryforwards, which expire in various years beginning in 2002 and through 2012.
Other. On April 16, 1999, Alaska Federal's Board of Directors approved
the opening of a new office location in leased premises in the Juneau area,
including the expenditure of approximately $230,000 for equipment and leasehold
improvements.
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BUSINESS OF ALASKA PACIFIC BANCSHARES
General
Alaska Federal directed the organization of Alaska Pacific Bancshares
as an Alaska business corporation on March 19, 1999 for the purpose of becoming
a holding company for Alaska Federal upon completion of the conversion. As a
result of the conversion, Alaska Federal will be a wholly owned subsidiary of
Alaska Pacific Bancshares and Alaska Pacific Bancshares will own all of the
issued and outstanding capital stock of Alaska Federal.
Business
Prior to the conversion, Alaska Pacific Bancshares has not and will not
engage in any significant activities other than that of an organizational
nature. Upon completion of the conversion, Alaska Pacific Bancshares' sole
business activity will be the ownership of the outstanding capital stock of
Alaska Federal. In the future, Alaska Pacific Bancshares may acquire or organize
other operating subsidiaries, although there are no current plans, arrangements,
agreements or understandings, written or oral, to do so.
Initially, Alaska Pacific Bancshares will neither own nor lease any
property but will instead use the premises, equipment and furniture of Alaska
Federal with the payment of appropriate rental fees, as required by applicable
law.
Since Alaska Pacific Bancshares will only hold the outstanding capital
stock of Alaska Federal, the competitive conditions applicable to Alaska Pacific
Bancshares will be the same as those confronting Alaska Federal. See "Business
of Alaska Federal -- Competition."
BUSINESS OF ALASKA FEDERAL
General
Alaska Federal was founded as "Alaska Federal Savings and Loan
Association of Juneau" in 1935 and changed its name to "Alaska Federal Savings
Bank" in October 1993. Alaska Federal is regulated by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. The Federal Deposit
Insurance Corporation under the Savings Association Insurance Fund currently
insures Alaska Federal's deposits, which have been federally insured since 1937.
Alaska Federal has been a member of the Federal Home Loan Bank System since
1937.
Alaska Federal experienced steady growth, especially during the 1980s
when the entire state of Alaska was enjoying the benefits of the distribution of
oil based revenues. In the mid-1980s the price of oil plummeted which caused a
severe recession in Alaska. As a result, Alaska Federal suffered substantial
losses on many of its loans and investments which had been originated during the
1970s and early 1980s. From 1985 to 1993 there was a significant change in the
balance sheet and operational structure of Alaska Federal. The branch offices in
Valdez and Palmer which had originally been opened in connection with the
business boom brought on by the construction of the Alaska pipeline were closed
as the economies of these cities did not sustain their growth after completion
of the project. Assets declined and the concentration of earning assets shifted
from loans to investments and cash. Alaska Federal faced a difficult time
balancing the need for earnings and capital against long term operating income.
As a result, Alaska Federal chose to sell a significant amount of its loan
portfolio in the secondary market in exchange for the gain on sale of loans. The
gain that was realized on the loans enabled Alaska Federal to continue to
operate through a difficult economic period but this gain resulted in
significantly reduced income from earning assets as the funds were reinvested in
lower yielding assets.
Many of the losses incurred by Alaska Federal during this period were a
result of the economy and were further aggravated by commercial real estate and
business loans that were poorly underwritten, were secured by collateral outside
of Alaska Federal's primary market area and were not properly monitored for
credit weakness. The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 mandated strict new capital requirements and placed many
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<PAGE>
other restrictions on lending and other aspects of Alaska Federal's operations.
The combined effects of the recession, poor underwriting decisions and stringent
regulations caused many banks and thrift institutions to fail. Alaska Federal is
one of the two surviving thrift institutions in the State of Alaska and one of
only two remaining financial institutions headquartered in Southeast Alaska.
At the same time Alaska Federal was experiencing these operating
problems, it also experienced a series of management and employee problems. A
lack of system and internal controls, untrained staff, management conflict and a
series of personnel related litigation resulted in a complete change in senior
and middle management between mid- 1992 through 1993. These operational and
employee problems occupied a significant amount of management's time between
1993 and 1996.
The result of these operating and employee problems for Alaska Federal
was the execution of a Supervisory Agreement with the Office of Thrift
Supervision on July 15, 1991, which was updated on June 20, 1995. The
Supervisory Agreement required Alaska Federal to, among other things:
(4) develop a business plan that covers: (a) growth of assets; (b)
improvement of core profitability; (c) improvement of efficiency
and employee turnover; and (d) effective management of the risks
associated with current and proposed asset concentrations.
(5) develop an internal asset review policy;
(6) develop an internal audit plan; and
(7) maintain certain minimum capital levels.
Management's efforts to reverse the trend of Alaska Federal's shrinking
loan portfolio started in 1994. Alaska Federal's increase in a loan to deposit
ratio of approximately 45% in 1993 to 70% at December 31, 1998 reflects these
efforts. During this period of recovery, management's efforts shifted from
managing specific operational problems to developing strategic initiatives for
Alaska Federal. These strategic initiatives included the diversification into
consumer and selected commercial business lending, which has provided Alaska
Federal with increased yields, decreased interest rate risk and provided access
to additional lending opportunities. In addition, Alaska Federal revised its
written policies and procedures and developed the business plan required by the
Office of Thrift Supervision. As a result of these remedial actions, on August
15, 1996 the Supervisory Agreement was terminated by the Office of Thrift
Supervision.
Alaska Federal operates, and intends to continue to operate, as a
community oriented financial institution and is devoted to serving the needs of
its customers. Alaska Federal's business consists primarily of attracting retail
deposits from the general public and using those funds to originate one- to
four-family mortgage loans. To a lesser but growing extent, Alaska Federal also
originates commercial business loans, consumer loans, residential construction
loans and commercial real estate loans. See "-- Lending Activities."
Market Area
Alaska Federal's primary market area includes the communities of
Juneau, Ketchikan, Sitka and Wrangell. Alaska Federal's market area covers 500
miles along the Pacific Ocean coastline from Yakutat in the north to Prince of
Wales Island in the south, and encompasses approximately 35,000 square miles of
land. The region is home to approximately 74,000 residents who reside in 11
communities. This area has similar economic characteristics, however, there is
diversity in some unique industries. All of Juneau, Ketchikan, Sitka and
Wrangell offer a number of recreational activities, which are popular tourist
attractions.
Alaska Federal's market area exhibits a range of historical and
projected demographic trends, which reflect the impact of the various economic
developments in these areas. These trends include population and household
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increases, employment and construction, which are discussed below and based on
information provided by the U.S. Census:
o Population growth. From 1990 to 1998, the community of Juneau
reported a gain in population of 1.6%. During the same period,
the communities of Ketchikan, Sitka and Wrangell each reported a
loss in population of 0.3%, 0.2% and 0.2%, respectively. The
State of Alaska experienced an increase of 1.4% in population
during this period, which is higher than the 1.0% increase
reported by the United States.
o Employment. At November 1998, the communities of Juneau,
Ketchikan, Sitka, and Wrangell reported unemployment rates of
5.2%, 6.2%, 4.2% and 6.9%, respectively. Each community
experienced a decrease from its unemployment rate reported for
the same period during the prior year, as did the State of Alaska
and other communities in the State of Alaska. The unemployment
rates for the State of Alaska and for the United States at
November 1998 were 5.4% and 4.1%, respectively. The decrease in
unemployment rates in Alaska Federal's market area reflects the
economic recovery experienced throughout the State of Alaska.
o Construction. During 1996, the communities of Juneau, Sitka and
Ketchikan experienced a housing shortage. During 1998, all three
communities experienced an increase in residential and commercial
construction, which is indicative of the lower interest rate
environment and reflects a recovery from the timber mill
closures.
Additional information regarding each of the communities in Alaska
Federal's market area is provided below:
Alaska Federal's main office and one full service branch office are
located in Juneau (population approximately 30,684), which is the Capital of
Alaska. The primary economic sources in Juneau are government, tourism, support
services for logging and fish processing, mining and fishing. Historically,
Juneau had an active mining industry (primarily gold and silver), however,
mining employment has declined as a result of environmental pressures and a
decline in the price of gold. According to information provided by the Alaska
Department of Labor, the largest employers in Juneau are the state, local and
federal governments, Bartlett Regional Hospital and the University of Alaska.
The Juneau unemployment rate for November 1998 was 5.2%.
Two full service offices of Alaska Federal are located in Ketchikan
(population approximately 14,231). Ketchikan is an industrial center and a major
port of entry in Southeast Alaska with a diverse economy. A large fishing fleet,
fish processing facilities, timber and wood products manufacturing, and tourism
are Ketchikan's main economic support. In 1997, the Ketchikan Pulp Corporation's
pulp mill closed when its 50-year contract with the U.S. Forest Service for
timber was canceled, which resulted in the loss of 320 jobs. To ease the affects
of the shut-down, the U.S. Forest Service is allocating timber for the sawmill
to continue operations until 2000. The largest employers in the Ketchikan
Gateway Borough include the city and state government, Ketchikan General
Hospital, the Ketchikan Gateway School District, the Ketchikan Pulp Mill and the
federal government. The Ketchikan unemployment rate for November 1998 was 6.2%.
One full service office of Alaska Federal is located in Sitka
(population approximately 8,779) located on the west coast of Baranof Island
fronting the Pacific Ocean, on Sitka Sound. The primary economic sources in
Sitka are fishing, fish processing, tourism, government, transportation, retail
and health care services. Sitka is a port of call for many cruise ships each
summer. The largest employers in Sitka include the Southeast Alaska Regional
Health Corp., the Sitka Borough School District, city, state and federal
governments and the Sitka Community Hospital. Other Sitka employers include the
Alaska State Trooper Training Academy and numerous businesses involved in
commercial and sport fishing and tourism. The Sitka unemployment rate for
November 1998 was 4.2%.
43
<PAGE>
Alaska Federal also has a full service office located in Wrangell
(population approximately 2,589). Wrangell's economy is based on commercial
fishing, fish processing and timber from the Tongass National Forest. In
connection with its fishing industry, a dive fishery is also under development.
There has also been renewed gold mining activities. In 1994, Wrangell
experienced a downturn in its economy with the closing of the Alaska Pulp Corp.
sawmill, which forced approximately 20% of the workforce into other employment.
Silver Bay Logging bought the mill and reopened it in April 1998. Other Wrangell
employers include city, state and federal government, Wrangell Public Schools,
Wrangell Medical Center and Wrangell Fisheries, Inc.. The Wrangell unemployment
rate for November 1998 was 6.9%.
The State of Alaska maintains a "Permanent Fund" program to provide for
long-term stability of the state funded by oil revenues. The Permanent Fund pays
each resident of the state just for living in Alaska. In 1998, each resident
received a payment of $1,540 to help offset the high cost of living in Alaska.
The 1999 Alaska Legislature is addressing, for the first time, a substantial
funding deficit caused by lower than anticipated oil prices but it is
politically unwilling to utilize the Permanent Fund to fund the deficit,
preferring instead to discuss instituting a state income tax along with the use
of some permanent fund monies.
Competition
Alaska Federal faces strong competition in its primary market area for
the attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits has historically
come from commercial banks and credit unions operating in its primary market
area. Alaska Federal competes with four commercial banks including one
Southeast Alaska based community bank and three statewide regional banks and six
credit unions in its primary market area. Particularly in times of high interest
rates, Alaska Federal has faced additional significant competition for
investors' funds from short-term money market securities, other corporate and
government securities and credit unions. Alaska Federal's competition for loans
also comes from mortgage bankers. This competition for deposits and the
origination of loans may limit Alaska Federal's future growth.
Lending Activities
General. At December 31, 1998, Alaska Federal's total loan portfolio
amounted to $71.5 million, or 64.5%, of total assets at that date. Alaska
Federal has traditionally concentrated its lending activities on conventional
first mortgage loans secured by one- to four-family properties, with these loans
amounting to $34.3 million, or 47.9% of the total loan portfolio at December 31,
1998. In addition, Alaska Federal originates construction loans, commercial real
estate loans, land loans, consumer loans and commercial business loans. A
substantial portion of Alaska Federal's loan portfolio is secured by real
estate, either as primary or secondary collateral, located in its primary market
area.
Loans Made by Alaska Federal in Excess of New Limitations. Office of
Thrift Supervision regulations restrict the amount that savings associations may
loan to one borrower. At December 31, 1998, Alaska Federal had two loans that
exceed its current loan-to-one borrower limitation. These loans exceed the
loan-to-one borrower limitation because this limit was reduced as the result of
the passage of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989. The loans are considered "non-conforming" from a regulatory perspective
because they were originally made in conformance with the loan-to-one borrower
limit but due to the regulatory reduction, are now in excess of the limit. As
"non-conforming" loans, Alaska Federal must make reasonable efforts when
renewing or modifying these loans to bring them into conformance with the
current regulatory limits. The current loan-to-one borrower limit is 15% of an
institution's unimpaired capital and surplus, or for Alaska Federal,
approximately $1.2 million at December 31, 1998. All of these loans were
performing in accordance with their terms on that date.
44
<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition
of Alaska Federal's loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1998 1997
------------------------ ---------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Permanent:
One- to four-family................... $ 34,252 47.90% $ 40,891 51.45%
Multi-family.......................... 2,485 3.48 2,281 2.87
Commercial nonresidential............. 10,683 14.94 13,751 17.30
Land.................................... 2,589 3.62 1,093 1.38
Construction:
One- to four-family................... 957 1.34 1,513 1.90
Multi-family.......................... 1,079 1.51 1,980 2.49
Commercial nonresidential............. 439 0.61 -- --
Commercial business ..................... 4,282 5.99 2,618 3.29
Consumer:
Home equity........................... 8,401 11.75 8,435 10.61
Boat.................................. 5,058 7.07 5,547 6.98
Automobile............................ 978 1.37 959 1.21
Other................................. 307 0.42 403 0.51
---------- -------- --------- --------
Total loans....................... $ 71,510 100.00% $ 79,471 100.00%
======== ====== ======== ======
Less:
Allowance for loan losses............. $ 674 $ 751
---------- ----------
Loans, net............................. $70,836 $78,720
======= =======
</TABLE>
One- to Four-Family Real Estate Lending. Historically, Alaska Federal
has concentrated its lending activities on the origination of loans secured by
first mortgages on existing one- to four-family residences located in its
primary market area. At December 31, 1998, $34.3 million, or 47.9% of Alaska
Federal's total loan portfolio consisted of these loans. Alaska Federal
originated $27.9 million and $13.6 million of one- to four-family residential
mortgage loans during the years ended December 31, 1998 and 1997, respectively.
Generally, Alaska Federal's fixed-rate one- to- four family mortgage
loans have maturities of 15 and 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, Alaska Federal originates these loans under
terms, conditions and documentation which permit them to be sold to U.S.
Government sponsored agencies such as the Federal Home Loan Mortgage Corporation
and the Alaska Housing Finance Corporation, a state agency that provides
affordable housing programs. Alaska Federal's fixed-rate loans customarily
include "due on sale" clauses, which gives Alaska Federal the right to declare a
loan immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not paid.
Alaska Federal offers adjustable rate mortgage loans at rates and terms
competitive with market conditions. At December 31, 1998, $5.5 million, or
15.7%, of Alaska Federal's one- to four-family residential loan portfolio
consisted of adjustable rate mortgage loans. Alaska Federal retains these
adjustable rate mortgage loans primarily for its portfolio. Alaska Federal
currently originates adjustable rate mortgage loans that adjust annually based
on the weekly average yield of U.S. Treasury securities adjusted to a constant
maturity of one year, plus 2.5%, with annual and life time interest rate
adjustment limits of 2% to 6%, respectively. Alaska Federal offers these
adjustable rate mortgage
45
<PAGE>
loans at an initial below market "teaser" rate. Alaska Federal qualifies
borrowers, however, at the fully indexed rate. Alaska Federal's adjustable rate
mortgages are typically based on a 15 or 30-year amortization schedule. Alaska
Federal's adjustable rate mortgage loans do not provide for negative
amortization.
Borrower demand for adjustable rate mortgage loans versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectations of
changes in the level of interest rates and the difference between the initial
interest rates and fees charged for each type of loan. The relative amount of
fixed-rate mortgage loans and adjustable rate mortgage loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment. In general, there has been reduced demand for
adjustable rate mortgage loans in Alaska Federal's primary market area.
Alaska Federal also originates one- to four-family mortgage loans under
Federal Home Loan Mortgage Corporation, Federal Housing Administration, Veterans
Administration, and Alaska Housing Finance Corporation programs. Alaska Federal
generally sells these loans in the secondary market, servicing retained, which
means Alaska Federal retains the right to collect principal and interest
payments and forward it to the purchaser of the loan, maintain escrow accounts
for payment of taxes and insurance and perform other loan administration
functions. See "-- Loan Originations, Sales and Purchases."
Alaska Federal requires title insurance insuring the status of its lien
on all loans where real estate is the primary source of security. Alaska Federal
also requires that fire and casualty insurance be maintained in an amount at
least equal to the outstanding loan balance and flood insurance where
appropriate.
One- to four-family residential mortgage loans may be made up to 80% of
the appraised value of the security property without private mortgage insurance.
Pursuant to underwriting guidelines adopted by the Board of Directors, Alaska
Federal can lend up to 97% of the appraised value of the property securing a
one- to four-family residential loan; however, Alaska Federal generally obtains
private mortgage insurance on the portion of the principal amount that exceeds
80% of the appraised value of the security property.
To a lesser extent, Alaska Federal has recently begun to originate
loans secured by non-owner occupied residential properties that are sold to the
Federal Home Loan Mortgage Corporation.
Land Lending. Alaska Federal also originates loans secured by first
mortgages on residential building lots on which the borrower proposes to
construct a primary residence. These loans generally have terms of up to five
years and are fixed-rate, fully amortizing loans. Alaska Federal also originates
commercial land loans, which have floating rates that adjust annually. At
December 31, 1998 and 1997, these loans amounted to $2.6 million and $1.1
million, respectively.
Loans secured by undeveloped land or improved lots involve greater
risks than one- to four-family residential mortgage loans because such loans are
more difficult to evaluate. If the estimate of value proves to be inaccurate, in
the event of default and foreclosure Alaska Federal may be confronted with a
property the value of which is insufficient to assure full repayment.
Construction Lending. At December 31, 1998, construction loans amounted
to $2.5 million, or 3.5%, of total loans, all of which were secured by
properties located in Alaska Federal's primary market area.
Construction loans are made for a term of up to 12 months. Construction
loans are made at adjustable rates based on the prime lending rate with interest
payable monthly. Alaska Federal originates construction loans to individuals who
have a contract with a builder for the construction of their residence. Alaska
Federal typically requires that permanent financing with Alaska Federal or some
other lender be in place prior to closing any construction loan to an
individual.
46
<PAGE>
Construction loans to builders are typically made with a maximum
loan-to-value ratio of the lesser of 80% of the cost of construction or 75% of
the appraised value. Construction loans to individuals are typically made in
connection with the granting of the permanent financing on the property. Alaska
Federal generally underwrites these loans, which typically convert to a fully
amortizing adjustable- or fixed-rate loan at the end of the construction term,
according to the underwriting standards for a permanent loan.
Prior to making a commitment to fund a construction loan, Alaska
Federal requires an appraisal of the property by an independent state-licensed
and qualified appraiser approved by the Board of Directors. Alaska Federal's
staff also reviews and inspects projects prior to disbursement of funds during
the term of the construction loan. Loan proceeds are generally disbursed after
inspection of the project.
Although construction lending affords Alaska Federal the opportunity to
achieve higher interest rates and fees with shorter terms to maturity than one-
to four-family mortgage lending, construction lending is generally considered to
involve a higher degree of risk than one- to four-family mortgage lending. It is
more difficult to evaluate construction loans than permanent loans. At the time
the loan is made, the value of the collateral securing the loan must be
estimated based on the projected selling price at the time the residence is
completed, typically six to 12 months later, and on estimated building and other
costs (including interest costs). Changes in the demand for new housing in the
area and higher-than-anticipated building costs may cause actual results to vary
significantly from those estimated. Accordingly, Alaska Federal may be
confronted, at the time the residence is completed, with a loan balance
exceeding the value of the collateral. Because construction loans require active
monitoring of the building process, including cost comparisons and on-site
inspections, these loans are more difficult and costly to monitor. Increases in
market rates of interest may have a more pronounced effect on construction loans
by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the
overall demand for new housing. The fact that in-process homes are difficult to
sell and typically must be completed in order to be successfully sold also
complicates the process of working out problem construction loans. This may
require Alaska Federal to advance additional funds and/or contract with another
builder to complete the residence. Furthermore, in the case of speculative
construction loans, there is the added risk associated with identifying an
end-purchaser for the finished home.
Alaska Federal has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending to primarily residential
properties, and limiting its speculative loans to a small number of well-known
local builders.
Multi-Family and Commercial Real Estate Lending. The multi-family
residential loan portfolio consists primarily of loans secured by small
apartment buildings and the commercial real estate loan portfolio consists
primarily of loans secured by retail, office, warehouse, mini-storage facilities
and other improved commercial properties. These loans generally range in size
from $200,000 to $400,000 and the largest loan totalled $1.5 million at December
31, 1998 and was performing in accordance with its terms. At December 31, 1998,
Alaska Federal had $2.5 million of multi-family residential and $10.7 million of
commercial real estate loans, which amounted to 3.5% and 14.9%, respectively, of
the total loan portfolio at this date. Multi-family and commercial real estate
loans are generally underwritten with loan-to-value ratios of up to 75% of the
lesser of the appraised value or the purchase price of the property. These loans
generally are made at the prime rate for 15 to 20 year terms, with adjustment
periods of one, three or five years and they adjust at a rate equal to this
prime rate plus a negotiated margin of 1% to 3%. Because of the inherently
greater risk involved in this type of lending, substantially all of Alaska
Federal's multi-family and commercial real estate loans are secured by property
located within Alaska Federal's primary market area.
Alaska Federal is also an approved lender under the Alaska Housing
Finance Corp. Multi-Family Participation Program, which was introduced in 1998.
The Alaska Housing Finance Corp. Multi-Family Participation Program provides for
up to 80% of the loan amount, which allows Alaska Federal to pursue larger
lending opportunities while mitigating its risk.
47
<PAGE>
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential property
lending. Multi-family residential and commercial real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on these loans typically is dependent on the successful
operation of the real estate project. Supply and demand conditions in the market
for office, retail and residential space can significantly affect these risks,
and, as such, may be subject to a greater extent to adverse conditions in the
economy generally. To minimize these risks, Alaska Federal generally only makes
loans within its market area. Alaska Federal reviews all commercial real estate
loans in excess of $250,000 on an annual basis to ensure that the loan meets
current underwriting standards.
Commercial Business Lending. At December 31, 1998, commercial business
loans amounted to $4.3 million, or 6.0% of total loans, compared to $2.6
million, or 3.3% of total loans, at December 31, 1997.
Alaska Federal originates commercial business loans to small sized
businesses in its primary market area. Commercial business loans are generally
made to finance the purchase of seasonal inventory needs, new or used equipment,
and for short-term working capital. Security for these loans generally includes
equipment, boats, accounts receivable and inventory, although commercial
business loans are sometimes granted on an unsecured basis. Commercial business
loans are made for terms of seven years or less, depending on the purpose of the
loan and the collateral, with loans to finance operating lines made for one year
or less renewed annually at an interest rate based on the prime rate plus a
margin of between 1 and 2.5 percentage points.
During the year ended December 31, 1998, Alaska Federal increased its
use of resources for loan guarantees through the Small Business Administration,
the U.S. Department of Agriculture and the Alaska Industrial Development and
Export Authority. Alaska Federal has also worked with local municipal agencies,
such as the Juneau Economic Development Council and the Cities of Sitka and
Ketchikan in exploring participation or guaranty programs in each of these
cities. At December 31, 1998, Alaska Federal had $1.4 million in loans
originated under these programs. Generally, Alaska Federal receives guarantees
of between 75% and 90% of the loan amount. In addition, Alaska Federal has
retained portions of four commercial loans originated through participation
programs with Alaska Industrial Development and Export Authority, Alaska
Electrical Pension Trust, and Alaska Housing Finance Corporation. As of December
31, 1998, Alaska Federal's portion of these loans totalled $700,000.
Alaska Federal also makes commercial loans secured by commercial
charter boats. These loans have ten year terms with an interest rate that
adjusts based on the prime interest rate. Alaska Federal also makes loans
secured by commercial fishing boats that have ten year terms and are based on
the prime interest rate. In connection with the loans on these boats, Alaska
Federal receives a ships preferred marine mortgage to protect its interest in
the collateral. Alaska Federal has also granted flooring lines to two boat
dealers for the purchase of boats and other related marine equipment. At
December 31, 1998 Alaska Federal had $2.2 million of commercial business loans
secured by boats.
At December 31, 1998, the largest commercial business loan was a
$500,000 line of credit with an outstanding balance of $300,000, was secured by
stock, and was performing according to its terms.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
often have equipment, inventory, accounts receivable or other business assets as
collateral, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.
48
<PAGE>
Consumer Lending. At December 31, 1998, consumer loans totaled $14.7
million, or 20.6%, of total loans, compared to $15.3 million, or 19.2%, of total
loans, at December 31, 1997. Over the last five years, Alaska Federal has made a
concerted effort to increase consumer lending volume, with particular emphasis
on home equity loans, boat loans and automobile loans. Total consumer loans
increased by approximately $12.0 million, or 357%, between June 30, 1993 and
December 31, 1997.
Consumer loans generally have shorter terms to maturity or repricing
and higher interest rates than long-term, fixed-rate mortgage loans. In addition
to home equity, boat loans and automobile loans, Alaska Federal's consumer loans
consist of loans secured by airplanes, deposit accounts, and unsecured loans for
personal or household purposes.
The largest category of Alaska Federal's consumer loan portfolio is
closed-end, fixed-rate home equity loans that are made on the security of
residences. At December 31, 1998, fixed-rate home equity loans totaled $7.8
million, or 10.9% of the total loan portfolio, compared to $8.3 million, or
10.4% of the total loan portfolio at December 31, 1997. Home equity loans
normally do not exceed 95% of the appraised value of the residence or 100% of
the tax assessment, less the outstanding principal of the first mortgage and
have terms of up to 15 years requiring monthly payments of principal and
interest.
At December 31, 1998, consumer boat loans amounted to $5.1 million, or
7.1% of the total loan portfolio compared to $5.5 million, or 7.0% of the total
loan portfolio at December 31, 1997. Alaska Federal offers boat loans with
maturities of between five and 15 years, which generally range in principal
amounts from $15,000 to $350,000 and are secured by new and used boats. Alaska
Federal makes boat loans of less than $50,000 at fixed rates of interest and
loans over $50,000 are made at an interest that is adjustable based on the prime
lending rate. Alaska Federal generally makes boat loans on new boats of up to
85% of the value and 75% on used boats, but in certain instances it will loan up
to 100% of the value.
At December 31, 1998, automobile loans amounted to $1.0 million, or
1.4% of the total loan portfolio compared to $1.0 million, or 1.2% of the total
loan portfolio at December 31, 1997. Alaska Federal offers automobile loans with
maturities of six years with fixed rates of interest.
Alaska Federal also requires title, fire and casualty insurance on
secured consumer loans. The only title exception is for home equity loans under
$25,000 where a property profile, obtained from a title company, indicates there
are no liens or encumbrances not previously disclosed. Consumer loans for boats
and airplanes also require a breach of warranty endorsement.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles or boats and particularly used
automobiles. In these cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
The remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on these loans.
These loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of these loans such as Alaska Federal, and a
borrower may be able to assert against this assignee claims and defenses that it
has against the seller of the underlying collateral. At December 31, 1998, there
were no consumer loans 90 days or more past due.
Loan Maturity and Repricing. The following table sets forth certain
information at December 31, 1998 regarding the dollar amount of loans maturing
in Alaska Federal's portfolio based on their contractual terms to final
maturity, but does not include scheduled payments or potential prepayments.
Demand loans, loans having no stated
49
<PAGE>
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Loan balances do not include undisbursed loan proceeds,
unearned discounts, and allowance for loan losses.
<TABLE>
<CAPTION>
After After After After 1 Year
1 Year 3 Years 5 Years -----------------
Within Through Through Through Beyond Fixed Adjustable
1 Year 3 Years 5 Years 10 Years 10 Years Total Rates Rates
------ ------- ------- -------- -------- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Permanent:
One- to four-family......... $ 550 $1,259 $ 839 $2,163 $30,585 $35,396 $29,302 $ 5,544
Multi-family................ -- -- 409 894 1,182 2,485 629 1,856
Commercial nonresidential... 45 135 348 3,617 6,599 10,744 2,671 8,028
Land ..................... 108 221 1,958 201 101 2,589 838 1,643
Construction:
One- to four-family......... 1,522 -- -- -- -- 1,522 -- --
Multi-family................ 1,295 -- -- -- -- 1,295 -- --
Commercial nonresidential... 576 -- -- -- -- 576 -- --
Commercial................... 1,241 41 1,078 1,284 638 4,282 249 2,792
Consumer:
Home equity................. 98 253 784 4,506 2,760 8,401 6,570 1,733
Boat ..................... 14 77 217 2,405 2,384 5,097 4,648 435
Automobile.................. 52 328 525 73 -- 978 920 6
Other ..................... 145 105 11 46 -- 307 116 46
-------- ------ ------ ------- ------- ------- ------- --------
Total.................... $ 5,646 $2,419 $6,169 $15,189 $44,249 $73,672 $45,943 $22,083
======= ====== ====== ======= ======= ======= ======= =======
</TABLE>
Loan Solicitation and Processing. Alaska Federal obtains its loan
applicants almost exclusively from walk-in traffic, which is generated through
media advertising, referrals from existing customers and, in the case of
commercial loans, through officer business development calls and activities.
Local real estate agents refer a small percentage of Alaska Federal's mortgage
loan applicants, and dealers refer some consumer loans, such as boat loans.
Alaska Federal requires title insurance on all loans. All mortgage loans require
fire and extended coverage on appurtenant structures and flood insurance, if
applicable.
Loan approval authority varies based on loan type. The President and
Chief Executive Officer has authority to approve all residential mortgage loans
up to and including $250,000 that are originated for Alaska Federal's portfolio
and up to the agency limit if the loan is to be sold in the secondary market,
multi-family and commercial real estate loans up to and including $300,000, and
consumer loans up to and including $200,000. Alaska Federal's Senior Loan
Committee consisting of the President and Chief Executive Officer, the Chief
Operating Officer and the two lending division managers must approve loans in
excess of these amounts up to and including $500,000. The Board of Directors
must approve all loans in excess of the Senior Loan Committee's approval
authority.
Upon receipt of a loan application from a prospective borrower, a
credit report and other data are obtained to verify specific information
relating to the loan applicant's employment, income and credit standing. An
independent fee appraiser approved by Alaska Federal and licensed or certified
by the State of Alaska undertakes an appraisal of the real estate offered as
collateral. Alaska Federal promptly notifies applicants of the decision.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment.
Pursuant to Office of Thrift Supervision regulations, loans-to-one
borrower cannot exceed 15% of Alaska Federal's unimpaired capital and surplus.
At December 31, 1998, the loan-to-one borrower limitation for Alaska Federal was
$1.2 million and Alaska Federal had two loans that were in excess of this
limitation. These loans exceed the loan-to-one borrower limitation because this
limit was reduced as the result of the passage of the Financial
50
<PAGE>
Institutions Reform, Recovery and Enforcement Act of 1989. The loans are
considered "non-conforming" from a regulatory perspective because although they
were originally made in conformance with the loan-to-one borrower limit, due to
the regulatory changes they are now in excess of the limit. As "non-conforming"
loans, Alaska Federal must make reasonable efforts when renewing or modifying
these loans to bring them into conformance with the current regulatory limits.
All of these loans were performing in accordance with their terms on that date.
See "-- Loans Made by Alaska Federal in Excess of New Limitations" and
"Regulation -- Federal Regulation of Savings Associations -- Loans-to-One
Borrower."
Loan Originations, Sales and Purchases. Historically, Alaska Federal's
primary lending activity has been the origination of one- to four-family
residential mortgage loans. During the past five years, Alaska Federal has
increased its emphasis on the origination of commercial and consumer loans.
Between December 31, 1997 and 1998, commercial business loans increased by 63.6%
to $4.3 million at December 31, 1998. See "Risk Factors -- Alaska Federal's
Recent Growth in Commercial Business and Consumer Lending Poses Greater Risks
Than Residential Lending."
Alaska Federal generally sells all loans without recourse. Alaska
Federal generally sells conventional fixed- rate one- to four-family residential
mortgage loans to the Federal Home Loan Mortgage Corporation or Alaska Home
Finance Corporation, servicing retained. By retaining the servicing, Alaska
Federal receives fees for performing the traditional services of processing
payments, accounting for loan funds, and collecting and paying real estate
taxes, hazard insurance and other loan-related items, such as private mortgage
insurance. At December 31, 1998, Alaska Federal's servicing portfolio was $83.4
million. For the year ended December 31, 1998, loan servicing fees totaled
$255,000, gross, before amortization of servicing rights. In addition, Alaska
Federal retains certain amounts in escrow for the benefit of investors. Alaska
Federal is able to invest these funds but is not required to pay interest on
them. At December 31, 1998, these escrow balances totaled $866,000.
Statement of Financial Accounting Standards No. 125 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. For a discussion of this Statement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of Accounting Pronouncements and Regulatory Policies --
Accounting For Transfers And Servicing of Financial Assets And Extinguishment of
Liabilities."
51
<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
-----------------------
1998 1997
---- ----
(In thousands)
Loans originated:
Real estate:
Permanent:
One- to four-family ...................... $ 27,926 $ 13,637
Multi-family.............................. 850 --
Commercial nonresidential................. 1,550 1,849
Land...................................... 1,985 586
Construction:
One- to four-family....................... 3,200 2,899
Multi-family.............................. -- --
Commercial nonresidential ................ 1,223 340
Commercial.................................... 3,359 1,949
Consumer:
Home equity............................... 3,899 4,678
Boat...................................... 1,013 2,121
Automobile................................ 555 646
Other..................................... 511 403
-------- --------
Total loans originated................... 46,071 29,108
Loans purchased................................ -- --
Loans sold..................................... (23,689) (9,882)
Principal repayments........................... (29,573) (16,830)
Foreclosed loans............................... (311) --
-------- --------
Net increase (decrease) in loans and
loans held for sale........................... $ (7,502) $ 2,396
======== ========
Loan Commitments. Occasionally, Alaska Federal issues, without charge,
commitments for fixed- and adjustable-rate single-family residential mortgage
loans conditioned upon the occurrence of certain events. These commitments are
made in writing on specified terms and conditions and are honored for up to 60
days. The only commercial commitments issued by Alaska Federal are business
lines of credit; letters of credit are not offered. At December 31, 1998, Alaska
Federal had $2.4 million of outstanding net loan commitments, including unused
portions on commercial business lines of credit and undisbursed funds on
residential construction loans. See Note 12 of Notes to the Financial Statements
included in the back of this prospectus.
Loan Origination and Other Fees. Alaska Federal, in most instances,
receives loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan which are charged to the
borrower for funding the loan. The amount of points charged by Alaska Federal
varies, though the range generally is between one and two points. Accounting
standards require fees received (net of certain loan origination costs) for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Net deferred fees associated with loans that are
prepaid are recognized as income at the time of prepayment. Alaska Federal had
$253,000 of net deferred mortgage loan fees at December 31, 1998.
Nonperforming Assets and Delinquencies. Alaska Federal utilizes one
full time loan collector to monitor the loan portfolio and communicate with
customers concerning past due payments. The size of the portfolio and
historically low delinquency rates allows one individual to manage consumer,
commercial and residential loans, including those loans serviced for other
investors. When a borrower fails to make a required payment, Alaska Federal
institutes collection procedures. The process for monitoring consumer,
commercial and residential loans are the same
52
<PAGE>
for each type of loan until foreclosure or repossession of the collateral.
Depending on the value or nature of the collateral, the loan servicing manager,
senior lender or senior management directs any further action.
Customers who miss a payment are mailed a computer-generated notice 15
days after the payment due date. If the customer does not pay promptly, the
collector telephones the customer 20 days after the payment due date. After 30
days, the collector sends a letter which begins the demand process. Follow-up
contacts are made between the 30th and 60th day, after which the collector sends
a demand letter that specifies the action Alaska Federal will take and the
deadline for resolving the delinquency. While most delinquencies are cured
promptly, the collector initiates foreclosure or repossession, according to the
terms of the security instrument and applicable law, if the deadline in the 60
day letter is not met.
Residential loans have a highly structured process for foreclosure. In
addition to Alaska Federal's residential loan portfolio, Alaska Federal services
real estate loans for other investors who in turn have their own requirements
that must be followed. Alaska Federal evaluates consumer and commercial business
loans individually depending on the nature and value of the collateral.
Alaska Federal places all loans which are past due 90 days or more on
nonaccrual status and all previously recorded interest income is reversed.
Alaska Federal charges off consumer loans when it is determined they are no
longer collectible.
Alaska Federal's Board of Directors is informed monthly as to the
status of all mortgage, commercial and consumer loans that are delinquent 30
days or more, the status on all loans currently in foreclosure, and the status
of all foreclosed and repossessed property owned by Alaska Federal.
The following table sets forth information with respect to Alaska
Federal's nonperforming assets and restructured loans within the meaning of
Statement of Financial Accounting Standards No. 15 at the dates indicated.
At December 31,
----------------
1998 1997
---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial ........................................... $ -- $132
Consumer:
Automobile ......................................... -- 12
Other .............................................. -- 2
---- ----
Total .......................................... -- 146
Accruing loans which are contractually past
due 90 days or more ................................... -- --
Total of nonaccrual and 90 days past due
loans ....................................... -- 146
Foreclosed property ................................... 311 --
---- ----
Total nonperforming assets ..................... $311 $146
==== ====
Restructured loans .................................... $ -- $ --
==== ====
Nonaccrual and 90 days or more past due loans
as a percentage of loans, net......................... --% 0.18%
Nonaccrual and 90 days or more past due loans
as a percentage of total assets....................... --% 0.13
Nonperforming assets as a percentage of
total assets.......................................... 0.28 0.13
53
<PAGE>
Gross interest income that would have been recorded for the year ended
December 31, 1998 if nonaccrual loans had been current according to their
original terms and had been outstanding throughout the year, and the amount of
interest income on these loans that was included in net income for the year,
were, in both cases, immaterial.
Foreclosed Property. Alaska Federal classifies real estate acquired as
a result of foreclosure or by deed-in-lieu of foreclosure as foreclosed property
until sold. When Alaska Federal acquires property, it is recorded at the lower
of its cost, which is the unpaid principal balance of the related loan plus
foreclosure costs, or fair market value. Subsequent to foreclosure, the property
is carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At December 31, 1998, Alaska Federal had $311,000 in foreclosed
properties consisting of two single-family homes. Both properties are listed for
sale and are expected to sell for amounts sufficient to cover current
outstanding balances, plus recover some or all of expenses that have already
been charged against earnings.
Asset Classification. The Office of Thrift Supervision has adopted
various regulations regarding problem assets of savings institutions. The
regulations require that each insured institution review and classify its assets
on a regular basis. In addition, in connection with examinations of insured
institutions, Office of Thrift Supervision examiners have authority to identify
problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. The regulations have also created a special mention category,
described as assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention. If
an asset or portion thereof is classified loss, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified loss. A portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
Alaska Federal monitors its asset quality through the use of an Asset
Classification Committee, which is comprised of senior lenders and executive
officers. The committee meets quarterly to review the loan portfolios, with
specific attention given to assets with an identified weakness, as well as
reviewing the local, state and national economic trends and the adequacy of the
allowance for loan and lease losses.
At December 31, 1998 and 1997, the aggregate amounts of Alaska
Federal's classified assets (as determined by Alaska Federal), were as follows:
At December 31,
-----------------------------
1998 1997
---- ----
(In thousands)
Loss............................. $ -- $ --
Doubtful......................... 25 1
Substandard assets............... 583 1,508
Special mention.................. 476 85
At December 31, 1998, assets classified as substandard, doubtful or
loss totaled $608,000. This compared to $1.5 million at December 31, 1997. In
1997, the largest component was a $1.3 million commercial building which had
been foreclosed by Alaska Federal, and subsequently sold with Alaska Federal
providing the financing. Alaska Federal classified the loan as substandard until
the new owners had operated the business for more than two years with
demonstrated cash flow. That loan was subsequently removed from classified
status. By comparison, the largest
54
<PAGE>
component of the 1998 classified loans was $311,000 for two new homes foreclosed
and held in "foreclosed property" pending sale. The remaining substandard and
doubtful loans are comprised of single family homes and one 42 foot motor yacht.
Special mention loans increased from $85,000 at December 31, 1997 to
$476,000 at December 31, 1998. This total consists of four single family homes,
with one loan representing $249,000 of the total at December 31, 1998. Alaska
Federal believes these loans are well secured, but are being monitored carefully
due to known problems with borrowers' employment.
Allowance for Loan Losses. Alaska Federal maintains an allowance for
credit losses sufficient to absorb losses inherent in the loan portfolio. Alaska
Federal has established a systematic methodology to ensure that the allowance is
adequate. The Asset Classification policy requires an ongoing quarterly
assessment of the probable estimated losses in the portfolios. The Asset
Classification Committee reviews the following information:
o All loans classified during the previous analysis. Current
information as to payment history, or actions taken to correct
the deficiency are reviewed, and if justified, the loan is no
longer classified. If conditions have not improved, the loan
classification is reviewed to ensure that the appropriate action
is being taken to mitigate loss.
o All loans past due on scheduled payments. The committee reviews
all loans that are past due 30 days or more, taking into
consideration the borrower, nature of the collateral and its
value, the circumstances that have caused the delinquency, and
the likelihood of the borrower correcting the conditions that
have resulted in the delinquent status. The committee may
recommend more aggressive collection activity, inspection of the
collateral, or no change in its classification.
o Reports from Alaska Federal's managers. Lending managers may be
aware of a borrower's circumstances that has not yet resulted in
any past due payments but has the potential for problems in the
immediate future. Each lending manager reviews their respective
lending unit's loans and identifies any that may have developing
weaknesses. This "self identification" process is an important
component of maintaining credit quality, as each lender is
accountable for monitoring as well as originating loans.
o Current economic conditions. Alaska Federal takes into
consideration economic condition in its market area, the state's
economy, and national economic factors that could influence the
quality of the loan portfolio in general. The unique, isolated
geography of Alaska Federal's market area of Southeast Alaska
requires that each community's economic activity be reviewed.
o Trends in Alaska Federal's delinquencies. Alaska Federal's market
area has seasonal trends and as a result, the portfolio tends to
have similar fluctuations. Prior period statistics are reviewed
and evaluated to determine if the current conditions exceed
expected trends.
The amount that is to be added to allowance for loan losses is based
upon a variety of factors. Many financial institutions establish required
reserves based, to a great extent, upon their own experience. Alaska Federal's
loan portfolio has traditionally consisted primarily of loans secured by single
family homes, and with the exception of a severe state-wide oil-driven recession
in the mid 1980s, the loss experience has been minimal. The current business
plan, however, has focused on increasing the amount of commercial and consumer
loans, which will inherently carry a higher risk of loss than single-family
residential loans. Consequently, until Alaska Federal is able to establish a
meaningful, reliable loan loss record of its own for the consumer and commercial
loans, the reserve for these types of loans has been based upon industry
standards, management's experience with similar portfolios in other
institutions, and a specific review of existing consumer and commercial credits.
55
<PAGE>
Each individual loan, previously classified by management, or newly
classified during the quarterly review, is evaluated for loss potential, and a
specific amount or percentage deemed to be at risk is added to the overall
required reserve amount. For the remaining portion of the portfolio, comprised
of "pass" loans, a loss factor is applied that is consistent with Alaska
Federal's experience in that portfolio or with industry guidelines if management
believes such guidelines are more appropriate for a relatively new and
unseasoned portfolio. The applied percentage is also influenced by other
economic factors as noted in the beginning of this section. The size of the
institution, the size of the portfolio, and the relatively small number of
classified loans, results in most members of the asset classification committee
being directly familiar with the borrower, the collateral or the circumstances
giving rise to the concerns.
The calculated amount is compared to the actual amount recorded in the
allowance at the end of each quarter and a determination is made as to whether
the allowance is adequate or needs to be increased. Management increases the
amount of the allowance for loan losses by charges to income and decreased by
loans charged off (net of recoveries).
Alaska Federal's three loan categories, that it considers in evaluating
risk, are residential, commercial and consumer. The following comments represent
management's view of the risks inherent in each portfolio category.
o One- to Four-Family Residential - Alaska Federal's market area is
comprised primarily of a population with above-average incomes
and market conditions that have, over the long term, supported a
stable or increasing market value of real estate. Absent an
overall economic downturn in the economy, experience in this
portfolio indicates that losses are minimal provided the property
is reasonably maintained, and marketing time to resell the
property is relatively short.
o Multi-Family Residential - While there have been minimal losses
taken in this segment of the portfolio, the rental market is very
susceptible to the effects of an economic downturn. While Alaska
Federal monitors loan-to-value ratios, the conditions that would
create a default would carry through to a new owner which may
require that Alaska Federal discount the property or hold it
until conditions improve.
o Commercial Real Estate - As with multi-family loans, the
classification of commercial real estate loans closely
corresponds to economic conditions which will limit the
marketability of the property, resulting in higher risk than a
loans secured by a single family residence. It has been
management's decision to reserve on commercial real estate loans
at or near the reserve levels of commercial business loans.
o Construction Loans (Residential and Commercial) - There are a
variety of risks in construction lending, increased in Alaska by
a short building season, difficult building sites and
construction delays due to delivery of materials. While Alaska
Federal has established construction loan policies and
underwriting guidelines designed to mitigate the risk, there is
still a higher risk of loss with these loans.
o Commercial Business Loans - These types of loans carry the
highest degree of risk, relying on the ongoing success of the
business to repay the loan. Collateral for commercial credits is
often difficult to secure, and even more difficult to liquidate
in the event of a default. The 1% for pass loans represents an
industry benchmark for commercial credits, and if a commercial
business loan demonstrates any credit weakness, the reserve is
increased to aggressively recognize the additional risk.
o Consumer Loans - The consumer loan portfolio has a wide range of
factors, determined primarily by the nature of the collateral and
the credit history and capacity of the borrower. The loans tend
to be smaller in principal amount and secured by second deeds of
trust, automobiles, and pleasure boats.
56
<PAGE>
Loans for automobiles and pleasure boats generally experience
higher than average wear in the Alaska's environment and hold a
higher degree of risk of loss in the event of repossession.
Management believes that the allowance for loan losses at December 31,
1998 was adequate at that date. Although management believes that it uses the
best information available to make these determinations, future adjustments to
the allowance for loan losses may be necessary and results of operations could
be significantly and adversely affected if circumstances differ substantially
from the assumptions used in making the determinations.
While Alaska Federal believes it has established its existing allowance
for loan losses in accordance with generally accepted accounting principles,
there can be no assurance that regulators, in reviewing Alaska Federal's loan
portfolio, will not request Alaska Federal to increase significantly its
allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect Alaska Federal's financial
condition and results of operations.
57
<PAGE>
The following table sets forth information with respect to Alaska
Federal's nonperforming assets and restructured loans within the meaning of
Statement of Financial Accounting Standards No. 15 at the dates indicated. It is
the policy of Alaska Federal to cease accruing interest on loans 90 days or more
past due.
At December 31,
----------------------
1998 1997
---- ----
(Dollars in thousands)
Allowance at beginning of period .................. $ 751 $ 723
Provision for loan losses ......................... 60 25
Recoveries:
Real estate:
Construction:
Commercial nonresidential .................. 1 --
Consumer:
Other ......................................... 3 4
----- -----
Total recoveries ......................... 4 4
Charge-offs:
Commercial ....................................... 99 --
Consumer:
Automobile ..................................... 23 --
Other .......................................... 19 1
----- -----
Total charge-offs ........................ 141 1
----- -----
Net charge-offs ........................ 137 (3)
----- -----
Balance at end of period .......................... $ 674 $ 751
===== =====
Allowance for loan losses as a percentage of
total loans outstanding at the end of the period.. 0.94% 0.94%
Net charge-offs as a percentage of average
loans outstanding during the period............... 0.19 --
Allowance for loan losses as a percentage of
nonperforming loans at end of period.............. NA 514.38
As of December 31, 1998, there were no loans past due 90 days or more,
therefore, there were no loans on nonaccrual status. While there were loans
during the course of the fiscal year that fell into nonaccrual status, those
loans all were subsequently paid current, paid off, or were charged off.
Accordingly, there was no unrecognized interest during fiscal 1998 due to
nonaccrual loans.
58
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
As a % % of As a % % of
of Out- Loans in of Out- Loans in
standing Category standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Permanent:
One- to four-family............. $110 0.39% 47.90% $126 0.31% 51.45%
Multi-family.................... 12 0.63 3.48 11 0.50 2.87
Commercial...................... 107 1.25 4.94 151 1.10 17.30
Land............................ 26 1.25 3.62 11 1.00 1.38
Construction:
One- to four-family............. 5 0.63 1.34 8 0.50 1.90
Multi-family.................... 11 1.25 1.51 20 1.00 4.60
Commercial...................... 4 1.25 0.61 -- -- --
Commercial......................... 59 1.72 5.99 38 1.45 1.19
Consumer:
Home equity..................... 25 0.38 11.75 26 0.30 10.61
Boat............................ 51 1.25 7.07 56 1.00 6.98
Automobile...................... 21 2.64 1.37 12 1.24 1.21
Other........................... 4 1.87 0.42 4 1.05 0.51
Unallocated........................ 239 -- 288
----- ---- ------ ----- ---- ------
Total allowance for loan losses.. $ 674 0.93% 100.00% $ 751 0.94% 100.00%
===== ==== ====== ===== ==== ======
</TABLE>
Loans identified by management as potentially impaired decreased
$901,000 from December 31, 1997 to December 31, 1998. This change is
attributable to a $1.3 million commercial building loan which had been
foreclosed by Alaska Federal and subsequently sold with Alaska Federal providing
the financing. This loan contributed $26,000 to the allowance for loan losses at
December 31, 1997. This loan was foreclosed in 1998. An increase in potentially
impaired loans in 1998, related primarily to one bankruptcy case, partially
offset this decrease in the allowance for loan losses. This loan contributed
$10,000 to the allowance for loan losses at December 31, 1998.
Special mention loans increased from $85,000 in 1997 to $476,000 in
1998. This increase was mainly in the one- to four-family residential mortgage
loan category, and the increase contributed $3,000 to the allowance for loan
losses.
A change in the mix and volume of loans in the pass category resulted
in a decrease of $18,000 in the allowance for loan losses. The largest factors
contributing to this change were a decrease of $6.6 million in one- to
four-family loans and $1.8 million in commercial nonresidential real estate
loans in the pass category. This resulted in a total $38,000 decrease in the
allowance for loan losses at December 31, 1998. This decrease was partially
offset by a $1.6 million increase in commercial business loans in the pass
category, which resulted in a $16,000 increase in the allowance for loan losses
at December 31, 1998.
The 10% decrease in the loan portfolio, as well as management's
evaluation of current economic conditions and overall delinquency trends,
contributed to the decrease in the unallocated reserve of $158,000, from
$288,000 at December 31, 1997, to $130,000 at December 31, 1998. There were no
changes in the methods of estimation or
59
<PAGE>
assumptions used in the development of the allowance for loan losses which
contributed to a significant change in the allowance in 1997 or 1998.
Investment Activities
Federal law permits Alaska Federal to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of various federal
agencies and of state and municipal governments, deposits at the Federal Home
Loan Bank of Seattle, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
Alaska Federal may also invest a portion of its assets in commercial paper and
corporate debt securities. Alaska Federal must also maintain an investment in
Federal Home Loan Bank stock as a condition of membership in the Federal Home
Loan Bank of Seattle.
Alaska Federal has, from time to time, invested in privately-issued
collateralized mortgage obligations, after evaluating the credit risk associated
with a private issued (compared with a government agency-backed issue) versus
the rewards of a higher return. At December 31, 1998, Alaska Federal held one
privately-issued collateralized mortgage obligation with a Moody rating of Aaa.
This security did not qualify as a high risk mortgage security as defined under
Office of Thrift Supervision regulations.
Federal regulations require Alaska Federal to maintain a minimum amount
of liquid assets. At December 31, 1998, Alaska Federal's regulatory liquidity of
32.6% exceeded the 4% required by Office of Thrift Supervision regulations.
Investment securities provide liquidity for funding loan originations and enable
Alaska Federal to improve the match between the maturities and repricing of its
interest-rate sensitive assets and liabilities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Regulation."
Alaska Federal's Asset Liability Management Committee determines
appropriate investments in accordance with the Board of Directors' approved
investment policies and procedures. Alaska Federal's policies generally limit
investments to U.S. Government and agency securities and mortgage-backed
securities issued and guaranteed by Federal Home Loan Mortgage Corporation,
Federal National Mortgage Association and Government National Mortgage
Association. Alaska Federal's policies provide that investment purchases be
ratified at monthly Board of Directors meetings. Certain considerations, which
include the interest rate, yield, settlement date and maturity of the
investment, Alaska Federal's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments) affect the
making of investments. The effect that the proposed investment would have on
Alaska Federal's credit and interest rate risk, and risk-based capital is also
considered. From time to time, investment levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the level of yield that will be
available in the future, as well as management's projections as to the
short-term demand for funds to be used in Alaska Federal's loan origination and
other activities.
60
<PAGE>
The following table sets forth the composition of Alaska Federal's
investment and mortgage-backed securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1998 1997
----------------------------------- ---------------------------------
Fair Amortized Percent of Fair Amortized Percent of
Value Cost Portfolio Value Cost Portfolio
----- ---- --------- ----- ---- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Available-for-sale:
Mortgage-backed securities:
Federal National Mortgage
Association..................... $ 3,701 $ 3,801 20.4% $ 4,604 $ 4,696 23.9%
Federal Home Loan Mortgage
Corporation..................... 5,095 5,269 28.0 -- -- --
Government National
Mortgage Association............ 1,622 1,638 8.9 2,340 2,319 12.1
Collateralized mortgage
obligations..................... 761 767 4.2 1,192 1,214 6.2
U.S. agencies and corporations:
Callable debentures:
Federal Home Loan Mortgage
Corporation................... 2,997 3,000 16.5 3,994 4,000 20.7
Federal Home Loan Bank......... 3,001 3,000 16.5 -- -- --
Small Business Administration
pools.......................... 999 999 5.5 1,204 1,177 6.2
------- ------- ----- ------- ------- -----
Total available-for-sale.... 18,176 18,474 100.0% 13,334 13,406 69.1%
Held-to-Maturity:
Mortgage-backed securities:
Federal National Mortgage
Association................... -- -- -- 147 145 0.8
Federal Home Loan Mortgage
Corporation................... -- -- -- 5,806 6,051 30.1
------- ------- ----- ------- ------- -----
Total held-to-maturity..... -- -- -- 5,953 6,196 30.9
------- ------- ----- ------- ------- -----
Total.................. $18,176 $18,474 100.0% $19,287 $19,602 100.0%
======= ======= ===== ======= ======= =====
</TABLE>
At December 31, 1998, the portfolio of U.S. Government and agency
securities (available-for-sale) had an aggregate estimated fair value of $7.0
million and the portfolio of mortgage-backed securities (available-for-sale) had
an estimated fair value of $10.3 million.
At December 31, 1998, mortgage-backed securities consisted of Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association and
Government National Mortgage Association issues. At December 31, 1998, their
amortized cost was $10.7 million. The mortgage-backed securities portfolio had
coupon rates ranging from 6.0% to 9.0% and had a weighted average yield of 5.6%
during the year ended December 31, 1998.
Mortgage-backed securities, which also are known as mortgage
participation certificates or pass-through certificates, typically represent
interests in pools of single-family or multi-family mortgages in which payments
of both principal and interest on the securities are generally made monthly. The
principal and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries, generally U.S. Government agencies and
61
<PAGE>
government sponsored enterprises, that pool and resell the participation
interests in the form of securities, to investors such as Alaska Federal. These
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the
Federal Home Loan Mortgage Corporation, Federal National Mortgage Association
and the Government National Mortgage Association. Mortgage-backed securities
typically are issued with stated principal amounts, and the securities are
backed by pools of mortgages that have loans with interest rates that fall
within a specific range and have varying maturities. Mortgage-backed securities
generally yield less than the loans that underlie these securities because of
the cost of payment guarantees and credit enhancements. In addition,
mortgage-backed securities are usually more liquid than individual mortgage
loans and may be used to collateralize certain liabilities and obligations of
Alaska Federal. These types of securities also permit Alaska Federal to optimize
its regulatory capital because they have low risk weighting.
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and may result
in a loss of any premiums paid and thereby reduce the net yield on these
securities. Although prepayments of underlying mortgages depend on many factors,
including the type of mortgages, the coupon rate, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of declining mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under these
circumstances, Alaska Federal may be subject to reinvestment risk because, to
the extent that Alaska Federal's mortgage-backed securities amortize or prepay
faster than anticipated, Alaska Federal may not be able to reinvest the proceeds
of these repayments and prepayments at a comparable rate.
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of Alaska
Federal's investment and mortgage-backed securities at December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------------------------------------------
Amount Due or Repricing within:
Over One to Over Five to
One Year or Less Five Years Ten Years Over Ten Years Totals
------------------ ------------------ ------------------- ------------------ -------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Federal National
Mortgage Association....... $ 3,801 5.62% $ -- --% $ -- --% $ -- --% $ 3,801 5.62%
Federal Home Loan Mortgage
Corporation.............. 5,269 5.23 -- -- -- -- -- -- 5,269 5.23
Government National
Mortgage Association..... 881 6.29 -- -- -- -- 757 7.32 1,638 6.77
Collateralized mortgage
obligations................ -- -- -- -- -- -- 767 5.36 767 5.36
U.S. agencies and corporations:
Callable debentures:
Federal Home Loan
Mortgage Corporation... 3,000 5.20 -- -- -- -- -- -- 3,000 5.20
Federal Home Loan Bank.. 3,000 5.00 -- -- -- -- -- -- 3,000 5.00
Small Business
Administration pools.. 999 4.93 -- -- -- -- -- -- 999 4.93
------ ----- ----- ------ -------
Total.......................... $16,950 $ -- $ -- $1,524 $18,474
====== ===== ===== ====== =======
</TABLE>
Alaska Federal's investment policy permits investment in "off balance
sheet" derivative instruments such as "forwards," "futures," "options" and
"swaps," however, Alaska Federal has not utilized such instruments.
62
<PAGE>
At December 31, 1998, only Alaska Federal's investment in the common
stock of the Federal Home Loan Bank of Seattle (carrying and market values of
$1.3 million) had an aggregate book value in excess of 10% of Alaska Federal's
total equity.
The following table sets forth certain information with respect to each
security (other than U.S. Government and agency securities and mutual funds
which invest exclusively in such securities) which had an aggregate book value
in excess of 10% of Alaska Federal's retained earnings at the dates indicated.
At December 31,
-------------------------------------------
1998 1997
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In thousands)
Collateralized mortgage
obligations............... $767 $761 $1,214 $1,192
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of Alaska
Federal's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while general interest rates
and money market conditions significantly influence deposit inflows and outflows
and loan prepayments. Alaska Federal may use borrowings on a short-term basis to
compensate for reductions in the availability of funds from other sources.
Alaska Federal may also use borrowings on a longer-term basis for general
business purposes.
Deposit Accounts. Alaska Federal attracts deposits from within Alaska
Federal's primary market area through the offering of a broad selection of
deposits as set forth in the following table. In determining the terms of its
deposit accounts, Alaska Federal considers current market interest rates,
profitability to Alaska Federal, matching deposit and loan products and its
customer preferences and concerns. Alaska Federal's deposit mix and pricing is
generally reviewed bi-weekly. Alaska Federal does not accept brokered deposits
nor does it currently hold deposits from municipalities or other public
entities.
In the unlikely event Alaska Federal is liquidated after the
conversion, depositors will be entitled to full payment of their deposit
accounts prior to any payment being made to Alaska Pacific Bancshares, as
stockholder of Alaska Federal. Substantially all of Alaska Federal's depositors
are residents of the State of Alaska.
63
<PAGE>
The following table sets forth information concerning Alaska Federal's
time deposits and other interest-bearing deposits at December 31, 1998.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ---- -------- ------ ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
--% NA Non-interest-bearing $ 5,046 $100 4.95%
2.15 NA Interest-bearing demand 25,570 100 25.08
3.74 NA Money market deposit accounts 15,872 3,500 15.57
3.00 NA Savings accounts 18,674 100 18.32
Certificates of Deposit
-----------------------
3.78 7-31 days Fixed-term, fixed-rate 194 500 0.19
4.04 32-59 days Fixed-term, fixed-rate 216 500 0.21
4.28 60-89 days Fixed-term, fixed-rate 305 500 0.30
4.54 90-179 days Fixed-term, fixed-rate 2,008 500 1.97
4.94 180-269 days Fixed-term, fixed-rate 4,106 500 4.03
4.97 270-364 days Fixed-term, fixed-rate 455 500 0.45
5.27 One year Fixed-term, fixed-rate 11,016 500 10.81
5.54 18 months Fixed-term, fixed-rate 447 500 0.44
5.63 Two years Fixed-term, fixed-rate 2,881 500 2.83
5.74 Three years Fixed-term, fixed-rate 98 500 0.10
5.88 Five years Fixed-term, fixed rate 1,678 500 1.65
5.34 Gold Minor Fixed term, fixed-rate 2,264 500 2.22
One year
7.85 Deferred Comp Fixed term, fixed rate 768 -- 0.75
One year
4.35 One year Fixed-term, variable rate 1,512 500 1.48
4.35 IRA 2-1/2 years Fixed-term, variable rate 3,415 100 3.35
5.23 Varies Jumbo certificates 5,420 -- 5.32
------- ------
TOTAL $101,945 100.00%
======= ======
</TABLE>
The following table indicates the amount of Alaska Federal's jumbo
certificates of deposit by time remaining until maturity as of December 31,
1998. Jumbo certificates of deposit are certificates in amounts of $100,000 or
more.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Three months or less................. $1,759
Over three through six months........ 1,030
Over six through twelve months....... 1,491
Over twelve months................... 1,140
-------
Total............................ $5,420
======
64
<PAGE>
The following table sets forth the balances and changes in dollar
amounts of deposits in the various types of savings accounts offered by Alaska
Federal at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1998 1997
------------------------------------- ---------------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
------ ----- ---------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-interest bearing demand accounts......$ 5,046 4.95% $ 1,154 $ 3,892 4.01%
Interest-bearing demand accounts.......... 25,570 25.08 1,631 23,939 24.69
Money market deposit accounts............. 15,872 15.57 2,574 13,298 13.72
Savings accounts.......................... 18,674 18.32 (17) 18,691 19.28
Variable-rate certificates which mature :
Within 1 year......................... 3,285 3.22 (696) 3,981 4.11
After 1 year, but within 2 years...... 1,314 1.29 (132) 1,446 1.49
After 2 years, but within 5 years..... 1,082 1.06 369 713 0.74
Fixed rate certificates which mature:
Within 1 year......................... 25,683 25.19 (581) 26,264 27.09
After 1 year, but within 2 years...... 2,836 2.78 1,406 1,430 1.47
After 2 years, but within 5 years..... 2,583 2.53 (722) 3,305 3.14
-------- ------ ------- -------- ------
Total........................ $101,945 100.00% $ 4,986 $ 96,959 100.00%
======== ====== ======= ======== ======
</TABLE>
Time Deposits by Rates
The following table sets forth the time deposits in Alaska Federal
classified by rates at the dates indicated.
At December 31,
-------------------------------
1998 1997
---- ----
(In thousands)
3.00 - 3.99%...................... $ 305 $ 7
4.00 - 4.99%...................... 12,147 3,813
5.00 - 5.99%...................... 18,583 22,953
6.00 - 6.99%...................... 4,658 9,224
7.00% and over.................... 1,090 1,142
------- -------
Total........................ $36,783 $37,139
======= =======
65
<PAGE>
Time Deposits by Maturities
The following table sets forth the amount and maturities of time
deposits at December 31, 1998.
Amount Due
------------------------------------------------------------
Over Over
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(Dollars in thousands)
3.00 - 3.99%....... $ 305 $ -- $ -- $ -- $ -- $ 305
4.00 - 4.99%....... 9,491 1,520 1,104 32 -- 12,147
5.00 - 5.99%....... 16,312 926 803 70 473 18,584
6.00 - 6.99%....... 2,862 1,703 10 64 18 4,657
7.00% and over..... -- -- 1,030 60 -- 1,090
------- ------ ------ ----- ----- -------
Total......... $28,970 $4,149 $2,947 $ 226 $ 491 $36,783
======= ====== ====== ===== ===== =======
Deposit Activities and Other Sources of Funds
The following table sets forth the deposit activities of Alaska Federal
for the periods indicated.
Year Ended
December 31,
----------------------
1998 1997
---- ----
(In thousands)
Beginning balance ............................... $ 96,959 $ 96,810
-------- --------
Net deposits (withdrawals)
before interest credited ...................... 1,791 (3,100)
Interest credited ............................... 3,195 3,249
-------- --------
Net increase (decrease) in deposits ............. 4,986 149
-------- --------
Ending balance .................................. $101,945 $ 96,959
======== ========
Borrowings. Deposits and loan repayments are the primary source of
funds for Alaska Federal's lending and investment activities. However, Alaska
Federal may rely upon advances from the Federal Home Loan Bank of Seattle to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The Federal Home Loan Bank of Seattle functions as a central
reserve bank providing credit for thrift institutions and many other member
financial institutions. The Federal Home Loan Bank of Seattle requires Alaska
Federal, as a member, to own capital stock in the Federal Home Loan Bank of
Seattle and authorizes it to apply for advances on the security of this stock
and certain of its mortgage loans and other assets (principally securities which
are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. At December 31, 1998,
Alaska Federal had no advances outstanding from the Federal Home Loan Bank of
Seattle. At December 31, 1998, Alaska Federal had a borrowing capacity of $22.1
million with the Federal Home Loan Bank of Seattle.
66
<PAGE>
The following table sets forth certain information regarding short-term
borrowings by Alaska Federal at the end of and during the periods indicated:
Year Ended
December 31,
------------------
1998 1997
---- ----
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
Federal Home Loan Bank advances ................. $9,000 $9,000
Approximate average short-term borrowings
outstanding with respect to:
Federal Home Loan Bank advances ................. 2,654 7,702
Approximate weighted average rate paid on:
Federal Home Loan Bank advances ................. 6.22% 6.06%
At December 31,
----------------------
1998 1997
---- ----
(Dollars in thousands)
Balance outstanding at end of period:
Federal Home Loan Bank advances .................. $ -- $ 9,000
Weighted average rate paid on:
Federal Home Loan Bank advances .................. --% 6.08%
Subsidiary Activities
As of December 31, 1998, Alaska Federal did not own any active
subsidiaries.
67
<PAGE>
Properties
The following table sets forth certain information regarding Alaska
Federal's offices at December 31, 1998.
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In thousands)
Main Office:
Nugget Mall Office (1) 1984 16,000 $38,106
2094 Jordan Avenue, 2nd Floor
Juneau, Alaska 99801
Branch Offices:
301 N. Franklin Street 1960 6,268 29,474
Juneau, Alaska 99801
400 Mission Street (2) 1974 5,300 15,158
Ketchikan, Alaska 99901
2442 Tongass Avenue (3) 1997 1,550 1,425
Ketchikan, Alaska 99901
101 Lake Street (4) 1978 3,326 14,208
Sitka, Alaska 99835
219 Front Street (5) 1999 1,200 3,574
Wrangell, Alaska 99929
- -------------
(1) Lease expires in January 2009, with one 10-year option to renew.
(2) Alaska Federal is reviewing a listing agreement on the Mission Street
building in Ketchikan, with the intention of selling the facility and
vacating the current branch space in favor of a new, smaller office at a
more advantageous location in the downtown area.
(3) Lease expires in November 2002, with four three-year options to renew.
(4) Lease expires in May 2003, with option to renew for an unspecified term.
(5) Lease expires in January 2004.
Alaska Federal is studying the feasibility of opening a 1,000 square
foot branch in the Auke Bay area of Juneau. Pending the outcome of a demographic
review, a remodeling cost estimate, and meetings with the local branch of the
University of Alaska, which is adjacent to the proposed site, Alaska Federal has
paid the equivalent of two months rent to the building owner to take the
property off the market for 60 days, or through April 1999. Anticipated opening
of the branch would be mid-summer 1999.
Alaska Federal maintains three automated teller machines including one
at the Nugget Mall adjacent to the Juneau office, one at the Juneau airport and
one at the Sitka branch office. At December 31, 1998, the net book value of
Alaska Federal's properties and its fixtures, furniture and equipment was $3.3
million.
68
<PAGE>
Personnel
As of December 31, 1998, Alaska Federal had 57 full-time and nine
part-time employees, none of whom are represented by a collective bargaining
unit. Alaska Federal believes its relationship with its employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving
Alaska Federal, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which Alaska Federal holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to Alaska Federal's business. Alaska Federal is not a
party to any pending legal proceedings that it believes would have a material
adverse effect on the financial condition or operations of Alaska Federal.
MANAGEMENT OF ALASKA PACIFIC BANCSHARES
Alaska Pacific Bancshares' Board of Directors consists of seven persons
divided into three classes, each of which contain approximately one-third of the
Board. One class consisting of Avrum M. Gross and William J. Schmitz, has a term
of office expiring at the first annual meeting of stockholders after their
initial election by stockholders; a second class, consisting of Roger Grummett
and Deborah Marshall has a term of office expiring at the second annual meeting
of stockholders after their initial election by stockholders; and a third class,
consisting of Craig E. Dahl, Hugh N. Grant and D. Eric McDowell has a term of
office expiring at the third annual meeting of stockholders after their initial
election by stockholders.
Alaska Pacific Bancshares' executive officers are elected annually and
hold office until death, resignation or removal by the Board of Directors. The
executive officers of Alaska Pacific Bancshares are:
Name Position
---- --------
Craig E. Dahl President and Chief Executive Officer
Lisa Corrigan Bell Senior Vice President and Chief Operating Officer
Roger K. White Senior Vice President, Chief Financial Officer and Secretary
Since the formation of Alaska Pacific Bancshares, none of the executive
officers, directors or other personnel has received remuneration from Alaska
Pacific Bancshares. Information concerning the principal occupations, employment
and compensation of the directors and executive officers of Alaska Pacific
Bancshares during the past five years is set forth under "Management of Alaska
Federal -- Biographical Information."
MANAGEMENT OF ALASKA FEDERAL
Alaska Federal's Board of Directors consists of seven persons divided
into three classes as nearly equal in number as possible. Each class serves for
three-year terms with one class elected annually. Alaska Federal's executive
officers are elected annually by the Board of Directors and serve at the Board's
discretion. The following table sets forth information with respect to the
directors and executive officers of Alaska Federal.
69
<PAGE>
<TABLE>
<CAPTION>
Directors
Year Year of
Elected Expiration
Name Age(1) Position Director of Term
---- ------ -------- -------- -------
<S> <C> <C> <C>
Craig E. Dahl 49 President, Chief Executive 1996 2001
Officer and Director
Roger Grummett 56 Director 1987 2000
Hugh N. Grant 63 Director 1990 2001
Avrum M. Gross 62 Chairman of the Board 1982 1999
Deborah Marshall 46 Director 1992 2000
D. Eric McDowell 56 Director 1989 2001
William J. Schmitz 68 Director 1987 1999
Executive Officers Who Are Not Directors
----------------------------------------
Name Age(1) Position
- ---- ------ --------
Lisa Corrigan Bell 39 Senior Vice President and Chief Operating Officer
Roger K. White 48 Senior Vice President and Chief Financial Officer
</TABLE>
- -------------
(1) At December 31, 1998.
Biographical Information
The principal occupation(s) of each of the above individuals for the
past five years, as well as other information, is set forth below. All of the
individuals reside in Juneau, Alaska, unless otherwise indicated. No family
relationships exist between or among the individuals.
Craig E. Dahl is President and Chief Executive Officer of Alaska
Federal. He has been employed by Alaska Federal since 1992, and is the former
President of the B.M. Behrends Banks in Juneau, Alaska.
Roger Grummett is retired. Previously, he was a Partner at Shattuck &
Grummett, Inc., an insurance agency, for 32 years.
Hugh N. Grant has been self-employed as a contractor and real estate
developer since 1961. He is also the owner of Western Auto.
Avrum M. Gross is an attorney and has been a Partner in the law firm of
Gross & Burke, Juneau, Alaska, since 1982.
Deborah Marshall is the owner of MacDonnah's Ltd. dba The Fiddlehead, a
restaurant and bakery established in 1978.
70
<PAGE>
D. Eric McDowell is President and majority stockholder of McDowell,
Inc., an economic, market and business research and consulting group,
established in 1972.
William J. Schmitz is a Certified Public Accountant and has been a
Partner in the accounting firm of Schmitz & Buck, Juneau, Alaska, since 1961.
Lisa Corrigan Bell is Senior Vice President and Chief Operating Officer
of Alaska Federal, positions she has held since 1996. Ms. Bell served in various
positions of increasing responsibility at Alaska Federal since 1992.
Roger K. White is Senior Vice President and Chief Financial Officer of
Alaska Federal, positions he has held since 1995. Prior to that time, Mr. White
served as Vice President and Controller of Puget Sound Bancorp, Tacoma,
Washington.
Directors' Compensation
All directors, other than the Chairman of the Board, receive a monthly
fee of $775 per Board meeting attended and $100 per committee meeting attended.
The Chairman of the Board receives a monthly fee of $900 and $100 per committee
meeting attended. Total fees paid to directors during the year ended December
31, 1998 were $67,350. Following consummation of the conversion, directors' fees
will continue to be paid by Alaska Federal and, initially, no separate fees are
expected to be paid for service on Alaska Pacific Bancshares' Board of
Directors.
Meetings and Committees of the Board of Directors
Alaska Federal's Board of Directors meets monthly and has additional
special meetings as needed. During the year ended December 31, 1998, the Board
of Directors met 14 times. No director attended fewer than 75% in the aggregate
of the total number of Board meetings held and the total number of committee
meetings on which he served during the fiscal year ended December 31, 1998.
The Human Resources Committee (which also serves as a Compensation
Committee) consists of Messrs. McDowell (Chairman), Gross and Schmitz and Ms.
Marshall. This Committee meets on an as-needed basis and is responsible for
reviewing Alaska Federal's personnel to determine if and when additional
personnel are needed. This Committee met four times during fiscal 1998.
The full Board of Directors appoints a Nominating Committee consisting
of members of Alaska Federal for the annual selection of management's nominees
for election as directors. The Nominating Committee met once during the year
ended December 31, 1998.
The Board of Directors also has a standing Audit Committee, Loan and
Investment Committee, and a Strategic Planning and Marketing Committee.
Executive Compensation
Summary Compensation Table. The following information is furnished for
Messrs. Dahl and White. No other executive officer of Alaska Federal received
salary and bonus in excess of $100,000 during the year ended December 31, 1998.
71
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation(1)
---------------------------------------------------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus Compensation(2) Compensation(3)
- -------- ---- ------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Craig E. Dahl 1998 $110,000 $22,000 $ -- $6,887
President and Chief
Executive Officer
Roger K. White 1998 90,000 14,000 -- 6,748
Chief Financial Officer
</TABLE>
- ------------
(1) Compensation information for fiscal years ended December 31, 1997 and 1996
has been omitted as Alaska Federal was neither a public company nor a
subsidiary thereof at such time.
(2) The aggregate amount of perquisites and other personal benefits was less
than 10% of the total annual salary and bonus reported.
(3) Consists of 401(k) contributions, automobile allowance and racquet club
dues.
Employment Agreement for Executive Officer. In connection with the
conversion, Alaska Federal intends to enter into a three-year employment
agreement with Craig E. Dahl. Under the employment agreement, the initial salary
level for Mr. Dahl will be $110,000, which amount will be paid by Alaska Federal
and may be increased at the discretion of the Board of Directors or an
authorized committee of the Board. On each anniversary of the initial date of
the employment agreement, the term of the agreement may be extended for an
additional year at the discretion of the Board. The agreement may be terminated
by Alaska Federal at any time, by the executive if he is assigned duties
inconsistent with his initial position, duties, responsibilities and status, or
upon the occurrence of certain events specified by federal regulations. In the
event that the executive's employment is terminated without cause or upon the
executive's voluntary termination following the occurrence of an event described
in the preceding sentence, Alaska Federal would be required to honor the terms
of the agreement through the expiration of the current term, including payment
of then current cash compensation and continuation of employee benefits.
The employment agreement also provides for a severance payment and
other benefits if the executive is involuntarily terminated because of a change
in control of Alaska Pacific Bancshares and Alaska Federal. The agreement
authorizes severance payments on a similar basis if the executive voluntarily
terminates his employment following a change in control because he is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The agreement defines the term
"change in control" as having occurred when, among other things, a person other
than Alaska Pacific Bancshares purchases shares of Alaska Pacific Bancshares'
common stock under a tender or exchange offer for the shares; any person, as
such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, is or becomes the beneficial owner, directly or indirectly, of
securities of Alaska Pacific Bancshares representing 25% or more of the combined
voting power of Alaska Pacific Bancshares' then outstanding securities; the
membership of the Board of Directors changes as the result of a contested
election; or shareholders of Alaska Pacific Bancshares approve a merger,
consolidation, sale or disposition of all or substantially all of Alaska Pacific
Bancshares' assets, or a plan of partial or complete liquidation.
The maximum value of the severance benefits under the employment
agreement is 2.99 times the executive's average annual compensation during the
five-year period prior to the effective date of the change in control. The
employment agreement provides that the value of the maximum benefit may be
distributed, at the executive's election, in the form of a lump sum cash payment
equal to 2.99 times the executive's base amount, or a combination of a cash
payment and continued coverage under Alaska Pacific Bancshares' and Alaska
Federal's health, life and disability programs for a 36-month period following
the change in control, the total value of which does not exceed 2.99 times the
executive's base amount. Assuming that a change in control had occurred at
December 31, 1998 and that Mr. Dahl elected to receive a lump sum cash payment,
he would be entitled to a payment of approximately $343,605. Section 280G of the
Internal Revenue Code provides that severance payments that equal or exceed
three times the individual's
72
<PAGE>
base amount are deemed to be "excess parachute payments" if they are conditioned
upon a change in control. Individuals receiving parachute payments in excess of
2.99 times of their base amount are subject to a 20% excise tax on the amount of
such excess payments. If excess parachute payments are made, Alaska Pacific
Bancshares and Alaska Federal would not be entitled to deduct the amount of such
excess payments. The employment agreement provides that severance and other
payments that are subject to a change in control will be reduced as much as
necessary to ensure that no amounts payable to the executive will be considered
excess parachute payments.
The employment agreement restricts Mr. Dahl's right to compete against
Alaska Federal for a period of one year from the date of termination of the
agreement if Mr. Dahl voluntarily terminates employment except in the event of a
change in control.
Severance Agreements for Executive Officers. In connection with the
conversion, Alaska Federal intends to enter into three-year severance agreements
with Lisa Corrigan Bell and Roger K. White. On each anniversary of the initial
date of the severance agreements, the term of each agreement may be extended for
an additional year at the discretion of the Board. The agreements may be
terminated by Alaska Federal at any time, by the executive if he is assigned
duties inconsistent with his initial position, duties, responsibilities and
status, or upon the occurrence of certain events specified by federal
regulations.
The severance agreements also provide for a severance payment and other
benefits if the executive is involuntarily terminated because of a change in
control of Alaska Pacific Bancshares and Alaska Federal. The agreement
authorizes severance payments on a similar basis where an executive voluntarily
terminates his employment following a change in control because he is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The agreement defines the term
"change in control" as having occurred when, among other things, a person other
than Alaska Pacific Bancshares purchases shares of Alaska Pacific Bancshares'
common stock under a tender or exchange offer for the shares; any person, as
such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, is or becomes the beneficial owner, directly or indirectly, of
securities of Alaska Pacific Bancshares representing 25% or more of the combined
voting power of Alaska Pacific Bancshares' then outstanding securities; the
membership of the Board of Directors changes as the result of a contested
election; or shareholders of Alaska Pacific Bancshares approve a merger,
consolidation, sale or disposition of all or substantially all of Alaska Pacific
Bancshares' assets, or a plan of partial or complete liquidation.
The maximum value of the severance benefits under the severance
agreements is 2.99 times the executive's average annual compensation during the
five-year period prior to the effective date of the change in control. The
severance agreements provide that the value of the maximum benefit may be
distributed, at the executive's election, in the form of a lump sum cash payment
equal to 2.99 times the executive's base amount, or a combination of a cash
payment and continued coverage under Alaska Pacific Bancshares' and Alaska
Federal's health, life and disability programs for a 36-month period following
the change in control, the total value of which does not exceed 2.99 times the
executive's base amount. Assuming that a change in control had occurred at
December 31, 1998 and that each executive elected to receive a lump sum cash
payment, Lisa Corrigan Bell and Roger K. White would be entitled to payments of
approximately $220,970 and $310,368, respectively. Section 280G of the Internal
Revenue Code provides that severance payments that equal or exceed three times
the individual's base amount are deemed to be "excess parachute payments" if
they are conditioned upon a change in control. Individuals receiving parachute
payments in excess of 2.99 times their base amount are subject to a 20% excise
tax on the amount of such excess payments. If excess parachute payments are
made, Alaska Pacific Bancshares and Alaska Federal would not be entitled to
deduct the amount of such excess payments. The severance agreements provide that
severance and other payments that are conditioned on a change in control will be
reduced as much as necessary to ensure that no amounts payable to the executive
will be considered excess parachute payments.
Severance Agreements for Senior Officers. In connection with the
conversion, Alaska Federal intends to enter into one-year severance agreements
with five senior officers of Alaska Federal. This group of senior officers is
made up of officers other than Messrs. Dahl and White and Ms. Bell, whose
employment or severance agreements have
73
<PAGE>
previously been described. On each anniversary of the initial date of the
severance agreements, the term of each agreement may be extended for an
additional year at the discretion of the Board of Directors. It is anticipated
that the severance agreements will have an initial term of 12 months.
The severance agreements will provide for severance payments and
continuation of other benefits if the executive's employment is involuntarily
terminated because of a change in control of Alaska Pacific Bancshares and
Alaska Federal. Severance payments and benefits also will be provided on a
similar basis where an executive voluntarily terminates his employment following
a change in control because he is assigned duties inconsistent with his
position, duties, responsibilities and status immediately prior to such change
in control. The agreement defines the term "change in control" as having
occurred when, among other things, a person other than Alaska Pacific Bancshares
purchases shares of Alaska Pacific Bancshares' common stock under a tender or
exchange offer for such shares; any person, as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act, is or becomes the beneficial
owner, directly or indirectly, of securities of Alaska Pacific Bancshares
representing 25% or more of the combined voting power of Alaska Pacific
Bancshares' then outstanding securities: the membership of the Board of
Directors changes as the result of a contested election; or shareholders of
Alaska Pacific Bancshares approve a merger, consolidation, sale or disposition
of all or substantially all of Alaska Pacific Bancshares' assets, or a plan of
partial or complete liquidation.
The maximum value of the severance benefits under the severance
agreements is 1.0 times the executive's average annual compensation during the
five-year period prior to the effective date of the change in control. In
addition, the executive will receive 12 months of medical benefits following the
effective date of the change in control. Assuming that a change in control had
occurred at December 31, 1998, and excluding any other benefits due under the
severance agreements, the aggregate amount payable to the five senior officers
would have been approximately $272,229.
Employee Severance Compensation Plan. Alaska Federal's Board of
Directors intends to, upon conversion, establish the Alaska Pacific Bank
Employee Severance Compensation Plan which will provide eligible employees with
severance pay benefits in the event of a change in control of Alaska Federal or
Alaska Pacific Bancshares following the conversion. Management personnel with
employment agreements or change in control agreements are not eligible to
participate in the severance plan. Generally, employees are eligible to
participate in the severance plan if they have completed at least one year of
service with Alaska Federal. The severance plan vests in each participant a
contractual right to the benefits the participant is entitled to thereunder.
Under the severance plan, in the event of a change in control of Alaska Federal,
or Alaska Pacific Bancshares, eligible employees who are terminated from or
terminate their employment within one year, for reasons specified under the
severance plan, will be entitled to receive a severance payment. If the
participant, whose employment has terminated, has completed at least one year of
service, the participant will be entitled to a cash severance payment equal to
3.846% of annual compensation for each year of service up to a maximum of 100%
of annual compensation. Such payments may tend to discourage takeover attempts
by increasing costs to be incurred by Alaska Federal in the event of a takeover.
In the event the provisions of the severance plan are triggered, the total
amount of payments that would be due thereunder, based solely upon current
salary levels, would be approximately $130,000. However, it is management's
belief that substantially all of Alaska Federal's employees would be retained in
their current positions in the event of a change in control, and that any amount
payable under the severance plan would be considerably less than the total
amount that could be possibly be paid under the severance plan.
Benefits
General. Alaska Federal currently provides health, life and disability
insurance benefits for all full-time employees, after the employees pay certain
deductibles.
401(k) Savings Plan. Alaska Federal maintains the Alaska Federal
Savings Bank 401(k) Savings Plan for the benefit of eligible employees of Alaska
Federal. The plan is intended to be a tax-qualified plan under Sections 401(a)
and 401(k) of the Internal Revenue Code. Employees of Alaska Federal who have
completed three months of service
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and who have attained age 18 are eligible to participate in the plan.
Participants may contribute from 1% to 17% of their annual compensation to the
plan through a salary reduction election. Alaska Federal matches participant
contributions equal to 75% of the participant's contribution. However, Alaska
Federal makes no matching contribution with respect to a participant's
contribution in excess of $2,667. In addition to Alaska Federal's matching
contributions, Alaska Federal may contribute a discretionary amount to the plan
in any plan year which is allocated to individual participants in the proportion
that their annual compensation bears to the total compensation of all
participants during the plan year. To be eligible to receive a discretionary
contribution from Alaska Federal, the participant must complete 1,000 hours of
service during the plan year and remain employed by Alaska Federal on the last
day of the plan year. Participants are at all times 100% vested in salary
reduction contributions. With respect to matching and discretionary
contributions made by Alaska Federal, participants vest in such contributions at
the rate of 20% per year beginning with the completion of their first year of
service with full vesting occurring after five years of service. For the year
ended December 31, 1998, Alaska Federal incurred total contribution-related
expenses of $47,000 in connection with the plan.
Generally, plan participants direct the investment of plan assets. In
connection with the conversion, the investment options available to participants
will be expanded to include the opportunity to direct the investment of their
plan account balance to purchase shares of the common stock. A participant in
the plan who elects to purchase common stock through the plan will receive the
same subscription priority and be subject to the same individual purchase
limitations as if the participant had elected to make such purchase using other
funds. See "Alaska Federal's Conversion -- Limitations on Purchases of Shares."
Performance Incentive Plan. Alaska Federal implemented the Alaska
Federal Savings Bank Performance Incentive Plan for the benefit of its officers
in 1999. The purpose of the plan is to reward officers based upon both the
overall performance of Alaska Federal and the achievements of the individual.
Employees designated as officers of Alaska Federal as of July 1, the beginning
of the current fiscal year, are eligible to participate in the plan. Officers
hired, or employees promoted to officer status during the first quarter of the
fiscal year will be eligible to participate at 50% of the eligible distribution.
Other officers promoted or hired during the remaining three quarters of the year
will not be eligible for a distribution under the plan. Alaska Federal did not
achieve performance targets during fiscal 1998, so no bonus pool was established
or paid out under the plan.
Employee Stock Ownership Plan. The Board of Directors has authorized
the adoption by Alaska Pacific Bancshares of an employee stock ownership plan
for employees of Alaska Pacific Bancshares and Alaska Federal to become
effective upon the completion of the conversion. The purpose of the employee
stock ownership plan is d to satisfy the requirements for an employee stock
ownership plan under the Internal Revenue Code and the Employee Retirement
Income Security Act of 1974, as amended. Employees of Alaska Pacific Bancshares
and Alaska Federal who have been credited with at least 1,000 hours of service
during a designated 12-month period and who have attained age 18 will be
eligible to participate in the employee stock ownership plan.
The employee stock ownership plan intends to purchase 8% of the shares
issued in the conversion. This would range between 47,600 shares, assuming
595,000 shares are issued in the conversion, and 64,400 shares, assuming 805,000
shares are issued in the conversion. It is anticipated that the employee stock
ownership plan will borrow funds from Alaska Pacific Bancshares. Such loan will
equal 100% of the aggregate purchase price of the common stock. The employee
stock ownership plan will repay the loan principally from Alaska Federal's
contributions to the employee stock ownership plan and dividends payable on
common stock held by the employee stock ownership plan over the anticipated
10-year term of the loan. The interest rate for the employee stock ownership
plan loan is expected to be the prime rate as published in The Wall Street
Journal on the closing date of the conversion. See "Pro Forma Data." To the
extent that the employee stock ownership plan is unable to acquire 8% of the
common stock sold in the offering, it is anticipated that it may acquire
additional shares following the conversion through open market purchases.
In any plan year, Alaska Federal may make additional discretionary
contributions to the employee stock ownership plan for the benefit of plan
participants in either cash or shares of common stock, which may be acquired
through the purchase of outstanding shares in the market or from individual
stockholders or which constitute authorized
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but unissued shares or shares held in treasury by Alaska Pacific Bancshares.
Several factors will affect the timing, amount, and manner of such discretionary
contributions, including applicable regulatory policies, the requirements of
applicable laws and regulations, and market conditions.
Alaska Pacific Bancshares will hold shares purchased by the employee
stock ownership plan with the proceeds of the loan will be held in a suspense
account and release them on a pro rata basis as the loan is repaid.
Discretionary contributions to the employee stock ownership plan and shares
released from the suspense account will be allocated among participants on the
basis of each participant's proportional share of total compensation.
Forfeitures will be reallocated among the remaining plan participants.
Participants will vest in their accrued benefits under the employee
stock ownership plan at the rate of 20% per year, beginning upon the completion
of three years of service. A participant is fully vested at retirement, in the
event of death or disability or upon termination of the employee stock ownership
plan. Benefits are distributable upon a participant's retirement, early
retirement, death, disability, or termination of employment. Alaska Federal's
contributions to the employee stock ownership plan are not fixed, so benefits
payable under the employee stock ownership plan cannot be estimated.
It is anticipated the Board of Directors will select an institutional
trustee to serve as trustee of the employee stock ownership plan. The trustee
must vote all allocated shares held in the employee stock ownership plan in
accordance with the instructions of plan participants and unallocated shares
must be voted in the same ratio on any matter as those shares for which
instructions are given. The trustee will vote, in his discretion, allocated
shares for which no instructions are received .
Under applicable accounting requirements, compensation expense for a
leveraged employee stock ownership plan is recorded at the fair market value of
the employee stock ownership plan shares when committed to be released to
participants' accounts. See "Pro Forma Data."
The employee stock ownership plan will meet the requirements of the
Employee Retirement Income Security Act of 1974, as amended, and the regulations
of the Internal Revenue Service and the Department of Labor issued thereunder.
Alaska Pacific Bancshares intends to request a determination letter from the
Internal Revenue Service regarding the tax-qualified status of the employee
stock ownership plan. Alaska Pacific Bancshares expects, but cannot guarantee,
that a favorable determination letter will be received by the employee stock
ownership plan.
1999 Stock Option Plan. The Board of Directors of Alaska Pacific
Bancshares intends to adopt the stock option plan and to submit the stock option
plan to the stockholders for approval at a meeting held no earlier than six
months following the conversion. Under current Office of Thrift Supervision
regulations, the approval of a majority vote of Alaska Pacific Bancshares'
outstanding shares is required for the implementation of the stock option plan
within one year after the conversion. The stock option plan will comply with all
applicable regulatory requirements. However, the stock option plan will not be
approved or endorsed by the Office of Thrift Supervision.
Alaska Federal will design the stock option plan to attract and retain
qualified management personnel and nonemployee directors, to provide such
officers, key employees and nonemployee directors with a proprietary interest in
Alaska Pacific Bancshares as an incentive to contribute to the success of Alaska
Pacific Bancshares and Alaska Federal, and to reward officers and key employees
for outstanding performance. The stock option plan will provide for the grant of
incentive stock options intended to comply with the requirements of the Internal
Revenue Code and for nonqualified stock options. Upon receipt of stockholder
approval of the stock option plan, Alaska Federal may grant stock options to key
employees of Alaska Pacific Bancshares and its subsidiaries, including Alaska
Federal. The stock option plan will continue in effect for a period of ten years
from the date the stock option plan is approved by stockholders, unless
terminated earlier.
A number of authorized shares of common stock equal to 10% of the
number of shares of common stock issued in connection with the conversion will
be reserved for future issuance under the stock option plan. This would range
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from 59,500 shares, assuming 595,000 shares are issued in the conversion, to
80,500, assuming 805,000 shares are issued in the conversion. Shares acquired
upon exercise of options will be authorized but unissued shares or treasury
shares. If a stock split, reverse stock split, stock dividend, or similar event
occurs, the number of shares of common stock under the stock option plan, the
number of shares to which any award relates and the exercise price per share
under any option may be adjusted by the compensation committee to reflect the
increase or decrease in the total number of shares of common stock outstanding.
The compensation committee of the Board of Directors of Alaska Pacific
Bancshares will administer and interpret the stock option plan. According to
applicable Office of Thrift Supervision regulations, the compensation committee
will determine which nonemployee directors, officers and key employees will be
granted options, whether, in the case of officers and employees the number of
shares represented by each option, and the exercisability of options. All
options granted to nonemployee directors will be nonqualified stock options. The
per share exercise price of all options will equal at least 100% of the fair
market value of a share of common stock on the date the option is granted.
Under current Office of Thrift Supervision regulations, if the stock
option plan is implemented within one year of the conversion, no officer or
employee could receive an award of options covering in excess of 25%, no
nonemployee director could receive in excess of 5%, and nonemployee directors,
as a group, could not receive in excess of 30% of the number of shares reserved
for issuance under the stock option plan.
Alaska Federal anticipates that it will grantall options under the
stock option plan subject to a vesting schedule so that the options become
exercisable over a specified period following the date of grant. Under Office of
Thrift Supervision regulations, if the stock option plan is implemented within
the first year following the conversion the minimum vesting period will be five
years. All unvested options will be immediately exercisable upon the recipient's
death or disability.
Each incentive stock option that is awarded to an officer or key
employee will remain exercisable at any time on or after the date it vests
through the earlier to occur of the tenth anniversary of the date of grant or
three months after the date on which the optionee terminates employment, or one
year if the optionee's termination results from death or disability, unless the
compensation committee extends the time period. Each nonqualified stock option
that is awarded to an officer, key employee or nonemployee director will remain
exercisable through the earlier to occur of the tenth anniversary of the date of
grant or one year or two years following the grantee's death, disability or
termination of service. All incentive stock options are nontransferable except
by will or the laws of descent or distribution.
Under current provisions of the Internal Revenue Code, the federal tax
treatment of incentive stock options and non-qualified stock options is
different. With respect to incentive stock options, an optionee who satisfies
certain holding period requirements will not recognize compensation income at
the time the option is granted or at the time the option is exercised. If the
holding period requirements are satisfied, the optionee will generally recognize
capital gain or loss upon a subsequent disposition of the shares of common stock
received upon the exercise of a stock option. If the holding period requirements
are not satisfied, the difference between the fair market value of the common
stock on the date of exercise and the option exercise price, if any, will be
taxable to the optionee at ordinary income tax rates. A federal income tax
deduction generally will not be available to Alaska Pacific Bancshares as a
result of the grant or exercise of an incentive stock option, unless the
optionee fails to satisfy the holding period requirements. For non-qualified
stock options, the grant generally is not a taxable event for the optionee and
no tax deduction will be available to Alaska Pacific Bancshares. However, upon
exercise, the difference between the fair market value of the common stock on
the date of exercise and the option exercise price generally will be treated as
compensation to the optionee upon exercise, and Alaska Pacific Bancshares will
be entitled to a compensation expense deduction in the amount of income
recognized by the optionee.
Although no specific award determinations have been made at this time,
Alaska Pacific Bancshares and Alaska Federal anticipate that if stockholder
approval is obtained it would provide awards to its directors, officers and
employees to the extent and under terms and conditions permitted by applicable
regulations.
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Management Recognition and Development Plan. The Board of Directors of
Alaska Pacific Bancshares intends to adopt the Alaska Pacific Bancshares'
Management Recognition and Development Plan, a restricted stock plan, for
officers, employees, and nonemployee directors of Alaska Pacific Bancshares and
Alaska Federal and to submit it to the stockholders for approval at a meeting
held no earlier than six months following the conversion. The plan will enable
Alaska Pacific Bancshares and Alaska Federal to provide participants with a
proprietary interest in Alaska Pacific Bancshares as an incentive to contribute
to the success of Alaska Pacific Bancshares and Alaska Federal. Persons who are
awarded stock under the plan will not have to pay for the stock. Furthermore,
some or all of the persons who receive awards under the management development
and recognition plan will also be granted options under the stock option plan.
The plan will comply with all applicable regulatory requirements. The Office of
Thrift Supervision will not approve or endorse the plan. Under current Office of
Thrift Supervision regulations, a majority of Alaska Pacific Bancshares'
outstanding shares must vote to approve the implementation of the plan within
one year after the conversion.
The plan intends to acquire a number of shares of Alaska Pacific
Bancshares' common stock equal to 4% of the common stock issued in the
conversion. This would range from 23,800 shares, assuming 595,000 shares are
issued in the conversion, to 32,200 shares, assuming 805,000 shares are issued
in the conversion. The plan will acquire the shares on the open market, if
available, with funds contributed by Alaska Pacific Bancshares or Alaska Federal
to a trust which Alaska Pacific Bancshares may establish in conjunction with the
plan or from authorized but unissued shares or treasury shares of Alaska Pacific
Bancshares.
The compensation committee of the Board of Directors of Alaska Pacific
Bancshares will administer the management development and recognition plan, the
members of which will also serve as trustees for the plan, if a trust is formed.
The trustees will be responsible for the investment of all funds contributed by
Alaska Pacific Bancshares or Alaska Federal to the trust. The Board of Directors
of Alaska Pacific Bancshares may terminate the plan at any time and, upon
termination, all unallocated shares of common stock will revert to Alaska
Pacific Bancshares.
Shares of common stock granted under the plan will be in the form of
restricted stock which will become unrestricted ratably over a specified vesting
period following the date of grant. During the period of restriction, Alaska
Pacific Bancshares or the plan will hold all shares in escrow. Under Office of
Thrift Supervision regulations, if the management development and recognition
plan is implemented within the first year following the conversion, the minimum
vesting period will be five years. All unvested awards will vest upon the
recipient's death or disability.
A recipient of a plan award in the form of restricted stock generally
will not recognize income upon an award of shares of common stock, and Alaska
Pacific Bancshares will not be entitled to a federal income tax deduction, until
the termination of the restrictions. Upon termination of the restrictions, the
recipient will recognize ordinary income in an amount equal to the fair market
value of the common stock at the time and Alaska Pacific Bancshares will be
entitled to a deduction in the same amount after satisfying federal income tax
reporting requirements. However, the recipient may elect to recognize ordinary
income in the year the restricted stock is granted in an amount equal to the
fair market value of the shares at that time, determined without regard to the
restrictions. In that event, Alaska Pacific Bancshares will be entitled to a
deduction in that year and in the same amount. Any gain or loss recognized by
the recipient upon subsequent disposition of the stock will be either a capital
gain or capital loss.
Although no specific award determinations have been made at this time,
Alaska Pacific Bancshares and Alaska Federal anticipate that if stockholder
approval is obtained it would provide awards to its directors, officers and
employees to the extent and under terms and conditions permitted by applicable
regulations. Under current Office of Thrift Supervision regulations, if the plan
is implemented within one year after the conversion, no officer or employees
could receive an award covering in excess of 25%, no nonemployee director could
receive in excess of 5% and nonemployee directors, as a group, could not receive
in excess of 30% of the number of shares reserved for issuance under the plan.
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Transactions with Alaska Federal
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, unless the loan or
extension of credit is made under a benefit program generally available to all
employees and does not give preference to any insider over any other employee,
and must not involve more than the normal risk of repayment or present other
unfavorable features. Alaska Federal has adopted a policy to this effect. In
addition, loans made to a director or executive officer in an amount that, when
aggregated with the amount of all other loans to such director or executive
officer and his or her related interests are in excess of the greater of
$25,000, or 5% of Alaska Federal's capital and surplus, up to a maximum of
$500,000, must be approved in advance by a majority of the disinterested members
of the Board of Directors. See "Regulation -- Federal Regulation of Savings
Associations -- Transactions with Affiliates." The aggregate amount of loans by
Alaska Federal to its executive officers and directors and their affiliates was
$967,000 at December 31, 1998, or approximately 7.0% of pro forma stockholders'
equity assuming that 805,000 shares are issued in the conversion. These loans
were performing according to their original terms at December 31, 1998.
REGULATION
General
Alaska Federal is subject to extensive regulation, examination and
supervision by the Office of Thrift Supervision as its chartering agency, and
the Federal Deposit Insurance Corporation, as the insurer of its deposits. The
activities of federal savings institutions are governed by the Home Owners' Loan
Act, as amended, and, in certain respects, the Federal Deposit Insurance Act,
and the regulations issued by the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which federal
savings associations may engage. Lending activities and other investments must
comply with various statutory and regulatory capital requirements. In addition,
Alaska Federal's relationship with its depositors and borrowers is also
regulated to a great extent, especially in such matters as the ownership of
deposit accounts and the form and content of Alaska Federal's mortgage
documents. Alaska Federal must file reports with the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation to review Alaska Federal's compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could
have a material adverse impact on Alaska Pacific Bancshares, Alaska Federal and
their operations. Alaska Pacific Bancshares, as a savings and loan holding
company, will also be required to file certain reports with, and otherwise
comply with the rules and regulations of, the Office of Thrift Supervision.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The Office of Thrift Supervision is an
office in the Department of the Treasury subject to the general oversight of the
Secretary of the Treasury. The Office of Thrift Supervision generally possesses
the supervisory and regulatory duties and responsibilities formerly vested in
the Federal Home Loan Bank Board. Among other functions, the Office of Thrift
Supervision issues and enforces regulations affecting federally insured savings
associations and regularly examines these institutions.
Federal Home Loan Bank System. The Federal Home Loan Bank System,
consisting of 12 Federal Home Loan Banks, is under the jurisdiction of the
Federal Housing Finance Board. The designated duties of the Federal
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Housing Finance Board are to: supervise the Federal Home Loan Banks; ensure that
the Federal Home Loan Banks carry out their housing finance mission; ensure that
the Federal Home Loan Banks remain adequately capitalized and able to raise
funds in the capital markets; and ensure that the Federal Home Loan Banks
operate in a safe and sound manner.
Alaska Federal, as a member of the Federal Home Loan Bank of Seattle,
is required to acquire and hold shares of capital stock in the Federal Home Loan
Bank of Seattle in an amount equal to the greater of 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the Federal Home Loan Bank of Seattle. Alaska Federal
is in compliance with this requirement with an investment in Federal Home Loan
Bank of Seattle stock of $1.3 million at December 31, 1998.
Among other benefits, the Federal Home Loan Bank provides a central
credit facility primarily for member institutions. Proceeds derived from the
sale of consolidated obligations of the Federal Home Loan Bank System is the
primary source of funding. It makes advances to members in accordance with
policies and procedures established by the Federal Housing Finance Board and the
Board of Directors of the Federal Home Loan Bank of Seattle.
Federal Deposit Insurance Corporation. The Federal Deposit Insurance
Corporation is an independent federal agency established originally to insure
the deposits, up to prescribed statutory limits, of federally insured banks and
to preserve the safety and soundness of the banking industry. The Federal
Deposit Insurance Corporation maintains two separate insurance funds: the Bank
Insurance Fund and the Savings Association Insurance Fund. Alaska Federal's
deposit accounts are insured by the Federal Deposit Insurance Corporation under
the Savings Association Insurance Fund to the maximum extent permitted by law.
As insurer of Alaska Federal's deposits, the Federal Deposit Insurance
Corporation has examination, supervisory and enforcement authority over all
savings associations.
Under applicable regulations, the Federal Deposit Insurance Corporation
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are:
well-capitalized, adequately capitalized, or undercapitalized. The Federal
Deposit Insurance Corporation also places an institution in one of three
supervisory subcategories within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the Federal Deposit Insurance Corporation by the institution's primary
federal regulator and information that the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned with
the most well-capitalized, healthy institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act was enacted,
which, among other things, imposed a special one-time assessment on Savings
Association Insurance Fund member institutions, including Alaska Federal, to
recapitalize the Savings Association Insurance Fund. As a result of the Deposit
Insurance Funds Act and the special one-time assessment, the Federal Deposit
Insurance Corporation reduced the assessment schedule for Savings Association
Insurance Fund members, effective January 1, 1997, to a range of 0% to 0.27%,
with most institutions, including Alaska Federal, paying 0%. This assessment
schedule is the same as that for the Bank Insurance Fund, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, Savings
Association Insurance Fund members are charged an assessment of 0.065% of
Savings Association Insurance Fund-assessable deposits for the purpose of paying
interest on the obligations issued by the Financing Corporation in the 1980s to
help fund the thrift industry cleanup. Bank Insurance Fund-assessable deposits
are charged an assessment to help pay interest on the Financing Corporation
bonds at a rate of approximately .013%. Full pro rata sharing of the Financing
Corporation payments between Bank Insurance Fund and Savings Association
Insurance Fund members will occur until the earlier of December 31, 1999, or the
date the Bank Insurance Fund and Savings Association Insurance Fund are merged.
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The Federal Deposit Insurance Corporation is authorized to raise the
assessment rates in certain circumstances. The Federal Deposit Insurance
Corporation has exercised this authority several times in the past and may raise
insurance premiums in the future. If such action is taken by the Federal Deposit
Insurance Corporation, it could have an adverse effect on the earnings of Alaska
Federal.
Under the Federal Deposit Insurance Act, the Federal Deposit Insurance
Corporation may terminate insurance of deposits upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the Federal Deposit Insurance
Corporation or the Office of Thrift Supervision. Management of Alaska Federal
does not know of any practice, condition or violation that might lead to
termination of deposit insurance.
Liquidity Requirements. Under Office of Thrift Supervision regulations,
each savings institution is required to maintain an average daily balance of
liquid assets, which consist of cash, certain time deposits and savings
accounts, bankers' acceptances, and specified U.S. Government, state or federal
agency obligations and certain other investments, equal to a monthly average of
not less than 4.0% of its net withdrawable accounts plus short-term borrowings.
Office of Thrift Supervision regulations also require each savings institution
to maintain an average daily balance of short-term liquid assets at 1.0% of the
total of its net withdrawable savings accounts and borrowings payable in one
year or less. The Office of Thrift Supervision may impose monetary penalties for
failure to meet liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Prompt Corrective Action. Under Section 38 of the Federal Deposit
Insurance Act, as added by the Federal Deposit Insurance Corporation Improvement
Act of 1991, each federal banking agency is required to implement a system of
prompt corrective action for institutions that it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement this
system of prompt corrective action. Under the regulations, an institution shall
be deemed to be "well capitalized" if it has a total risk-based capital ratio of
10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0% or more,
or 3.0% under certain circumstances, and does not meet the definition of "well
capitalized;" "undercapitalized" if it has a total risk-based capital ratio that
is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage ratio that is less than 4.0%, or 3.0% under certain circumstances;
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and "critically undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
Section 38 of the Federal Deposit Insurance Act and the implementing
regulations also provide that a federal banking agency may, after notice and an
opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or has received in its most recent examination, and has not corrected,
a less than satisfactory rating for asset quality, management, earnings or
liquidity. The Office of Thrift Supervision may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the Federal Deposit Insurance Act, which sets forth various
mandatory and discretionary restrictions on its operations.
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At December 31, 1998, Alaska Federal was categorized as "well
capitalized" under the prompt corrective action regulations of the Office of
Thrift Supervision.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions to use as guidelines relating to: internal controls, information
systems and internal audit systems; loan documentation; credit underwriting;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. The guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the Office of Thrift Supervision determines that Alaska Federal
fails to meet any standard prescribed by the guidelines, the agency may require
Alaska Federal to submit to the agency an acceptable plan to achieve compliance
with the standard. Management is aware of no conditions relating to these safety
and soundness standards which would require submission of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including
Alaska Federal, are required to meet a qualified thrift lender test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset, as defined by
regulation, in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At December 31, 1998,
Alaska Federal met the test and its qualified thrift lender percentage was
69.1%.
Any savings association that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender and thereafter remains a qualified thrift lender. If an
association does not requalify and converts to a national bank charter, it must
remain Savings Association Insurance Fund-insured until the Federal Deposit
Insurance Corporation permits it to transfer to the Bank Insurance Fund. If such
an association has not yet requalified or converted to a national bnak, its new
investments and activities are limited to those permissible for both a savings
association and a national bank, and it is limited to national bank branching
rights in its home state. In addition, Alaska Federal is immediately ineligible
to receive any new Federal Home Loan Bank borrowings and is subject to national
bank limits for payment of dividends. If such association has not requalified or
converted to a national bank within three years after the failure, it must
divest of all investments and cease all activities not permissible for a
national bank. In addition, it must repay promptly any outstanding Federal Home
Loan Bank borrowings, which may result in prepayment penalties. If any
association that fails the qualified thrift lender test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies.
Capital Requirements. Under Office of Thrift Supervision regulations a
savings association must satisfy three minimum capital requirements: core
capital, tangible capital and risk-based capital. Savings associations must meet
all of the standards in order to comply with the capital requirements. Alaska
Pacific Bancshares is not subject to any minimum capital requirements.
Office of Thrift Supervision capital regulations establish a 3% core
capital or leverage ratio, which is defined as the ratio of core capital to
adjusted total assets. Core capital is defined to include common stockholders'
equity, noncumulative perpetual preferred stock and any related surplus, and
minority interests in equity accounts of consolidated subsidiaries, less any
intangible assets, except for certain qualifying intangible assets; certain
mortgage servicing rights; and equity and debt investments in subsidiaries that
are not "includable subsidiaries," which is defined as subsidiaries engaged
solely in activities not impermissible for a national bank, engaged in
activities impermissible for a national bank but only as an agent for its
customers, or engaged solely in mortgage-banking activities. In calculating
adjusted total assets, adjustments are made to total assets to give effect to
the exclusion of certain assets from capital and to account appropriately for
the investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required to
file with the Office of Thrift Supervision a capital plan that details the steps
they will take to reach compliance. In addition, the Office of Thrift
Supervision's
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prompt corrective action regulation provides that a savings institution that has
a leverage ratio of less than 4%, or 3% for institutions receiving the highest
CAMEL examination rating, will be deemed to be "undercapitalized" and may be
subject to certain restrictions. See "-- Federal Regulation of Savings
Associations -- Prompt Corrective Action."
As required by federal law, the Office of Thrift Supervision has
proposed a rule revising its minimum core capital requirement to be no less
stringent than that imposed on national banks. The Office of Thrift Supervision
has proposed that it will permit only those savings associations rated a
composite one, the highest rating, under the CAMEL rating system for savings
associations to operate at or near the regulatory minimum leverage ratio of 3%.
It will require all other savings associations to maintain a minimum leverage
ratio of 4% to 5%. The Office of Thrift Supervision will assess each individual
savings association through the supervisory process on a case-by-case basis to
determine the applicable requirement. No assurance can be given as to the final
form of any such regulation, the date of its effectiveness or the requirement
applicable to Alaska Federal.
Savings associations also must maintain "tangible capital" of not less
than 1.5% of Alaska Federal's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal
to at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes permanent capital instruments such as cumulative perpetual preferred
stock, perpetual subordinated debt and mandatory convertible subordinated debt,
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, and general
valuation loan and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans, including multi-family mortgage loans, are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor, which ranges from 0% to 100%, assigned to
that category. These products are then totaled to arrive at total risk-weighted
assets. Off-balance sheet items are included in risk-weighted assets by
converting them to an approximate balance sheet "credit equivalent amount" based
on a conversion schedule. These credit equivalent amounts are then assigned to
risk categories in the same manner as balance sheet assets and included as risk-
weighted assets.
The Office of Thrift Supervision has incorporated an interest rate risk
component into its regulatory capital rule. Under the rule, savings associations
with "above normal" interest rate risk exposure would be subject to a deduction
from total capital for purposes of calculating their risk-based capital
requirements. A savings association's interest rate risk is measured by the
decline in the net portfolio value of its assets, which is the difference
between incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts, that would result from a hypothetical 200 basis
point increase or decrease in market interest rates divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the Office of Thrift Supervision. A savings association
whose measured interest rate risk exposure exceeds 2% must deduct an interest
rate risk component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data.
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The rule also provides that the Director of the Office of Thrift Supervision may
waive or defer an association's interest rate risk component on a case-by-case
basis. Under certain circumstances, a savings association may request an
adjustment to its interest rate risk component if it believes that the Office of
Thrift Supervision-calculated interest rate risk component overstates its
interest rate risk exposure. In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to calculate their interest rate risk component in lieu of the Office of Thrift
Supervision-calculated amount. The Office of Thrift Supervision has postponed
the date that the component will first be deducted from an institution's total
capital until savings associations become familiar with the process for
requesting an adjustment to its interest rate risk component.
See "Historical and Pro Forma Capital Compliance" for a table that sets
forth in terms of dollars and percentages the Office of Thrift Supervision
tangible, core and risk-based capital requirements, Alaska Federal's historical
amounts and percentages at December 31, 1998, and pro forma amounts and
percentages based upon the assumptions stated therein.
Limitations on Capital Distributions. Office of Thrift Supervision
regulations impose various restrictions on savings institutions with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account.
Generally, savings institutions, such as Alaska Federal, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the institution's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the Office of Thrift Supervision may have its dividend authority
restricted by the Office of Thrift Supervision. Alaska Federal may pay dividends
in accordance with this general authority.
Savings institutions proposing to make any capital distribution need
only submit written notice to the Office of Thrift Supervision 30 days prior to
such distribution. Savings institutions that do not, or would not meet their
current minimum capital requirements following a proposed capital distribution,
however, must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "--
Capital Requirements."
The Office of Thrift Supervision has proposed regulations that would
revise the current capital distribution restrictions. Under the proposal, a
savings institution may make a capital distribution without notice to the Office
of Thrift Supervision, unless it is a subsidiary of a holding company, provided
that it has a regulatory rating in the two top categories, is not of supervisory
concern, and would remain adequately capitalized, as defined in the Office of
Thrift Supervision prompt corrective action regulations, following the proposed
distribution. Savings institutions that would remain adequately capitalized
following the proposed distribution but do not meet the other noted requirements
must notify the Office of Thrift Supervision 30 days prior to declaring a
capital distribution. The Office of Thrift Supervision stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings institution may not make a capital
distribution without prior approval of the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation if it is undercapitalized before, or as a
result of, such a distribution. As under the current rule, the Office of Thrift
Supervision may object to a capital distribution if it would constitute an
unsafe or unsound practice. No assurance may be given as to whether or in what
form the regulations may be adopted.
At December 31, 1998, Alaska Federal met the criteria to be designated
a Tier 1 association and, consequently, could at its option, after prior notice
to, and no objection made by, the Office of Thrift Supervision, distribute up to
100% of its net income during the calendar year plus 50% of its surplus capital
ratio at the beginning of the calendar year less any distributions previously
paid during the year.
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Loans-to-One Borrower. Under the Home Owners' Loan Act, savings
institutions are generally subject to the national bank limit on loans-to-one
borrower. Generally, this limit is 15% of Alaska Federal's unimpaired capital
and surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The Office of Thrift Supervision by
regulation has amended the loans-to-one borrower rule to permit savings
associations meeting certain requirements, including capital requirements, to
extend loans to one borrower in additional amounts under circumstances limited
essentially to loans to develop or complete residential housing units with the
prior consent of the Office of Thrift Supervision. At December 31, 1998, Alaska
Federal's limit on loans-to-one borrower was $1.2 million. At December 31, 1998,
Alaska Federal's largest aggregate amount of loans to one borrower was $1.5
million, all of which were performing according to their original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the Federal Deposit Insurance Corporation and the Office
of Thrift Supervision 30 days in advance and provide the information each agency
may, by regulation, require. Savings associations also must conduct the
activities of subsidiaries in accordance with existing regulations and orders.
The Office of Thrift Supervision may determine that the continuation by
a savings association of its ownership control of, or its relationship to, the
subsidiary constitutes a serious risk to the safety, soundness or stability of
the association or is inconsistent with sound banking practices or with the
purposes of the Federal Deposit Insurance Act. Based upon that determination,
the Federal Deposit Insurance Corporation or the Office of Thrift Supervision
has the authority to order the savings association to divest itself of control
of the subsidiary. The Federal Deposit Insurance Corporation also may determine
by regulation or order that any specific activity poses a serious threat to the
Savings Association Insurance Fund. If so, it may require that no Savings
Association Insurance Fund member engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the Home Owners' Loan Act. Generally, Sections 23A and 23B: limit the
extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and require that all such transactions be on terms substantially the
same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, the purchase of assets, the issuance of a guaranty and similar types
of transactions.
Three additional rules apply to savings associations: a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; a savings association may not purchase or invest in securities issued
by an affiliate, other than securities of a subsidiary; and the Office of Thrift
Supervision may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be
granted only by the Federal Reserve Board, as is currently the case with respect
to all Federal Deposit Insurance Corporation-insured banks. Alaska Federal has
not been significantly affected by the rules regarding transactions with
affiliates.
Alaska Federal's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals, unless the loan or extension of credit is
made under a benefit program generally available to all employees and does not
give preference to any insider over any
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other employee, and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
Alaska Federal may make to such persons based, in part, on Alaska Federal's
capital position, and requires certain board approval procedures to be followed.
The Office of Thrift Supervision regulations, with certain minor variances,
apply Regulation O to savings institutions.
Community Reinvestment Act. Under the Community Reinvestment Act, a
federal statute, all federally-insured financial institutions have a continuing
and affirmative obligation consistent with safe and sound operations to help
meet all the credit needs of its delineated community. The Community
Reinvestment Act does not establish specific lending requirements or programs
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to meet all the credit needs of
its delineated community. The Community Reinvestment Act requires the federal
banking agencies, in connection with regulatory examinations, to assess an
institution's record of meeting the credit needs of its delineated community and
to take such record into account in evaluating certain regulatory applications
filed by an institution. The Community Reinvestment Act requires public
disclosure of an institution's Community Reinvestment Act rating. Alaska Federal
received a "outstanding" rating as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. Under the Federal
Deposit Insurance Act, the Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $27,500 per day, or $1.1 million per
day in especially egregious cases. Under the Federal Deposit Insurance Act, the
Federal Deposit Insurance Corporation has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The Home Owners' Loan Act and Office of
Thrift Supervision regulations issued thereunder generally prohibit a savings
and loan holding company, without prior Office of Thrift Supervision approval,
from acquiring more than 5% of the voting stock of any other savings association
or savings and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the Office of Thrift Supervision.
Holding Company Activities. As a unitary savings and loan holding
company, Alaska Pacific Bancshares generally is not subject to activity
restrictions. If Alaska Pacific Bancshares acquires control of another savings
association as a separate subsidiary other than in a supervisory acquisition, it
would become a multiple savings and loan holding company. There generally are
more restrictions on the activities of a multiple savings and loan holding
company than on those of a unitary savings and loan holding company. The Home
Owners' Loan Act provides that, among other things, no multiple savings and loan
holding company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: furnishing or performing management services for a
subsidiary insured institution, conducting an insurance agency or escrow
business, holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, holding or managing properties used or occupied
by a subsidiary insured institution, acting as trustee under deeds of trust,
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or those activities
authorized by the Federal Reserve as permissible for bank holding companies,
unless the Office of Thrift Supervision
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by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities authorized by the Federal Reserve for bank holding
companies, which are described above, also must be approved by the Office of
Thrift Supervision prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The Home Owners' Loan Act requires any
savings and loan holding company that controls a savings association that fails
the qualified thrift lender test, as explained under "-- Federal Regulation of
Savings Associations -- Qualified Thrift Lender Test," must, within one year
after the date on which the association ceases to be a qualified thrift lender,
register as and be deemed a bank holding company subject to all applicable laws
and regulations.
Federal Securities Laws
Alaska Pacific Bancshares has filed a Registration Statement with the
Securities and Exchange Commission under the Securities Act of 1933 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 Securities and
Exchange Commission under the Securities Exchange Act and, under Office of
Thrift Supervision regulations, generally may not be deregistered for at least
three years thereafter. Alaska Pacific Bancshares will then be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the Securities Exchange Act.
The registration under the Securities Act of the common stock to be
issued in the conversion does not cover the resale of such shares. Shares of the
common stock purchased by persons who are not affiliates of Alaska Pacific
Bancshares may be resold without registration. Shares purchased by an affiliate
of Alaska Pacific Bancshares may only be sold in compliance with the resale
restrictions of Rule 144 under the Securities Act. For purposes of Rule 144,
affiliates are considered to be executive officers and directors of Alaska
Pacific Bancshares, since they are presumed to have "the power to direct or
cause the direction of the management and policies of [a company], whether
through the ownership of voting securities or otherwise."
TAXATION
Federal Taxation
The following discussion summarizes certain federal income tax
provisions applicable to Alaska Federal as a thrift institution and discusses
all material terms of the federal tax law as it applies to Alaska Federal. This
summary is based on the Internal Revenue Code, Internal Revenue Code
regulations, rulings and decisions currently in effect, all of which are subject
to change. For a discussion of the Federal income tax consequences of the plan
of conversion to Alaska Federal, the account holders and the holders of common
stock, see "Alaska Federal's Conversion -- Effects of Conversion to Stock Form
on Depositors and Borrowers of Alaska Federal -- Tax Effects." For further
information regarding federal and state taxes, see Note 11 of Notes to the
Financial Statements included at the back of this prospectus.
Net Operating Loss Carryforwards. Alaska Federal has a federal tax
operating loss carryforwards aggregating approximately $3.9 million at December
31, 1998 which ultimately expire in 2012. In addition, as of December 31, 1998
Alaska Federal had a financial statement allowance for loan losses of
approximately $674,000 which had been previously recognized for financial
statement purposes. The majority of the allowance for loan losses is anticipated
to give rise to deductible tax losses in future years. Losses which Alaska
Federal has not yet recognized for tax purposes that may be utilized to offset
taxable income in the current or a past or future year are sometimes referred to
as "Built-in Losses."
An ownership change can result from either an owner shift or an equity
structure shift. An owner shift is nearly any transfer of an equity interest. An
equity structure shift is any tax-free reorganization except for reorganizations
defined under Internal Revenue Code Section 368(a)(1)F, a mere change in
corporate identity, form or place of
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organization, certain reorganizations defined under Section 368 (a)(1)(D), a
transfer by a corporation of all or part of its assets to another corporation in
which the transfer by a corporation of all or part of its assets to another
corporation in which the transferor, or one or more of its shareholders, is in
immediate control of the transferee, or certain reorganizations defined under
Section 368(a)(1)(G), a transfer by a corporation of all or a part of its assets
to another corporation in a title 11 bankruptcy or similar case. Although an
owner shift or an equity structure shift is necessary for an ownership change,
not every shift constitutes an ownership change to which Section 382 applies.
If an "ownership change", discussed below, occurs with respect to
Alaska Pacific Bancshares and its subsidiaries, either in connection with this
transaction or in the future years as a result of transactions unrelated to this
transaction, Alaska Federal would become subject to the limitation on their
ability to use their net operating loss carryforwards and other tax benefit
items to offset taxable income. Such limitation, were it to become applicable,
would also limit the recognition for tax purposes of Built-in Losses, if the
excess of any Built-in Losses of Alaska Federal over any gains which they have
not yet recognized for tax purposes (the "Net Unrealized Built-in Losses" of
Alaska Federal) exceeds the lesser of:
(i) 15 percent of the fair market value of the assets of Alaska
Federal immediately before the ownership change, or
(ii) $10 million.
The determination whether an ownership change has occurred is made by:
(i) determining in the case of any 5% stockholder, the number of
percentage points by which such 5% stockholder's interest has
increased at the end of the three-year testing period relative to
such stockholder's lowest percentage ownership at time during
such testing period, and
(ii) aggregating such percentage point increases for all 5%
stockholders during the applicable testing period.
For purposes of the preceding sentence, any direct or indirect holder,
taking into account certain attribution rules, of 5% or more of Alaska Pacific
Bancshares stock is a 5% stockholder, and all holders of less than 5%
collectively are generally treated as a single 5% stockholder. An ownership
change will occur at the end of any three-year testing period if the aggregate
percentage point increases for all 5% stockholders for such testing period
exceeds 50 percentage points. For these purposes, Alaska Federal expects to
treat the depositors as stockholders. Potential purchasers are cautioned,
however, that there can be no assurance that the IRS will agree with such
treatment, or that such treatment would be sustained if challenged.
Under certain "segregation rules," stockholders who individually
acquire and own less than 5% of a corporation's stock pursuant to an offering of
such stock are treated as a single 5% stockholder (the "New Public Group") which
is separate and apart from the group of less than 5% stockholders that existed
prior to the offering (the "Pre-Issuance Public Group," in this instance the
"Depositor Group"). In general, a member of the New Public Group is presumed not
to have owned any of the corporation's stock prior to the offering except to the
extent that the corporation has actual knowledge that such person is also a
member of the Pre-Issuance Public Group. Thus, unless a substantial portion of
the stock of Alaska Pacific Bancshares is purchased by the Depositor Group,
under the general operation of the segregation rules there is a substantial risk
that an ownership change will occur. However, regulations of the IRS now create
a presumption that Alaska Federal's pre-conversion owners (i.e., its depositors)
will have purchased a significant percentage of the stock now offered. The
regulations provide that if a corporation with a net built-in loss or net
operating loss carryforward issues stock for cash, an amount of the stock issued
equal to the lesser of:
(i) one-half of the percentage ownership of the Pre-Issuance Public
Group, or
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(ii) the total amount of stock issued in the transaction less the
amount of issued stock owned by 5% stockholders (other than a
direct public group) immediately after the issuance, will not be
subject to the segregation rules.
Under the regulations, this cash issuance exception is not applicable
to shares acquired upon the exercise of an option that was not issued solely for
cash or was not distributed with respect to stock. Alaska Pacific Bancshares
believes that stock acquired pursuant to the exercise of subscription rights
will qualify as stock issued for cash under the regulations, but there can be no
assurance that such position would be sustained if challenged by the Internal
Revenue Service. If the cash issuance exception to the segregation rules is
available to Alaska Pacific Bancshares, it will reduce the likelihood that the
proposed transaction would result in an ownership change of Alaska Pacific
Bancshares and its subsidiaries. Potential investors should be aware, however,
that even if Alaska Pacific Bancshares is able to apply the cash issuance
exception to prevent this transaction from causing an ownership change under
Section 382, increases in percentage ownership by 5% stockholders subsequent to
this transaction could nevertheless give rise to an ownership change.
If an ownership change occurs with respect to Alaska Pacific Bancshares
and its subsidiaries, an annual limitation (the "Section 382 limitation") would
be imposed pursuant to Section 382 of the Internal Revenue Code on the rate at
which its net operating loss carryforward (and any Built-In Losses) could be
deducted against taxable income. Although the computation of the Section 382
limitation in the case of mutual-to-stock bank conversions is not entirely
clear, it would probably be computed by multiplying the estimated value of
Alaska Pacific Bancshares immediately prior to the ownership change by the
then-applicable long-term tax exempt rate published by the Internal Revenue
Service for this purpose (the long-term tax exempt rate was 4.8% for the month
of December 1998, per Internal Revenue Service tables). The limitation on the
use of Built-In Losses would apply with respect to Built-In Losses recognized in
any taxable year any portion of which falls within the 5-year period beginning
on the date of the ownership change. Accordingly, if the Section 382 Limitations
were to apply to Alaska Pacific Bancshares and its subsidiaries to the limit the
rate of utilization of such losses, it is uncertain whether Alaska Pacific
Bancshares and its subsidiaries would be able to utilize their net operating
loss carryforwards and Built-In-Losses.
As noted above, only if the proposed transaction does not result in an
ownership change, transactions in shares of Stock subsequent to consummation of
the conversion, which generally are beyond the control of Alaska Pacific
Bancshares, could result in an unanticipated increase in the ownership of the
stock of Alaska Pacific Bancshares by one or more 5% stockholders. If a
sufficient number of shares of stock of Alaska Pacific Bancshares were sold or
purchased by an applicable stockholder group in the current or future years, an
ownership change could occur and the Section 382 limitation might then be
applicable to Alaska Pacific Bancshares and its subsidiaries. In such
circumstances, the determination of whether Alaska Pacific Bancshares and its
subsidiaries have Net Unrealized Build-in Losses in excess of the threshold
amounts would be made as of the date of such a future ownership change.
In order to reduce the likelihood that an ownership change will occur
in the proposed transaction the plan of conversion provides that the maximum
number of shares which may be purchased by any person in the conversion,
excluding the employee stock ownership plan, is $125,000.
Options to purchase the stock of Alaska Pacific Bancshares, including
the subscription rights, must also be considered to determine if an ownership
change occurs. Under Section 382(1)(3)(A) of the Internal Revenue Code, except
as provided in regulations an option to acquire stock is treated as exercised if
such exercise results in an ownership change. However, under the regulations an
option to acquire stock is not treated as exercised unless its issuance or
transfer satisfies an ownership test, a control test or an income test. Whether
an option satisfies one or more of these tests depends on all relevant facts and
circumstances, but each of these tests requires that a principal purpose of the
issuance, transfer or structuring of the option is to avoid or ameliorate the
impact of an ownership change under Section 382. Assuming that a principal
purpose of the issuance of the subscription rights is not to avoid or ameliorate
the impact of an ownership change under Section 382, the subscription rights
should not be treated as exercised for purposes of testing whether an ownership
change has occurred under Section 382. In addition, the regulations provide
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certain safe harbors pursuant to which certain options are not treated as
exercised pursuant to the ownership, control or income tests. One such safe
harbor applies to compensatory options. Accordingly, the options to be issued
under the proposed stock option plan of Alaska Pacific Bancshares described
below under "Management of Alaska Federal -- Benefits -- 1999 Stock Option Plan"
should not be treated as exercised even if such exercise would result in an
ownership change.
Section 383 of the Internal Revenue Code provides rules that restrict a
corporation's ability to utilize tax credit carryforwards and net operating loss
carryforwards after an ownership change. These rules are similar to and work in
conjunction with the Section 382 limitation described above. As of December 31,
1998, Alaska Federal had $18,000 of tax credit carryforwards which would become
subject to the limitations of Section 383 if an ownership change occurred.
Bad Debt Reserve. Historically, savings institutions such as Alaska
Federal which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. Alaska Federal's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on Alaska Federal's actual loss experience, or a percentage equal
to 8% of Alaska Federal's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to Alaska Federal's loss experience, Alaska Federal generally
recognized a bad debt deduction equal to 8% of taxable income.
Distributions. To the extent that Alaska Federal makes "nondividend
distributions" to Alaska Pacific Bancshares that are considered as made: (i)
from the reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in Alaska Federal's taxable income. Nondividend distributions include
distributions in excess of Alaska Federal's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. Dividends paid out of Alaska Federal's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from Alaska Federal's bad
debt reserve. However, any dividends to Alaska Pacific Bancshares that would
reduce amounts appropriated to Alaska Federal's bad debt reserve and deducted
for federal income tax purposes would create a tax liability for Alaska Federal.
The amount of additional taxable income attributable to an Excess Distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. See "Regulation -- Federal Regulation of
Savings Associations -- Limitations on Capital Distributions" and "Alaska
Pacific Bancshares' Dividend Policy -- Current Restrictions" for limits on the
payment of dividends by Alaska Federal. Alaska Federal does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a
tax on alternative minimum taxable income at a rate of 20%. Only 90% of
alternative minimum taxable income can be offset by net operating loss
carryovers. Alternative minimum taxable income is increased by an amount equal
to 75% of the amount by which Alaska Federal's adjusted current earnings exceeds
its alternative minimum taxable income (determined without regard to this
preference and prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. Alaska Pacific
Bancshares may exclude from its income 100% of dividends received from Alaska
Federal as a member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which Alaska Pacific Bancshares and Alaska
Federal will not file a consolidated tax return, except that if Alaska Pacific
Bancshares or Alaska Federal owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
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Audits. There have not been any Internal Revenue Service audits of
Alaska Federal's federal income tax returns during the past five years.
State Taxation
The Alaska state income tax applicable to Alaska Federal is based on a
graduated tax rate schedule, with a maximum rate of 9.4% on income over $90,000.
There have not been any audits of Alaska Federal's state tax returns during the
past five years.
ALASKA FEDERAL'S CONVERSION
The Office of Thrift Supervision has approved the plan of conversion
with the condition that it is approved by the members of Alaska Federal entitled
to vote and to the satisfaction of certain other conditions imposed by the
Office of Thrift Supervision in its approval. Office of Thrift Supervision
approval is not a recommendation or endorsement of the plan of conversion.
General
On February 19, 1999, the Board of Directors of Alaska Federal
unanimously adopted, and on April 16, 1999 subsequently amended, the plan of
conversion, under which Alaska Federal will be converted from a federally
chartered mutual savings bank to a federally chartered stock savings bank to be
held as a wholly-owned subsidiary of Alaska Pacific Bancshares, a newly formed
Alaska corporation. The following discussion of the plan of conversion contains
all material terms about the conversion. Nevertheless, readers are urged to read
carefully the plan of conversion, which is attached as Exhibit A to Alaska
Federal's Proxy Statement and is available to members of Alaska Federal upon
request. The plan of conversion is also filed as an exhibit to the Registration
Statement. See "Where You Can Find More Information." A special meeting of
Alaska Federal's members entitled to vote on the conversion has been called for
that purpose to be held on June 21, 1999.
As part of the conversion, Alaska Federal will adopt a Federal stock
charter and bylaws to authorize the issuance of capital stock by Alaska Federal.
As part of the conversion, Alaska Federal will issue all of its newly issued
common stock, 1,000 shares of common stock, to Alaska Pacific Bancshares in
exchange for 50% or more of the net proceeds from the sale of common stock by
Alaska Pacific Bancshares.
The plan of conversion provides generally that:
o Alaska Federal will convert from a federally chartered mutual
savings bank to a federally chartered stock savings bank;
o the common stock will be offered by Alaska Pacific Bancshares in
the subscription offering to persons having subscription rights
and in a direct community offering to certain members of the
general public, with preference given to natural persons residing
in the communities of Juneau, Ketchikan, Sitka and Wrangell, and
then to natural persons residing in counties contiguous to the
local community;
o if necessary, shares of common stock not subscribed for in the
subscription and direct community offering will be offered to
certain members of the general public in a syndicated community
offering through a syndicate of registered broker-dealers under
selected dealers agreements; and
o Alaska Pacific Bancshares will purchase all of the capital stock
of Alaska Federal to be issued in connection with the conversion.
The conversion will be completed only upon the sale of at least
$5,950,000 of common stock to be issued pursuant to the plan of
conversion.
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As part of the conversion, Alaska Pacific Bancshares is making a
subscription offering of its common stock to holders of subscription rights in
the following order of priority:
(i) depositors of Alaska Federal with $50.00 or more on deposit as of
December 31, 1997;
(ii) Alaska Pacific Bancshares' employee stock ownership plan;
(iii) depositors of Alaska Federal with $50.00 or more on deposit as
of March 31, 1999; and
(iv) depositors of Alaska Federal as of April 30, 1999 and borrowers
of Alaska Federal with loans outstanding as of October 20, 1993,
which continue to be outstanding as of April 30, 1999.
Shares of common stock not subscribed for in the subscription and
direct community offering may be offered for sale in the syndicated community
offering. Regulations require that the syndicated community offering be
completed within 45 days after completion of the fully extended subscription
offering unless extended by Alaska Federal or Alaska Pacific Bancshares with the
approval of the regulatory authorities. If the syndicated community offering is
determined not to be feasible, the Board of Directors of Alaska Federal will
consult with the regulatory authorities to determine an appropriate alternative
method for selling the unsubscribed shares of common stock. The plan of
conversion provides that the conversion must be completed within 24 months after
the date of the approval of the plan of conversion by the members of Alaska
Federal.
No sales of common stock may be completed, either in the subscription
offering, direct community offering or syndicated community offering unless the
plan of conversion is approved by the members of Alaska Federal.
The completion of the offerings, however, depends on market conditions
and other factors beyond Alaska Federal's control. No assurance can be given as
to the length of time after approval of the plan of conversion at the special
meeting that will be required to complete the direct community or syndicated
community offerings or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of Alaska Pacific Bancshares and Alaska Federal, as converted, together
with corresponding changes in the net proceeds realized by Alaska Pacific
Bancshares from the sale of the common stock. In the event the conversion is
terminated, Alaska Federal would be required to charge all conversion expenses
against current income.
Orders for shares of common stock will not be filled until at least
595,000 shares of common stock have been subscribed for or sold and the Office
of Thrift Supervision approves the final valuation and the conversion closes. If
the conversion is not completed within 45 days after the last day of the fully
extended subscription offering and the Office of Thrift Supervision consents to
an extension of time to complete the conversion, subscribers will be given the
right to increase, decrease or rescind their subscriptions. Unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, the funds will be returned promptly, together with
accrued interest at Alaska Federal's passbook rate) from the date payment is
received until the funds are returned to the subscriber. If such period is not
extended, or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at Alaska Federal's passbook rate from the date
payment is received until the conversion is terminated.
Reasons for the Conversion
The Board of Directors and management believe that the conversion is in
the best interests of Alaska Federal, its members and the communities it serves.
Alaska Federal's Board of Directors has formed Alaska Pacific Bancshares to
serve as a holding company, with Alaska Federal as its subsidiary, after the
conversion. By
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converting to the stock form of organization, Alaska Pacific Bancshares and
Alaska Federal will be structured in the form used by holding companies of
commercial banks and by a growing number of savings institutions. Management of
Alaska Federal believes that the conversion offers a number of advantages which
will be important to the future growth and performance of Alaska Federal. The
capital raised in the conversion is intended to support Alaska Federal's current
lending and investment activities and may also support possible future expansion
and diversification of operations, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such expansion or
diversification. The conversion is also expected to afford Alaska Federal's
management, members and others the opportunity to become stockholders of Alaska
Pacific Bancshares and participate more directly in, and contribute to, any
future growth of Alaska Pacific Bancshares and Alaska Federal. The conversion
will also enable Alaska Pacific Bancshares and Alaska Federal to raise
additional capital in the public equity or debt markets should the need arise,
although there are no current specific plans, arrangements or understandings,
written or oral, regarding any such financing activities.
Effects of Conversion to Stock Form on Depositors and Borrowers of Alaska
Federal
Voting Rights. Savings members and borrowers will have no voting rights
in Alaska Federal, as converted, or Alaska Pacific Bancshares and therefore will
not be able to elect directors of Alaska Federal or Alaska Pacific Bancshares or
to control their affairs. Currently, these rights are accorded to savings
members of Alaska Federal. After the conversion, voting rights will be vested
exclusively in Alaska Pacific Bancshares with respect to Alaska Federal and the
holders of the common stock as to matters pertaining to Alaska Pacific
Bancshares. Each holder of common stock shall be entitled to vote on any matter
to be considered by the stockholders of Alaska Pacific Bancshares. A stockholder
will be entitled to one vote for each share of common stock owned.
Deposit Accounts and Loans. Alaska Federal's deposit accounts, account
balances and existing Federal Deposit Insurance Corporation insurance coverage
of deposit accounts will not be affected by the conversion. Furthermore, the
conversion will not affect the loan accounts, loan balances or obligations of
borrowers under their individual contractual arrangements with Alaska Federal.
Tax Effects. Alaska Federal has received an opinion from Breyer &
Associates PC, Washington, D.C., that the conversion will constitute a
nontaxable reorganization under Section 368(a)(1)(F) of the Internal Revenue
Code. Among other things, the opinion states that:
1. no gain or loss will be recognized to Alaska Federal in its
mutual or stock form by reason of the conversion;
2. no gain or loss will be recognized to its account holders upon
the issuance to them of accounts in Alaska Federal immediately
after the conversion, in the same dollar amounts and on the same
terms and conditions as their accounts at Alaska Federal in its
mutual form plus interest in the liquidation account;
3. the tax basis of account holders' accounts in Alaska Federal
immediately after the conversion will be the same as the tax
basis of their accounts immediately prior to conversion;
4. the tax basis of each account holder's interest in the
liquidation account will be equal to the value, if any, of that
interest;
5. the tax basis of the common stock purchased in the conversion
will be the amount paid and the holding period for the stock will
begin at the date of purchase; and
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6. no gain or loss will be recognized to account holders upon the
receipt or exercise of subscription rights in the conversion,
except to the extent subscription rights are deemed to have value
as discussed below.
Unlike a private letter ruling issued by the Internal Revenue Service,
an opinion of counsel is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions reached therein. If
there is a disagreement, no assurance can be given that the conclusions reached
in an opinion of counsel would be sustained by a court if contested by the
Internal Revenue Service.
Based upon past rulings issued by the Internal Revenue Service, the
opinion provides that the receipt of subscription rights by certain persons
under the plan of conversion will be taxable to the extent, if any, that the
subscription rights are deemed to have a fair market value. RP Financial, a
financial consulting firm retained by Alaska Federal, whose findings are not
binding on the Internal Revenue Service, has issued a letter indicating that the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration and afford the recipients the right only to purchase shares of the
common stock at a price equal to its estimated fair market value, which will be
the same price paid by purchasers in the direct community offering for
unsubscribed shares of common stock. If the subscription rights are deemed to
have a fair market value, the receipt of the rights may only be taxable to those
persons who exercise their subscription rights. Alaska Federal could also
recognize a gain on the distribution of such subscription rights. Holders of
subscription rights are encouraged to consult with their own tax advisors as to
the tax consequences in the event the subscription rights are deemed to have a
fair market value.
Alaska Federal has also received an opinion from Deloitte & Touche LLP,
Anchorage, Alaska, that, assuming the conversion does not result in any federal
income tax liability to Alaska Federal, its account holders, or Alaska Pacific
Bancshares, implementation of the plan of conversion will not result in any
Alaska income tax liability to such entities or persons.
The opinions of Breyer & Associates PC and Deloitte & Touche LLP and
the letter from RP Financial are filed as exhibits to the Registration
Statement. See "Where You Can Find More Information."
Prospective Investors Are Urged to Consult With Their Own Tax Advisors
Regarding The Tax Consequences of The Conversion Particular to Them.
Liquidation Account. In the unlikely event of a complete liquidation of
Alaska Federal in its present mutual form, each depositor in Alaska Federal
would receive a pro rata share of any assets of Alaska Federal remaining after
payment of claims of all creditors, including the claims of all depositors up to
the withdrawal value of their accounts. Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account to the total value of all deposit accounts in Alaska Federal at the time
of liquidation.
After the conversion, holders of withdrawable deposit(s) in Alaska
Federal, including certificates of deposit, shall not be entitled to share in
any residual assets in the event of liquidation of Alaska Federal. However,
under Office of Thrift Supervision regulations, Alaska Federal shall, at the
time of the conversion, establish a liquidation account in an amount equal to
its total equity as of the date of the latest statement of financial condition
contained in the final prospectus relating to the conversion.
The liquidation account shall be maintained by Alaska Federal
subsequent to the conversion for the benefit of eligible account holders and
supplemental eligible account holders who retain their savings accounts in
Alaska Federal. Each eligible account holder and supplemental eligible account
holder shall, with respect to each savings account held, have a related inchoate
interest in a subaccount portion of the liquidation account balance.
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The initial subaccount balance for a savings account held by an
eligible account holder or a supplemental eligible account holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of such holder's "qualifying
deposit" in the savings account and the denominator is the total amount of the
"qualifying deposits" of all eligible account holders. The initial subaccount
balance shall not be increased, and it shall be decreased as provided below.
If the deposit balance in any savings account of an eligible account
holder or supplemental eligible account holder at the close of business on any
annual closing day of Alaska Federal subsequent to December 31, 1997 or March
31, 1999 is less than the lesser of the deposit balance in a savings account at
the close of business on any other annual closing date subsequent to December
31, 1997 or March 31, 1999, or the amount of the "qualifying deposit" in a
savings account on December 31, 1997 or March 31, 1999, then the subaccount
balance for a savings account shall be adjusted by reducing the subaccount
balance in an amount proportionate to the reduction in the deposit balance. Once
reduced, the subaccount balance shall not be subsequently increased,
notwithstanding any increase in the deposit balance of the related savings
account. If any savings account is closed, the related subaccount balance shall
be reduced to zero.
Only upon a complete liquidation of Alaska Federal, each eligible
account holder and supplemental eligible account holder shall be entitled to
receive a liquidation distribution from the liquidation account in the amount of
the then current adjusted subaccount balance(s) for savings account(s) then held
by the holder before any liquidation distribution may be made to stockholders.
No merger, consolidation, bulk purchase of assets with assumptions of savings
accounts and other liabilities or similar transactions with another federally
insured institution in which Alaska Federal is not the surviving institution
shall be considered to be a complete liquidation. In any of these transactions
the liquidation account shall be assumed by the surviving institution.
In the unlikely event Alaska Federal is liquidated after the
conversion, depositors will be entitled to full payment of their deposit
accounts before any payment is made to Alaska Pacific Bancshares as the sole
stockholder of Alaska Federal.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. Under the plan of conversion, nontransferable
subscription rights to purchase the common stock have been issued to persons and
entities entitled to purchase the common stock in the subscription offering. The
amount of the common stock which these parties may purchase will depend on the
availability of the common stock for purchase under the categories set forth in
the plan of conversion. Subscription priorities have been established for the
allocation of stock to the extent that the common stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or
more on deposit at Alaska Federal as of December 31, 1997 will receive
nontransferable subscription rights to subscribe for up to the greater of 12,500
shares of common stock, one-tenth of one percent of the total offering of common
stock or 15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
eligible account holder and the denominator is the total amount of qualifying
deposits of all eligible account holders. If the exercise of subscription rights
in this category results in an oversubscription, shares of common stock will be
allocated among subscribing eligible account holders so as to permit each one,
to the extent possible, to purchase a number of shares sufficient to make the
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated proportionately, based on the amount of their respective qualifying
deposits as compared to total qualifying deposits of all subscribing eligible
account holders. Subscription rights received by officers and directors in this
category based on their increased deposits in Alaska Federal in the one year
period preceding December 31, 1997 are subordinated to the subscription rights
of other eligible account holders.
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Category 2: Employee Stock Ownership Plan. The plan of conversion
provides that the employee stock ownership plan shall receive nontransferable
subscription rights to purchase up to 10% of the shares of common stock issued
in the conversion. The plan intends to purchase 8% of the shares of common stock
issued in the conversion. In the event the number of shares offered in the
conversion is increased, the plan shall have a priority right to purchase any
shares exceeding that amount up to 8% of the common stock. If the plan's
subscription is not filled in its entirety, the plan may purchase shares in the
open market or may purchase shares directly from Alaska Pacific Bancshares.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of March 31, 1999 will receive nontransferable
subscription rights to subscribe for up to the greater of 12,500 shares of
common stock, one-tenth of one percent of the total offering of common stock or
15 times the product, rounded down to the next whole number, obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
supplemental eligible account holder and the denominator is the total amount of
qualifying deposits of all supplemental eligible account holders. If the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing supplemental eligible
account holders so as to permit each one, to the extent possible, to purchase a
number of shares sufficient to make his total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less. Thereafter,
unallocated shares will be allocated among subscribing supplemental eligible
account holders proportionately, based on the amount of their respective
qualifying deposits as compared to total qualifying deposits of all supplemental
eligible account holders.
Category 4: Other Members. Each depositor of Alaska Federal as of April
30, 1999 and each borrower with a loan outstanding on October 20, 1993, which
continues to be outstanding as of April 30, 1999,will receive nontransferable
subscription rights to purchase up to 12,500 shares of common stock in the
conversion to the extent shares are available following subscriptions by
eligible account holders, Alaska Pacific Bancshares' employee stock ownership
plan and supplemental eligible account holders. If there is an oversubscription
in this category, the available shares will be allocated proportionately based
on the amount of the respective subscriptions.
Subscription rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for common stock in the subscription
offering or subscribing for common stock on behalf of another person may forfeit
those rights and may face possible further sanctions and penalties imposed by
the Office of Thrift Supervision or another agency of the U.S. Government. Each
person exercising subscription rights will be required to certify that he or she
is purchasing such shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of the shares. Once tendered, subscription orders cannot be revoked without the
consent of Alaska Federal and Alaska Pacific Bancshares.
Alaska Pacific Bancshares and Alaska Federal will make reasonable
attempts to provide a prospectus and related offering materials to holders of
subscription rights. However, the subscription offering and all subscription
rights under the plan of conversion will expire at Noon, Alaska Time, on June
16, 1999, whether or not Alaska Federal has been able to locate each person
entitled to such subscription rights. Orders for common stock in the
subscription offering received in hand by Alaska Federal after that time will
not be accepted. The subscription offering may be extended by Alaska Pacific
Bancshares and Alaska Federal up to July 2, 1999 without the Office of Thrift
Supervision's approval. Office of Thrift Supervision regulations require that
Alaska Pacific Bancshares complete the sale of common stock within 45 days after
the close of the subscription offering. If the direct community offering and the
syndicated community offerings are not completed within that period, all funds
received will be promptly returned with interest at Alaska Federal's passbook
rate and all withdrawal authorizations will be canceled. If regulatory approval
of an extension of the time period has been granted, all subscribers will be
notified of the extension and of the duration of any extension that has been
granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any resolicitation is not received by
Alaska Pacific Bancshares from a subscriber, the subscriber's order will be
rescinded and all funds received will be
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promptly returned with interest, or withdrawal authorizations will be canceled.
No single extension can exceed 90 days.
Direct Community Offering. Concurrently with the subscription offering,
Alaska Pacific Bancshares is offering shares of the common stock to certain
members of the general public in a direct community offering, with preference
given to natural persons residing in the communities of Juneau, Ketchikan, Sitka
and Wrangell and then to natural persons residing in counties contiguous to the
local community. Purchasers in the direct community offering are eligible to
purchase up to $125,000 of common stock in the conversion, which equals 12,500
shares. If not enough shares are available to fill orders in the direct
community offering, the available shares will be allocated on a pro rata basis
determined by the amount of the respective orders. Orders for the common stock
in the direct community offering will be filled to the extent such shares remain
available after the satisfaction of all orders received in the subscription
offering. The direct community offering may terminate on or at any time
subsequent to Noon, Alaska Time, on June 16, 1999, but no later than 45 days
after the close of the subscription offering, unless extended by Alaska Pacific
Bancshares and Alaska Federal, with approval of the Office of Thrift
Supervision. If regulatory approval of an extension of the time period has been
granted, all subscribers will be notified of the extension and of the duration
of any extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response is not received by
Alaska Pacific Bancshares from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest. Alaska
Pacific Bancshares and Alaska Federal have the absolute right to accept or
reject in whole or in part any orders to purchase shares in the direct community
offering. If an order is rejected in part, the purchaser does not have the right
to cancel the remainder of the order. Alaska Pacific Bancshares presently
intends to terminate the direct community offering as soon as it has received
orders for all shares available for purchase in the conversion.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the direct
community offering.
Syndicated Community Offering. The plan of conversion provides that all
shares of common stock not purchased in the subscription and direct community
offering, if any, may be offered for sale to certain members of the general
public in a syndicated community offering through a syndicate of registered
broker-dealers to be managed by Charles Webb acting as agent of Alaska Pacific
Bancshares. Alaska Pacific Bancshares and Alaska Federal have the right to
reject orders, in whole or part, in their sole discretion in the syndicated
community offering. If an order is rejected in part, the purchaser does not have
the right to cancel the remainder of the order. Neither Charles Webb nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the common stock in the syndicated community offering; however,
Charles Webb has agreed to use its best efforts in the sale of shares in the
syndicated community offering.
Stock sold in the syndicated community offering will be sold at the
$10.00 purchase price, the same price as all other shares in the offering. See
"-- Stock Pricing and Number of Shares to be Issued." No person, together with
any associate or group of persons acting in concert, will be permitted to
subscribe in the syndicated community offering for shares of common stock with
an aggregate purchase price of more than $250,000, or 25,000 shares of common
stock. See "-- Plan of Distribution for the Subscription, Direct Community and
Syndicated Community Offerings" for a description of the commission to be paid
to any selected dealers and to Charles Webb.
Charles Webb may enter into agreements with selected dealers to assist
in the sale of shares in the syndicated community offering. During the
syndicated community offering, selected dealers may only solicit indications of
interest from their customers to place orders with Alaska Pacific Bancshares as
of a certain date for the purchase of shares. When and if Charles Webb and
Alaska Pacific Bancshares believe that enough indications of interest and orders
have been received in the subscription offering, the direct community offering
and the syndicated community offering to complete the conversion, Charles Webb
will request, as of that certain date, selected dealers to submit orders to
purchase shares for which they have received indications of interest from their
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customers. Selected dealers will send confirmations to such customers on the
next business day after that certain date. Selected dealers may settle the trade
by debiting the accounts of their customers on a date which will be three
business days from that certain 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 Alaska Pacific Bancshares
established for each selected dealer. Each customer's funds so forwarded to
Alaska Pacific Bancshares, along with all other accounts held in the same title,
will be insured by the Federal Deposit Insurance Corporation up to the
applicable $100,000 legal limit. After payment has been received by Alaska
Pacific Bancshares from selected dealers, funds will earn interest at Alaska
Federal's passbook rate until the completion of the offering. At the
consummation of the conversion, the funds received will be used to purchase the
shares of common stock ordered. The shares of common stock issued in the
conversion cannot and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency. If the conversion is not completed,
funds with interest will be returned promptly to the selected dealers, who, in
turn, will promptly credit their customers' brokerage accounts.
The syndicated community offering may close as early as Noon, Alaska
Time, on June 16, 1999, or any date thereafter at the discretion of Alaska
Pacific Bancshares. The syndicated community offering will terminate no more
than 45 days following June 16, 1999, unless extended by Alaska Pacific
Bancshares, with approval from the Office of Thrift Supervision, but in no case
later than August 16, 1999. The syndicated community offering may run concurrent
to the subscription and direct community offering, or subsequent thereto.
If Alaska Federal is unable to find purchasers from the general public
for all unsubscribed shares, other purchase arrangements will be made by the
Board of Directors of Alaska Federal, if feasible. Any other arrangements must
be approved by the Office of Thrift Supervision. The Office of Thrift
Supervision may grant one or more extensions of the offering period, provided
that no single extension exceeds 90 days, subscribers are given the right to
increase, decrease or rescind their subscriptions during the extension period,
and the extensions do not go more than two years beyond the date on which the
members approved the plan of conversion. If the conversion is not completed
within 45 days after the close of the subscription offering, either all funds
received will be returned with interest, and withdrawal authorizations canceled,
or, if the Office of Thrift Supervision has granted an extension of time, all
subscribers will be given the right to increase, decrease or rescind their
subscriptions at any time prior to 20 days before the end of the extension
period. If an extension of time is obtained, all subscribers will be notified of
the extension and of their rights to modify their orders. If an affirmative
response to any resolicitation is not received by Alaska Pacific Bancshares from
a subscriber, the subscriber's order will be rescinded and all funds received
will be promptly returned with interest, or withdrawal authorizations will be
canceled. No single extension can exceed 90 days.
Persons in Non-Qualified States. Alaska Pacific Bancshares and Alaska
Federal will make reasonable efforts to comply with the securities laws of all
states in the United States in which persons entitled to subscribe for stock
under the plan of conversion reside. Under certain circumstances, however,
Alaska Pacific Bancshares and Alaska Federal are not required to offer stock in
the subscription offering to any person who resides in a foreign country or who
resides in a state of the United States, even though the person may be an
eligible subscriber. Generally, these circumstances occur in states where a
small number of persons otherwise eligible to subscribe for shares of common
stock reside, or Alaska Pacific Bancshares or Alaska Federal determines that
compliance with the securities laws of such state is impracticable for reasons
of cost or otherwise. Many states request or require that Alaska Pacific
Bancshares and Alaska Federal, or their officers, directors or trustees,
register as a broker, dealer, salesman or selling agent, under the securities
laws of the state. This registration may be an expensive and time consuming
effort that may not be completed by the time the offering begins. States may
also request or require Alaska Pacific Bancshares to register or otherwise
qualify the subscription rights or common stock for sale or submit additional
filings regarding the sale of the stock. Where a state has only a small number
of persons eligible to subscribe for shares, Alaska Pacific Bancshares and
Alaska Federal will base their decision as to whether or not to offer the common
stock in the state on a number of factors. Some of these factors include the
size of accounts held by account holders in the state, the cost of reviewing the
registration and qualification requirements of the state,
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and of actually registering or qualifying the shares, or the need to register
Alaska Pacific Bancshares, its officers, directors or employees as brokers,
dealers or salesmen.
Eligible account holders, or supplemental eligible account holders, who
reside in these states will receive a letter from Charles Webb that indicates
they will not be eligible to purchase shares of common stock in the offering.
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
Alaska Pacific Bancshares and Alaska Federal have retained Charles Webb
to consult with and to advise Alaska Federal and Alaska Pacific Bancshares, and
to assist Alaska Pacific Bancshares on a best efforts basis, in the distribution
of the shares of common stock in the offering. The services that Charles Webb
will provide include, but are not limited to training the employees of Alaska
Federal who will perform certain ministerial functions in the subscription
offering and direct community offering regarding the mechanics and regulatory
requirements of the stock offering process, managing the stock information
center by assisting interested stock subscribers and by keeping records of all
stock orders, preparing marketing materials, and assisting in the solicitation
of proxies from Alaska Federal's members for use at the special meeting.
For its services, Charles Webb will receive a management fee of $25,000
and a success fee of 1.5% of the aggregate purchase price of the shares of
common stock sold in the subscription offering and direct community offerings
excluding shares purchased by the employee stock ownership plan and officers and
directors of Alaska Federal. If selected dealers are used to assist in the sale
of shares of common stock in the direct community offering, those dealers will
be paid a fee of up to 5.5% of the aggregate purchase price of the shares sold
by such dealers. Alaska Pacific Bancshares and Alaska Federal have agreed to
reimburse Charles Webb for its out-of-pocket expenses, and its legal fees up to
a total of $35,000, and to indemnify Charles Webb against certain claims or
liabilities, including certain liabilities under the Securities Act, and will
contribute to payments Charles Webb may be required to make in connection with
any such claims or liabilities.
Sales of shares of common stock will be made primarily by registered
representatives affiliated with Charles Webb or by the broker-dealers managed by
Charles Webb. A stock information center will be established at the main office
of Alaska Federal. Alaska Pacific Bancshares will rely on Rule 3a4-1 of the
Securities Exchange Act and sales of common stock will be conducted within the
requirements of such Rule, so as to permit officers, directors and employees to
participate in the sale of the common stock in those states where the law so
permits. No officer, director or employee of Alaska Pacific Bancshares or Alaska
Federal will be compensated directly or indirectly by the payment of commissions
or other remuneration in connection with his or her participation in the sale of
common stock.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering
To purchase shares in the subscription and direct community offering,
an executed stock order form along with the required full payment for each share
subscribed, or with appropriate authorization for withdrawal of full payment
from the subscriber's deposit account with Alaska Federal, must be received by
Alaska Federal by Noon, Alaska Time, on June 16, 1999. Stock order forms will be
provided to each accountholder, regardless of the number of accounts held. Stock
order forms that are not received by that time or are executed defectively or
are received without full payment, or without appropriate withdrawal
instructions, are not required to be accepted. Alaska Pacific Bancshares and
Alaska Federal have the right to waive or permit the correction of incomplete or
improperly executed stock order forms, but do not represent that they will do
so. Under the plan of conversion, the interpretation by Alaska Pacific
Bancshares and Alaska Federal of the terms and conditions of the plan of
conversion and of the stock order form will be final. Once received, an executed
stock order form may not be modified, amended or rescinded without the consent
of Alaska Federal, unless the conversion has not been completed within 45 days
after the end of the subscription offering, unless such period has been
extended.
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In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, they must list all accounts on
the stock order form giving all names in each account, the account number and
the approximate account balance as of the appropriate eligibility date. Failure
to list an account could result in fewer shares allocated if there is an
over-subscription than if all accounts had been disclosed.
Full payment for subscriptions may be made in cash only if delivered in
person at an office of Alaska Federal, by check, bank draft, or money order, or
by authorization of withdrawal from deposit accounts maintained with Alaska
Federal. Appropriate means by which such withdrawals may be authorized are
provided on the stock order form. No wire transfers will be accepted and full
payment is required. Interest will be paid on payments made by cash, check, bank
draft or money order at Alaska Federal's passbook rate from the date payment is
received until the completion or termination of the conversion. If payment is
made by authorization of withdrawal from deposit accounts, the funds authorized
to be withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the conversion, unless the
certificate matures after the date of receipt of the stock order form but prior
to closing, in which case funds will earn interest at the passbook rate from the
date of maturity until of the conversion is completed or terminated, but a hold
will be placed on such funds, thereby making them unavailable to the depositor
until completion or termination of the conversion. When the conversion is
completed, the funds received in the offering will be used to purchase the
shares of common stock ordered. The shares of common stock issued in the
conversion cannot and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency. If the conversion is not consummated
for any reason, all funds submitted will be promptly refunded with interest as
described above.
If a subscriber authorizes Alaska Federal to withdraw the amount of the
aggregate purchase price from his or her deposit account, Alaska Federal will do
so as of the effective date of the conversion, though the account must contain
the full amount necessary for payment at the time the subscription order is
received. Alaska Federal will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at Alaska Federal's passbook rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for the
shares of common stock subscribed for at the $10.00 purchase price after the
conversion, provided that there is in force from the time of its subscription
until that time, a loan commitment from an unrelated financial institution or
Alaska Pacific Bancshares to lend to the employee stock ownership plan, at that
time, the aggregate purchase price of the shares for which it subscribed.
Individual retirement accounts maintained in Alaska Federal do not
permit investment in the common stock. A depositor interested in using his or
her individual retirement account funds to purchase common stock must do so
through a self-directed individual retirement account. Since Alaska Federal does
not offer such accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the individual retirement account funds to a trustee offering a
self-directed individual retirement account program with the agreement that the
funds will be used to purchase Alaska Pacific Bancshares' common stock in the
offering. There will be no early withdrawal or Internal Revenue Service interest
penalties for such transfers. The new trustee would hold the common stock in a
self-directed account in the same manner as Alaska Federal now holds the
depositor's individual retirement account funds. An annual administrative fee
may be payable to the new trustee. Depositors interested in using funds in an
individual retirement account at Alaska Federal to purchase common stock should
contact the stock information center as soon as possible so that the necessary
forms may be forwarded for execution and returned prior to June 16, 1999. In
addition, federal laws and regulations require that officers, directors and 10%
shareholders who use self-directed individual retirement account funds to
purchase shares of common stock in the subscription and direct community
offering make purchases for the exclusive benefit of individual retirement
accounts.
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Certificates representing shares of common stock purchased, and any
refund due, will be mailed to purchasers at the address that is specified in a
properly completed stock order form or to the last address of the person
appearing on the records of Alaska Federal as soon as practicable following
completion of the sale of all shares of common stock. Any certificates returned
as undeliverable will be disposed of in accordance with applicable law.
Purchasers may not be able to sell the shares of common stock which they
purchased until certificates for the common stock are available and delivered to
them, even though trading of the common stock may have begun.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to June 16, 1999 in accordance with Rule 15c2-8 under the Securities
Exchange Act, no prospectus will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to that date. Signing
the stock order form will confirm receipt or delivery in accordance with Rule
15c2-8. Stock order forms will only be distributed with a prospectus. Alaska
Federal will accept for processing only orders submitted on original stock order
forms. Alaska Federal is not obligated to accept orders submitted on photocopied
or telecopied stock order forms. Orders cannot and will not be accepted without
the execution of the certification appearing on the reverse side of the stock
order form.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of Alaska Pacific Bancshares and Alaska Federal, as converted, as
determined by an independent appraisal. Alaska Federal and Alaska Pacific
Bancshares have retained RP Financial to prepare an appraisal of the pro forma
market value of Alaska Pacific Bancshares and Alaska Federal, as converted, as
well as a business plan. RP Financial will receive a fee expected to total
approximately $30,000 for its appraisal services and assistance in the
preparation of a business plan, plus reasonable out-of-pocket expenses incurred
in connection with the appraisal. Alaska Federal has agreed to indemnify RP
Financial under certain circumstances against liabilities and expenses,
including legal fees, arising out of, related to, or based upon the conversion.
RP Financial has prepared an appraisal of the estimated pro forma
market value of Alaska Pacific Bancshares and Alaska Federal, as converted,
taking into account the formation of Alaska Pacific Bancshares as the holding
company for Alaska Federal. For its analysis, RP Financial undertook substantial
investigations to learn about Alaska Federal's business and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, RP Financial reviewed
Alaska Federal's Form AC Application for Approval of Conversion and Alaska
Pacific Bancshares' Form SB-2 Registration Statement. Furthermore, RP Financial
visited Alaska Federal's facilities and had discussions with Alaska Federal's
management and its special conversion legal counsel, Breyer & Associates PC. No
detailed individual analysis of the separate components of Alaska Pacific
Bancshares' or Alaska Federal's assets and liabilities was performed in
connection with the evaluation.
In estimating the pro forma market value of Alaska Pacific Bancshares
and Alaska Federal, as converted, as required by applicable regulatory
guidelines, RP Financial's analysis utilized three selected valuation
procedures, the Price/Book method, the Price/Earnings method, and Price/Assets
method, all of which are described in its report. RP Financial placed the
greatest emphasis on the Price/Earnings and Price/Book methods in estimating pro
forma market value. In applying these procedures, RP Financial reviewed, among
other factors, the economic make-up of Alaska Federal's primary market area,
Alaska Federal's financial performance and condition in relation to
publicly-traded institutions that RP Financial deemed comparable to Alaska
Federal, the specific terms of the offering of Alaska Pacific Bancshares' common
stock, the pro forma impact of the additional capital raised in the conversion,
conditions of securities markets in general, and the market for thrift
institution common stock in particular. RP Financial's analysis provides an
approximation of the pro forma market value of Alaska Pacific Bancshares and
Alaska Federal, as converted, based on the valuation methods applied and the
assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of Alaska Pacific Bancshares after the
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conversion that were utilized in determining the appraised value. These
assumptions included estimated expenses and an assumed after-tax rate of return
on the net conversion proceeds as described under "Pro Forma Data," purchases by
the employee stock ownership plan of 8% of the common stock sold in the
conversion and purchases in the open market by the management recognition and
development plan of a number of shares equal to 4% of the common stock sold in
the conversion at the purchase price. See "Pro Forma Data" for additional
information concerning these assumptions. The use of different assumptions may
yield different results.
On the basis of the foregoing, RP Financial has advised Alaska Pacific
Bancshares and Alaska Federal that, in its opinion, as of April 16, 1999, the
aggregate estimated pro forma market value of Alaska Pacific Bancshares and
Alaska Federal, as converted, and, therefore, the common stock was within the
valuation range of $5,950,000 to $8,050,000 with a midpoint of $7,000,000. After
reviewing the methodology and the assumptions used by RP Financial in the
preparation of the appraisal, the Board of Directors established the estimated
valuation range which is equal to the valuation range of $5,950,000 to
$8,050,000 with a midpoint of $7,000,000. Assuming that the shares are sold at
$10.00 per share in the conversion, the estimated number of shares would be
between 595,000 and 805,000 with a midpoint of 700,000. The purchase price of
$10.00 was determined by discussion among the Boards of Directors of Alaska
Federal and Alaska Pacific Bancshares and Charles Webb, taking into account,
among other factors the requirement under Office of Thrift Supervision
regulations that the common stock be offered in a manner that will achieve the
widest distribution of the stock, the desired liquidity in the common stock
subsequent to the conversion, and the expense of issuing shares for purposes of
Alaska franchise taxes. Since the outcome of the Offerings relate in large
measure to market conditions at the time of sale, it is not possible to
determine the exact number of shares that will be issued by Alaska Pacific
Bancshares at this time. The estimated valuation range may be amended, with the
approval of the Office of Thrift Supervision, if necessitated by developments
following the date of such appraisal in, among other things, market conditions,
the financial condition or operating results of Alaska Federal, regulatory
guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the
Registration Statement. See "Where You Can Find More Information."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of Alaska Pacific Bancshares and Alaska
Federal, as converted, as of the close of the subscription offering.
No sale of the shares will take place unless RP Financial confirms to
the Office of Thrift Supervision that, to the best of RP Financial's knowledge
and judgment, nothing of a material nature has occurred that would cause it to
conclude that the actual total purchase price on an aggregate basis was
incompatible with its estimate of the total pro forma market value of Alaska
Pacific Bancshares and Alaska Federal, as converted, at the time of the sale.
If, however, the facts do not justify that statement, the offering or other sale
may be canceled, a new estimated valuation range and price per share set and new
subscription, direct community and syndicated community offerings held. Under
such circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
Depending upon market and financial conditions, the number of shares
issued may be more than 925,750 shares or less than 595,000 shares. If the total
amount of shares issued is less than 595,000 or more than 925,750, 15% above the
maximum of the estimated valuation range, for aggregate gross proceeds of less
than $5,950,000 or more than $9,257,500, subscription funds will be returned
promptly with interest to each subscriber unless he indicates otherwise. If RP
Financial establishes a new valuation range, it must be approved by the Office
of Thrift Supervision.
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If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by the Boards of Directors of Alaska Federal and Alaska Pacific Bancshares,
if possible. Other purchase arrangements must be approved by the Office of
Thrift Supervision and may provide for purchases for investment purposes by
directors, officers, their associates and other persons in excess of the
limitations provided in the plan of conversion and in excess of the proposed
director purchases discussed earlier, although no such purchases are currently
intended. If such other purchase arrangements cannot be made, the plan of
conversion will terminate.
In formulating its appraisal, RP Financial relied upon the
truthfulness, accuracy and completeness of all documents Alaska Federal
furnished to it. RP Financial also considered financial and other information
from regulatory agencies, other financial institutions, and other public
sources, as appropriate. While RP Financial believes this information to be
reliable, RP Financial does not guarantee the accuracy or completeness of the
information and did not independently verify the financial statements and other
data provided by Alaska Federal and Alaska Pacific Bancshares or independently
value the assets or liabilities of Alaska Pacific Bancshares and Alaska Federal.
The appraisal by RP Financial is not intended to be, and must not be interpreted
as, a recommendation of any kind as to the advisability of voting to approve the
plan of conversion or of purchasing shares of common stock. Moreover, because
the appraisal is necessarily based on many factors which change from time to
time, there is no assurance that persons who purchase shares in the conversion
will later be able to sell shares after the conversion at prices at or above the
purchase price.
Limitations on Purchases of Shares
The plan of conversion provides for certain limitations to be placed
upon the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares. The plan
of conversion provides for the following purchase limitations:
1. The maximum purchase in the subscription offering by any person
or group of persons through a single account is $125,000, which
equals 12,500 shares;
2. No person may purchase more than $125,000, which equals 12,500
shares, in the direct community offering; and
3. The maximum purchase in the conversion by any person, related
persons or persons acting in concert is $250,000, which equals
25,000 shares.
For purposes of the plan of conversion, the directors are not deemed to
be acting in concert solely by reason of their Board membership. Pro rata
reductions within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitations are exceeded.
Alaska Federal's and Alaska Pacific Bancshares' Boards of Directors
may, in their sole discretion, increase the maximum purchase limitation up to
9.99% of the shares of common stock sold in the conversion, provided that orders
for shares which exceed 5% of the shares of common stock sold in the conversion
may not exceed, in the aggregate, 10% of the shares sold in the conversion.
Alaska Federal and Alaska Pacific Bancshares do not intend to increase the
maximum purchase limitation unless market conditions justify an increase in the
maximum purchase limitation is necessary to sell a number of shares in excess of
the minimum of the estimated valuation range. If the Boards of Directors decide
to increase the purchase limitation set forth above, persons who subscribed for
the maximum number of shares of common stock will be, and other large
subscribers in the discretion of Alaska Pacific Bancshares and Alaska Federal
may be, given the opportunity to increase their subscriptions accordingly, based
on the rights and preferences of any person who has priority subscription
rights.
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The term "acting in concert" is defined in the plan of conversion to
mean knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not by to an express agreement;
or a combination or pooling of voting or other interests in the securities of an
issuer for a common purpose under any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise. In general, a
person who acts in concert with another party shall also be deemed to be acting
in concert with any person who is also acting in concert with that other party.
Alaska Pacific Bancshares and Alaska Federal may presume that certain persons
are acting in concert based upon, among other things, joint account
relationships and the fact that persons may have filed joint Schedules 13D with
the Securities And Exchange Commission with respect to other companies.
The term "associate" of a person is defined in the plan of conversion
to mean any corporation or organization, other than Alaska Federal or a
majority-owned subsidiary of Alaska Federal, 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; any trust or other estate in which a person has
a substantial beneficial interest or as to which such person serves as trustee
or in a similar fiduciary capacity; and any relative or spouse of a person, or
any relative of a spouse, who either has the same home as a person or who is a
director or officer of Alaska Federal or any of its parents or subsidiaries. For
example, a corporation of which a person serves as an officer would be an
associate of a person and, therefore, all shares purchased by the corporation
would be included with the number of shares which a person could purchase
individually under the above limitations.
The term "officer" is defined in the plan of conversion to mean an
executive officer of Alaska Federal, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Treasurer.
Common stock purchased in the conversion will be freely transferable,
except for shares purchased by directors and officers of Alaska Federal and
Alaska Pacific Bancshares and by NASD members. See "-- Restrictions on
Transferability by Directors and Officers and NASD Members."
Restrictions on Repurchase of Stock
Under Office of Thrift Supervision regulations, Office of Thrift
Supervision-regulated savings associations, and their holding companies, may not
for a period of three years from the date of an institution's mutual-to-stock
conversion repurchase any of its common stock from any person, except if an
offer made to all of its stockholders to repurchase the common stock on a pro
rata basis, approved by the Office of Thrift Supervision, or the repurchase of
qualifying shares of a director. Furthermore, repurchases of any common stock
are prohibited if the effect thereof would cause the association's regulatory
capital to be reduced below the amount required for the liquidation account or
the regulatory capital requirements imposed by the Office of Thrift Supervision.
Repurchases are generally prohibited during the first year following conversion.
Upon ten days' written notice to the Office of Thrift Supervision, and if the
Office of Thrift Supervision does not object, an institution may make open
market repurchases of its outstanding common stock during years two and three
following the conversion, provided that certain regulatory conditions are met
and that the repurchase would not adversely affect the financial condition of
the institution. Any repurchases of common stock by Alaska Pacific Bancshares
must meet these regulatory restrictions unless the Office of Thrift Supervision
would provide otherwise.
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of common stock purchased in the offering by directors and
officers of Alaska Pacific Bancshares may not be sold for a period of one year
following consummation of the conversion, except in the event of the death of
the stockholder or in any exchange of the common stock in connection with a
merger or acquisition of Alaska Pacific Bancshares. Shares of common stock
received by directors or officers through the employee stock ownership plan or
the management recognition and development plan or upon exercise of options
issued under the
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stock option plan or purchased after the conversion free of restriction.
Accordingly, shares of common stock issued by Alaska Pacific Bancshares to
directors and officers shall bear a legend giving appropriate notice of the
restriction and, in addition, Alaska Pacific Bancshares will give appropriate
instructions to the transfer agent for Alaska Pacific Bancshares' common stock
with respect to the restriction on transfers. Any shares issued to directors and
officers as a stock dividend, stock split or otherwise with respect to
restricted common stock shall also be restricted.
Purchases of outstanding shares of common stock of Alaska Pacific
Bancshares by directors, executive officers, or any person who was an executive
officer or director of Alaska Federal after adoption of the plan of conversion,
and their associates during the three-year period following conversion may be
made only through a broker or dealer registered with the Securities and Exchange
Commission, except with the prior written approval of the Office of Thrift
Supervision. This restriction does not apply, however, to negotiated
transactions involving more than 1% of Alaska Pacific Bancshares' outstanding
common stock or to the purchase of stock pursuant to the stock option plan.
Alaska Pacific Bancshares has filed with the Securities and Exchange
Commission a registration statement under the Securities Act for the
registration of the common stock to be issued in the conversion. The
registration under the Securities Act of shares of the common stock to be issued
in the conversion does not cover the resale of the shares. Shares of common
stock purchased by persons who are not affiliates of Alaska Pacific Bancshares
may be resold without registration. Shares purchased by an affiliate of Alaska
Pacific Bancshares will be subject to the resale restrictions under Rule 144 of
the Securities Act. If Alaska Pacific Bancshares meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
Alaska Pacific Bancshares 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 1% of the outstanding shares of Alaska Pacific Bancshares or the
average weekly volume of trading in the shares during the preceding four
calendar weeks. Provision may be made in the future by Alaska Pacific Bancshares
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates
face to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of the securities.
RESTRICTIONS ON ACQUISITION OF ALASKA PACIFIC BANCSHARES
The following discussion is a summary of certain provisions of federal
law and regulations and Alaska corporate law, as well as the Articles of
Incorporation and Bylaws of Alaska Pacific Bancshares, relating to stock
ownership and transfers, the Board of Directors and business combinations, all
of which may be deemed to have "anti-takeover" effects. The description of these
provisions is necessarily general and reference should be made to the actual law
and regulations and to the Articles of Incorporation and Bylaws of Alaska
Pacific Bancshares. See "Where You Can Find More Information" as to how to
obtain a copy of these documents.
Conversion Regulations
Office of Thrift Supervision regulations prohibit any person from
making an offer, announcing an intent to make an offer or participating in any
other arrangement to purchase stock or acquiring stock or subscription rights in
a converting institution (or its holding company) from another person prior to
completion of its conversion. Further, without the prior written approval of the
Office of Thrift Supervision, no person may make such an offer or announcement
of an offer to purchase shares or actually acquire shares in the converting
institution (or its holding company) for a period of three years from the date
of the completion of the conversion if, upon the completion of such offer,
announcement or acquisition, that person would become the beneficial owner of
more than 10% of the outstanding stock of the institution (or its holding
company).
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The Office of Thrift Supervision has defined "person" to include any individual,
group acting in concert, corporation, partnership, association, joint stock
company, trust, unincorporated organization or similar company, a syndicate or
any other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution. However, offers made exclusively to Alaska
Federal (or its holding company) or an underwriter or member of a selling group
acting on the converting institution's (or its holding company's) behalf for
resale to the general public are excepted. The regulation also provides civil
penalties for willful violation or assistance in any such violation of the
regulation by any person connected with the management of the converting
institution (or its holding company) or who controls more than 10% of the
outstanding shares or voting rights of a converting or converted institution (or
its holding company).
Change of Control
Under the Change in Bank Control Act, no person may acquire control of
an insured federal savings and loan association or its parent holding company
unless the Office of Thrift Supervision has been given 60 days' prior written
notice and has not issued a notice disapproving the proposed acquisition. In
addition, Office of Thrift Supervision regulations provide that no company may
acquire control of a savings association without the prior approval of the
Office of Thrift Supervision. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the Office of Thrift Supervision.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the Office of Thrift Supervision
that the acquiror has the power to direct, or directly or indirectly to exercise
a controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings association's voting
stock, if the acquiror also is subject to any one of eight "control factors,"
constitutes a rebuttable determination of control under the regulations. Such
control factors include the acquiror being one of the two largest stockholders.
The determination of control may be rebutted by submission to the Office of
Thrift Supervision, prior to the acquisition of stock or the occurrence of any
other circumstances giving rise to such determination, of a statement setting
forth facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock must file with the
Office of Thrift Supervision a certification form that the holder is not in
control of such institution, is not subject to a rebuttable determination of
control and will take no action which would result in a determination or
rebuttable determination of control without prior notice to or approval of the
Office of Thrift Supervision, as applicable. There are also rebuttable
presumptions in the regulations concerning whether a group "acting in concert"
exists, including presumed action in concert among members of an "immediate
family."
The Office of Thrift Supervision may prohibit an acquisition of control
if it finds, among other things, that (i) the acquisition would result in a
monopoly or substantially lessen competition, (ii) the financial condition of
the acquiring person might jeopardize the financial stability of the
institution, or (iii) the competence, experience or integrity of the acquiring
person indicates that it would not be in the interest of the depositors or the
public to permit the acquisition of control by such person.
Anti-takeover Provisions in Alaska Pacific Bancshares' Articles of Incorporation
and Bylaws and in Alaska Law
A number of provisions of Alaska Pacific Bancshares' Articles of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of Alaska Pacific Bancshares' Articles of Incorporation and Bylaws
and regulatory provisions relating to stock ownership and transfers, the Board
of Directors and business combinations, which might be deemed to have a
potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual Alaska Pacific Bancshares
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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. The following description of certain of
the provisions of the Articles of Incorporation and Bylaws of Alaska Pacific
Bancshares is necessarily general and reference should be made in each case to
such Articles of Incorporation and Bylaws, which are incorporated herein by
reference. See "Where You Can Find More Information" as to where to obtain a
copy of these documents.
Board of Directors. The Articles of Incorporation provide that the
number of directors shall not be less than five nor more than 15. The initial
number of directors is seven, but such number may be changed by resolution of
the Board of Directors. These provisions have the effect of enabling the Board
of Directors to elect directors friendly to management in the event of a
non-negotiated takeover attempt and may make it more difficult for a person
seeking to acquire control of Alaska Pacific Bancshares to gain majority
representation on the Board of Directors in a relatively short period of time.
Alaska Pacific Bancshares believes these provisions to be important to
continuity in the composition and policies of the Board of Directors.
The Articles of Incorporation provide that there will be staggered
elections of directors so that the directors will each be initially elected to
one, two or three-year terms, and thereafter all directors will be elected to
terms of three years each. This provision also has the effect of making it more
difficult for a person seeking to acquire control of Alaska Pacific Bancshares
to gain majority representation on the Board of Directors.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting in an election of directors. Cumulative voting in election of
directors entitles a stockholder to cast a total number of votes equal to the
number of directors to be elected multiplied by the number of his or her shares
and to distribute that number of votes among such number of nominees as the
stockholder chooses. The absence of cumulative voting for directors limits the
ability of a minority stockholder to elect directors. Because the holder of less
than a majority of Alaska Pacific Bancshares' shares cannot be assured
representation on the Board of Directors, the absence of cumulative voting may
discourage accumulations of Alaska Pacific Bancshares' shares or proxy contests
that would result in changes in Alaska Pacific Bancshares' management. The Board
of Directors believes that (i) elimination of cumulative voting will help to
assure continuity and stability of management and policies; (ii) directors
should be elected by a majority of the stockholders to represent the interests
of the stockholders as a whole rather than be the special representatives of
particular minority interests; and (iii) efforts to elect directors representing
specific minority interests are potentially divisive and could impair the
operations of Alaska Pacific Bancshares.
Special Meetings. The Articles of Incorporation of Alaska Pacific
Bancshares provide that special meetings of stockholders of Alaska Pacific
Bancshares may be called by the President or by the Board of Directors. If a
special meeting is not called by such person or entity, stockholder proposals
cannot be presented to the stockholders for action until the next annual
meeting. Stockholders are not permitted to call special meetings under Alaska
Pacific Bancshares' Articles of Incorporation.
Authorized Capital Stock. The Articles of Incorporation of Alaska
Pacific Bancshares authorize the issuance of 20,000,000 shares of common stock
and 1,000,000 shares of preferred stock. The shares of Common Stock and
Preferred Stock were authorized in an amount greater than that to be issued in
the Conversion to provide Alaska Pacific Bancshares' Board of Directors with
flexibility to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with its
fiduciary duty to deter future attempts to gain control of Alaska Pacific
Bancshares. The Board of Directors also has sole authority to determine the
terms of any one or more series of Preferred Stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of Preferred Stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of Preferred Stock
to persons friendly to management in order to attempt to block a post tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. Alaska Pacific Bancshares'
Board currently has no plan for the issuance of additional shares, other than
the issuance of additional shares pursuant to stock benefit plans.
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Director Nominations. The Articles of Incorporation of Alaska Pacific
Bancshares require a stockholder who intends to nominate a candidate for
election to the Board of Directors at a stockholders' meeting to give written
notice to the Secretary of Alaska Pacific Bancshares at least 30 days (but not
more than 60 days) in advance of the date of the meeting at which such
nominations will be made. The nomination notice is also required to include
specified information concerning the nominee and the proposing stockholder. The
Board of Directors of Alaska Pacific Bancshares believes that it is in the best
interests of Alaska Pacific Bancshares and its stockholders to provide
sufficient time for the Board of Directors to study all nominations and to
determine whether to recommend to the stockholders that such nominees be
considered.
Supermajority Voting Provisions. Alaska Pacific Bancshares' Articles of
Incorporation require the affirmative vote of 80% of the outstanding shares
entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least 80% of the number of the Continuing Directors (as defined in
the Articles of Incorporation) on Alaska Pacific Bancshares' Board of Directors.
"Continuing Directors" generally includes all members of the Board of Directors
who are not affiliated with any individual, partnership, trust or other person
or entity (or the affiliates and associates of such person or entity) which is a
beneficial owner of 10% or more of the voting shares of Alaska Pacific
Bancshares. This provision could tend to make the acquisition of Alaska Pacific
Bancshares more difficult to accomplish without the cooperation or favorable
recommendation of Alaska Pacific Bancshares' Board of Directors.
Amendment of Articles of Incorporation and Bylaws. Alaska Pacific
Bancshares' Articles of Incorporation may be amended by the vote of the holders
of a majority of the outstanding shares of Holding Company Common Stock, except
that the provisions of the Articles of Incorporation governing (i) the duration
of the corporation, (ii) the purpose and powers of the corporation, (iii)
authorized capital stock, (iv) denial of preemptive rights, (v) the number and
staggered terms of directors, (vi) notice for shareholder nominations and
proposals, (vii) approval of certain business combinations, (viii) the
evaluation of certain business combinations, (ix) limitation of directors'
liability, (x) indemnification of officers and directors, (xi) calling of
special meetings of shareholders, (xii) the authority to repurchase shares and
(xiii) the manner of amending the Articles of Incorporation may not be repealed,
altered, amended or rescinded except by the vote of the holders of at least 80%
of the outstanding shares of Alaska Pacific Bancshares. This provision is
intended to prevent the holders of a lesser percentage of the outstanding stock
of Alaska Pacific Bancshares from circumventing any of the foregoing provisions
by amending the Articles of Incorporation to delete or modify one of such
provisions.
Alaska Pacific Bancshares' Bylaws may only be amended by a majority
vote of the Board of Directors of Alaska Pacific Bancshares or by the holders of
at least 80% of the outstanding stock by Alaska Pacific Bancshares.
Board Consideration of Certain Nonmonetary Factors in the Event of an
Offer by Another Party. The Articles of Incorporation of Alaska Pacific
Bancshares directs the Board of Directors, in evaluating a Business Combination
or a tender or exchange offer, to consider, in addition to the adequacy of the
amount to be paid in connection with any such transaction, certain specified
factors and any other factors the Board deems relevant, including (i) the social
and economic effects of the transaction on Alaska Pacific Bancshares and its
subsidiaries, employees, depositors, loan and other customers, creditors and
other elements of the communities in which Alaska Pacific Bancshares and its
subsidiaries operate or are located; (ii) the business and financial condition
and earnings prospects of the acquiring party or parties; and (iii) the
competence, experience and integrity of the acquiring party or parties and its
or their management. By having the standards in the Articles of Incorporation of
Alaska Pacific Bancshares, 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 Alaska
Pacific Bancshares, even if the price offered is significantly greater than the
then market price of any equity security of Alaska Pacific Bancshares.
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Purpose and Takeover Defensive Effects of Alaska Pacific Bancshares'
Articles of Incorporation and Bylaws. The Board of Directors of Alaska Federal
believes that the provisions described above are prudent and will reduce Alaska
Pacific Bancshares' 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 Alaska Federal in the orderly
deployment of the conversion proceeds into productive assets during the initial
period after the conversion. The Board of Directors believes these provisions
are in the best interest of Alaska Federal and Alaska Pacific Bancshares and its
stockholders. In the judgment of the Board of Directors, Alaska Pacific
Bancshares' Board will be in the best position to determine the true value of
Alaska Pacific Bancshares and to negotiate more effectively for what may be in
the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interest of Alaska Pacific Bancshares and its
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of Alaska Pacific Bancshares and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is also
the view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price reflective of
the true value of Alaska Pacific Bancshares and which is in the best interest of
all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of Alaska
Pacific Bancshares and its stockholders, with due consideration given to matters
such as the management and business of the acquiring corporation and maximum
strategic development of Alaska Pacific Bancshares' assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objective may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive Alaska
Pacific Bancshares' remaining stockholders of benefits of certain protective
provisions of the Securities Exchange Act, if the number of beneficial owners
became less than the 300 thereby allowing for Securities Exchange Act
deregistration.
Despite the belief of Alaska Federal and Alaska Pacific Bancshares as
to the benefits to stockholders of these provisions of Alaska Pacific
Bancshares' Articles of Incorporation and Bylaws, these provisions may also have
the effect of discouraging a future takeover attempt which would not be approved
by Alaska Pacific Bancshares' Board, but pursuant to which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have any opportunity to do so. Such provisions will also render the
removal of Alaska Pacific Bancshares' Board of Directors and of management more
difficult. The Board of Directors of Alaska Federal and Alaska Pacific
Bancshares, however, have concluded that the potential benefits outweigh the
possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the conversion, Alaska Pacific Bancshares may adopt
additional provisions to Alaska Pacific Bancshares' Articles of Incorporation or
Bylaws regarding the acquisition of its equity securities that would be
permitted for an Alaska business corporation. Alaska Pacific Bancshares and
Alaska Federal do not presently intend to propose the adoption of further
restrictions on the acquisition of Alaska Pacific Bancshares' equity securities.
The cumulative effect of the restriction on acquisition of Alaska
Pacific Bancshares contained in the Articles of Incorporation and Bylaws of
Alaska Pacific Bancshares, federal law and Alaska law
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may be to discourage potential takeover attempts and perpetuate incumbent
management, even though certain stockholders of Alaska Pacific Bancshares may
deem a potential acquisition to be in their best interests, or deem existing
management not to be acting in their best interests.
DESCRIPTION OF CAPITAL STOCK OF ALASKA PACIFIC BANCSHARES
General
Alaska Pacific Bancshares is authorized to issue 20,000,000 shares of
common stock having a par value of $.01 per share and 1,000,000 shares of
preferred stock having a par value of $.01 per share. Alaska Pacific Bancshares
currently expects to issue up to 805,000 shares of common stock and no shares of
preferred stock in the conversion. Each share of Alaska Pacific Bancshares'
common stock will have the same rights as, and will be identical in all respects
with, each other share of common stock. Upon payment of the $10.00 purchase
price for the common stock, as provided for in the plan of conversion, all such
stock will be duly authorized, fully paid and nonassessable.
The common stock of Alaska Pacific Bancshares will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the Federal Deposit Insurance Corporation.
Common Stock
Dividends. Alaska Pacific Bancshares can pay dividends profits if, as
and when declared by its Board of Directors. The payment of dividends by Alaska
Pacific Bancshares is subject to limitations which are imposed by law. See
"Alaska Pacific Bancshares' Dividend Policy" and "Regulation -- Federal
Regulation of Savings Associations -- Limitations on Capital Distributions." The
holders of common stock of Alaska Pacific Bancshares will be entitled to receive
and share equally in the dividends that may be declared by the Board of
Directors of Alaska Pacific Bancshares. If Alaska Pacific Bancshares issues
preferred stock, the holders thereof may have a priority over the holders of the
common stock with respect to dividends.
Stock Repurchases. The plan of conversion and Office of Thrift
Supervision regulations place certain limitations on the repurchase of Alaska
Pacific Bancshares' capital stock. See "Alaska Federal's Conversion --
Restrictions on Repurchase of Stock" and "How Alaska Pacific Bancshares Intends
to Use the Conversion Offering Proceeds."
Voting Rights. Upon the effective date of the conversion, the holders
of common stock of Alaska Pacific Bancshares will possess exclusive voting
rights in Alaska Pacific Bancshares. They will elect Alaska Pacific Bancshares'
Board of Directors and act on such other matters as are required to be presented
to them under Alaska law or as are otherwise presented to them by the Board of
Directors. Except as discussed in "Restrictions on Acquisition of Alaska Pacific
Bancshares," each holder of common stock will be entitled to one vote per share
and will not have any right to cumulate votes in the election of directors. If
Alaska Pacific Bancshares issues preferred stock, holders of the preferred stock
may also possess voting rights. Certain matters require a vote of 80% of the
outstanding shares entitled to vote thereon. See "Restrictions on Acquisition of
Alaska Pacific Bancshares."
As a federally chartered mutual savings bank, corporate powers and
control of Alaska Federal are vested in its Board of Directors, who elect the
officers of Alaska Federal and who fill any vacancies on the Board of Directors.
After the conversion, voting rights will be vested exclusively in the owners of
the shares of capital stock of Alaska Federal, all of which will be owned by
Alaska Pacific Bancshares, and voted at the direction of Alaska Pacific
Bancshares' Board of Directors. Consequently, the holders of the common stock
will not have direct control of Alaska Federal.
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Liquidation. In the event of any liquidation, dissolution or winding up
of Alaska Federal, Alaska Pacific Bancshares, as holder of Alaska Federal's
capital stock would be entitled to receive, after payment or provision for
payment of all debts and liabilities of Alaska Federal, including all deposit
accounts and accrued interest thereon, all assets of Alaska Federal available
for distribution. In the event of liquidation, dissolution or winding up of
Alaska Pacific Bancshares, the holders of its common stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of Alaska Pacific Bancshares available for
distribution. If Alaska Pacific Bancshares issues preferred stock, the holders
thereof may have a priority over the holders of the common stock in the event of
liquidation or dissolution.
Preemptive Rights. Holders of the common stock of Alaska Pacific
Bancshares will not be entitled to preemptive rights with respect to any shares
which may be issued. The common stock is not subject to redemption.
Preferred Stock
None of the shares of the authorized Alaska Pacific Bancshares
preferred stock will be issued in the conversion and there are no plans to issue
preferred stock. The preferred stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
Restrictions on Acquisition
Acquisitions of Alaska Pacific Bancshares are restricted by provisions
in its Articles of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "Regulation" and "Restrictions on Acquisition
of Alaska Pacific Bancshares."
REGISTRATION REQUIREMENTS
Alaska Pacific Bancshares will register the common stock with the
Securities and Exchange Commission pursuant to Section 12(g) of the Securities
Exchange Act upon the completion of the conversion and will not deregister its
common stock for a period of at least three years following the completion of
the conversion. Upon the registration of the common stock, the proxy and tender
offer rules, insider trading reporting and restrictions, annual and periodic
reporting and other requirements of the Securities Exchange Act will be
applicable.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for Alaska
Pacific Bancshares by Breyer & Associates PC, Washington, D.C. The federal tax
consequences of the offering have been opined upon by Breyer & Associates PC and
the Alaska tax consequences of the offering have been opined upon by Deloitte &
Touche LLP, Anchorage, Alaska. Breyer & Associates PC and Deloitte & Touche LLP
have consented to the references herein to their opinions. Certain legal matters
will be passed upon for Charles Webb by Elias, Matz, Tiernan & Herrick LLP,
Washington, D.C.
EXPERTS
The financial statements of Alaska Federal Savings Bank as of December
31, 1998 and 1997, and for each of the years then ended, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing at the back of this prospectus, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
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RP Financial has consented to the publication in this prospectus of the
summary of its report to Alaska Federal setting forth its opinion as to the
estimated pro forma market value of Alaska Pacific Bancshares and Alaska
Federal, as converted, and its letter with respect to subscription rights and to
the use of its name and statements with respect to it appearing in this
prospectus.
WHERE YOU CAN FIND MORE INFORMATION
Alaska Pacific Bancshares has filed with the Securities and Exchange
Commission a Registration Statement on Form SB-2 (File No. 333-74827) under the
Securities Act with respect to the common stock offered in the conversion. This
prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. Such information may be
inspected at the public reference facilities maintained by the Securities and
Exchange Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
and at its regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies may be obtained at prescribed rates from the Public Reference Section of
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Registration Statement also is available through the Securities
and Exchange Commission's World Wide Web site on the Internet
(http://www.sec.gov).
Alaska Federal has filed with the Office of Thrift Supervision an
Application for Approval of Conversion, which includes proxy materials for
Alaska Federal's special meeting of members and certain other information. This
prospectus omits certain information contained in the Application for Approval
of Conversion. The Application, including the proxy materials, exhibits and
certain other information that are a part of the Application for Approval of
Conversion, may be inspected, without charge, at the offices of the Office of
Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552 and at the
office of the Regional Director at the West Regional Office of the Office of
Thrift Supervision, Pacific Telesis Tower, 1 Montgomery Street, Suite 400, San
Francisco, California 94104.
Copies of Alaska Pacific Bancshares' Articles of Incorporation and
Bylaws may be obtained by written request to Alaska Federal.
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Index To Financial Statements
Alaska Federal Savings Bank
Page
----
Independent Auditors' Report - Deloitte & Touche LLP ..................... F-1
Balance Sheets as of December 31, 1998 and 1997 .......................... F-2
Statements of Income for the Years Ended December 31, 1998 and 1997 ...... 20
Statements of Changes in Equity Capital for the Years Ended
December 31, 1998 and 1997 .............................................. F-3
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 .. F-4
Notes to Financial Statements ............................................ F-5
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Financial Statements or related Notes.
Separate financial statements for Alaska Pacific Bancshares have not
been included herein because Alaska Pacific Bancshares, which has engaged in
only organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
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[LETTER HEAD FOR DELOITTE & TOUCHE]
Independent Auditors' Report
Board of Directors
Alaska Federal Savings Bank
Juneau, Alaska
We have audited the accompanying balance sheets of Alaska Federal Savings Bank
(the Bank) as of December 31, 1998 and 1997, and the related statements of
income, changes in equity capital, and cash flows for the years then ended.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Bank as of December 31, 1998 and 1997,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
- ---------------------
February 19, 1999
F-1
<PAGE>
Alaska Federal Savings Bank
Balance Sheets
================================================================================
(in thousands) December 31, 1998 1997
- --------------------------- ---- ----
Assets
Cash and due from banks ............................ $ 3,201 $ 2,648
Interest-bearing deposits with banks ............... 11,383 7,482
--------- ---------
Total cash and cash equivalents .................. 14,584 10,130
Investment securities available for sale, 18,176 13,334
at fair value (amortized cost: 1998
$18,474; 1997 - $13,306)
Investment securities held to maturity,
at amortized cost (fair value: 1997 - $5,953) ..... -- 6,196
Federal Home Loan Bank stock ....................... 1,265 1,173
Loans held for sale ................................ 899 440
Loans .............................................. 71,510 79,471
Less allowance for loan losses ................... 674 751
--------- ---------
Loans, net ..................................... 70,836 78,720
Accrued interest receivable ........................ 593 698
Premises and equipment ............................. 3,306 3,227
Foreclosed properties .............................. 311 --
Other assets ....................................... 836 558
--------- ---------
Total Assets ....................................... $ 110,806 $ 114,476
========= =========
Liabilities and Equity Capital
Deposits:
Noninterest-bearing demand ....................... $ 5,046 $ 3,892
Interest-bearing demand .......................... 25,570 23,939
Money market ..................................... 15,872 13,298
Savings .......................................... 18,674 18,691
Certificates of deposit .......................... 36,783 37,139
--------- ---------
Total deposits ................................. 101,945 96,959
Federal Home Loan Bank advances .................... -- 9,000
Advance payments by borrowers for taxes
and insurance ..................................... 866 932
Accounts payable and accrued expenses .............. 240 122
Accrued interest payable ........................... 389 195
Other liabilities .................................. 116 128
--------- ---------
Total liabilities ................................ 103,556 107,336
Commitments and contingencies (Notes 10 and 12)
Equity capital:
Retained earnings ................................ 7,548 7,212
Accumulated other comprehensive
income (loss) .................................. (298) (72)
--------- ---------
Total equity capital ........................... 7,250 7,140
--------- ---------
Total Liabilities and Equity Capital ............... $ 110,806 $ 114,476
========= =========
See notes to financial statements.
F-2
<PAGE>
Alaska Federal Savings Bank
Statements of Changes in Equity Capital
================================================================================
Accumulated
Other Total
Retained Comprehensive Equity
(in thousands) Earnings Income (Loss) Capital
- -------------- -------- ------------- -------
Balance, January 1, 1997 ................ $ 6,513 $ (155) $ 6,358
Net income .............................. 699 -- 699
Other comprehensive income:
Net change in unrealized losses
on securities available for sale ....... -- 83 83
-------
Other comprehensive income ............ 83
-------
Comprehensive income ........... 782
- --------------------------------------------------------------------------------
Balance, December 31, 1997 .............. 7,212 (72) 7,140
Net income .............................. 336 -- 336
Other comprehensive income:
Net change in unrealized losses
on securities available for sale -- (68) (68)
Cumulative effect of change in
accounting principle (Note 3) (158) (158)
-------
Other comprehensive income (loss) ..... (226)
-------
Comprehensive income (loss) ..... 110
- --------------------------------------------------------------------------------
Balance, December 31, 1998 .............. $ 7,548 $ (298) $ 7,250
======= ======= =======
See notes to financial statements.
F-3
<PAGE>
Alaska Federal Savings Bank
Statements of Cash Flows
================================================================================
(in thousands) Years ended December 31, 1998 1997
- --------------------------------------- ---- ----
Operating Activities
Net income ........................................... $ 336 $ 699
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ........................ 60 25
Depreciation and amortization .................... 351 366
Income tax benefit ............................... -- (100)
Federal Home Loan Bank stock dividends ........... (92) (86)
Amortization of fees, discounts, and
premiums, net ................................... (3) 29
Cash provided by changes in operating
assets and liabilities:
Accrued interest receivable .................. 105 (13)
Loans held for sale .......................... (459) (259)
Other assets ................................. (278) (75)
Advance payments by borrowers for
taxes and insurance ......................... (66) 21
Accrued interest payable ..................... 194 50
Accounts payable and accrued expenses ........ 118 9
Other liabilities ............................ (12) (22)
-------- --------
Net cash provided by operating
activities ................................. 254 644
Investing Activities
Purchase of investment securities available
for sale .......................................... (6,000) --
Maturities and principal repayments of:
Investment securities available for sale ......... 6,540 3,613
Investment securities held to maturity ........... 464 642
Loan originations, net of principal repayments ..... 7,642 (2,049)
Purchase of premises and equipment ................. (432) (264)
-------- --------
Net cash provided by investing activities ........ 8,214 1,942
Financing Activities
Net increase (decrease) in Federal Home
Loan Bank advances ................................ (9,000) 4,200
Net increase (decrease) in demand and
savings deposits .................................. 5,342 (3,482)
Net increase (decrease) in certificates
of deposit ........................................ (356) 3,631
-------- --------
Net cash provided (used) by financing
activities ...................................... (4,014) 4,349
-------- --------
Increase in cash and cash equivalents ................ 4,454 6,935
Cash and cash equivalents at beginning of year ....... 10,130 3,195
-------- --------
Cash and cash equivalents at end of year ............. $ 14,584 $ 10,130
======== ========
Supplemental information:
Cash paid for interest ............................. $ 3,613 $ 3,981
Loans foreclosed and transferred to
foreclosed properties ............................. 311 --
Net change in unrealized loss on securities
available
for sale ......................................... (68) 83
Investment securities transferred from
held to maturity
to available for sale ............................ 5,732 --
======== ========
See notes to financial statements.
F-4
<PAGE>
Alaska Federal Savings Bank
Notes to Financial Statements
December 31, 1998 and 1997
================================================================================
Note 1 - Summary of Significant Accounting Policies
GENERAL: Alaska Federal Savings Bank ("the Bank") is a federal mutual savings
bank that provides a range of financial services to individuals and small
businesses in Southeast Alaska. The Bank operates for the mutual benefit of its
depositors and borrowers. The Bank's financial services include accepting
deposits from the general public and making residential and commercial real
estate loans, consumer loans, and commercial loans. The Bank also originates,
sells and services residential mortgage loans under several federal and state
mortgage-lending programs.
Subsequent to December 31, 1998, the Board of Directors of the Bank adopted a
Plan of Conversion to change the Bank's legal form of organization to a stock
savings bank (Note 14).
INVESTMENT SECURITIES: Securities available for sale, including mortgage-backed
and related securities, are carried at fair value with unrealized gains and
losses excluded from earnings and reported in a separate component of equity.
Any security that management determines may not be held to maturity is
classified as available for sale at the time the security is acquired. Any gains
and losses realized on the sale of these securities are based on the specific
identification method and included in earnings.
Securities held to maturity, including mortgage-backed and related securities,
are carried at amortized cost. Investments are adjusted to the lower of cost or
fair value when other-than-temporary declines in value occur. Management intends
and has the ability to hold such securities until maturity and any differences
between fair value and amortized cost are considered temporary.
Purchase discounts and premiums on investment securities are amortized using the
level yield method.
LOANS: Loans are reported at the principal amount outstanding, adjusted for net
deferred loan fees and costs and other unamortized premiums or discounts.
Interest is accrued as earned unless management doubts the collectibility of the
loan or the unpaid interest. Interest accrual is generally discontinued and
loans are transferred to nonaccrual status when they become 90 days past due.
All previously accrued but uncollected interest is deducted from interest income
upon transfer to nonaccrual status. Income from nonaccrual loans is recorded
only when interest payments are received.
Loan origination fees and direct loan origination costs are deferred and
recognized as an adjustment to interest income over the contractual life of the
loan using the level yield method. When loans are sold, the related net
unamortized loan fees and costs are included in the determination of the gain on
sale of loans.
LOANS HELD FOR SALE: Loans held for sale consist primarily of residential
mortgage loans and are valued at the lower of cost or market.
F-5
<PAGE>
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
level believed to be sufficient to absorb probable losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on a number
of factors, including the level of nonperforming loans, loan loss experience,
collateral values, a review of the credit quality of the loan portfolio, and
current economic conditions. Loans are categorized as either pass graded or
problem graded based on periodic reviews of the loan portfolio. The allowance is
evaluated quarterly, and is comprised of three elements:
General component The general allowance component is calculated by loan
category by applying various loss factor to pass-graded outstanding loans.
The loss factors are based on the Bank's historical loss experience and
industry loss statistics, adjusted for significant factors, that, in
management's judgement, affect the collectibility of the portfolio as of
the evaluation date.
Specific component The specific allowance component is established in cases
where management has identified conditions or circumstances related to a
loan that management believes indicate a higher probability of loss
(problem-graded loans). Depending on the circumstances related to both
performing and nonperforming loans in this category, a specific allowance
is calculated either by applying various loss factors or by establishing an
allowance for impairment.
Loan impairment is measured in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". Under these
standards, loans are deemed to be impaired when management determines that
it is probable that all amounts due under the contractual terms of the loan
agreements will not be collectable. All loans except for loans grouped as
small and homogeneous are evaluated for impairment. Management groups all
small income property loans and all one-to-four-family residential mortgage
loans as small and homogeneous. Impairment is measured by comparing the
fair value of the collateral or present value of future cash flows to the
recorded investment in the loan.
Unallocated component The unallocated allowance component is established to
recognize the estimation risk inherent in the general and specific
components, and management's evaluation of various conditions that are not
directly measured in the determination of the general and specific
components. The conditions evaluated in connection with the unallocated
allowance may include existing general economic and business conditions
affecting key lending areas of the Bank, credit quality trends, collateral
values, loan volumes and concentrations, specific industry conditions
within portfolio segments, and recent loss experience in particular
segments of the portfolio.
MORTGAGE SERVICING RIGHTS: Mortgage servicing rights are stated at amortized
cost. Cost is amortized in proportion to, and over the period of, future
expected net servicing income. Mortgage servicing rights are assessed for
impairment based on the fair value of those rights and any impairment is
recognized through a valuation allowance. In assessing impairment, the mortgage
servicing rights are stratified based on the nature and risk characteristics of
the underlying loans, which at December 31, 1998 and 1997, consisted entirely of
one-to-four-family residential mortgage loans.
F-6
<PAGE>
PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed on the
straight-line method over estimated useful lives of the assets: 20 to 30 years
for buildings, 5 to 10 years for leasehold improvements, and 3 to 10 years for
furniture and equipment. Expenditures for improvements and major renewals are
capitalized and ordinary maintenance and repairs are charged to operations as
incurred.
Long-lived assets are assessed 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, estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are compared with the carrying value, and a direct writedown is recorded for the
amount of impairment, if any.
FORECLOSED PROPERTIES: Real estate acquired in satisfaction of a loan is
initially recorded in foreclosed properties at the lower of cost or estimated
fair value less estimated selling costs, with any difference from the loan
balance charged to the allowance for loan losses. Subsequent changes in
estimated fair value result in writing down the properties, directly or through
valuation accounts. Such writedowns and gains and losses on disposal, as well as
operating income and costs incurred during the period of ownership, are
recognized currently in noninterest expense.
FEDERAL HOME LOAN BANK STOCK: The Bank's investment in Federal Home Loan Bank
(FHLB) stock is carried at cost, which approximates its fair value. As a member
of the FHLB system, the Bank is required to maintain a minimum level of
investments in FHLB stock based on specified percentages of its outstanding
mortgages, total assets or FHLB advances. At December 31, 1998, the Bank's
minimum investment requirement was approximately $510,000. The Bank may request
redemption at par value of any stock in excess of the amount the Bank is
required to hold. Stock redemptions are granted at the discretion of the FHLB.
INCOME TAX: The Bank accounts for income tax using the liability method. The
liability method recognizes the amount of tax payable at the date of the
financial statements as a result of all events that have been recognized in the
financial statements, as measured by the provisions of current enacted tax laws
and rates. Net deferred tax assets are evaluated and reduced through a valuation
allowance to the extent that it is more likely than not that such assets will
not be fully recovered in the future.
STATEMENT OF CASH FLOWS: The statement of cash flows has been prepared using the
"indirect" method for presenting cash flows from operating activities. For
purposes of this statement, cash and cash equivalents include cash and due from
banks and interest-bearing deposits with banks.
CHANGES IN ACCOUNTING PRINCIPLES: Changes in accounting principles were the
result of adopting Statements of Financial Accounting Standards (SFAS). The
significant statements and the impact of their adoption are described below.
SFAS NO. 125: Effective January 1 1997, the Bank adopted Financial
Accounting Standards Board (FASB) SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities. This
statement provides guidance for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. The
statement also supercedes SFAS No. 122 to eliminate the distinction between
normal and excess servicing rights. The adoption of SFAS No. 125 did not
significantly affect the Bank's earnings, liquidity, or capital resources.
F-7
<PAGE>
SFAS NO. 130: In 1998, the Bank adopted FASB SFAS No. 130, Reporting
Comprehensive Income. This Statement establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements.
This Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. Adoption of this statement
resulted in the addition of a new section in the statements of changes in
equity capital. Adoption did not impact on the Bank's earnings, liquidity,
or capital resources.
SFAS 131: In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which establishes
standards for reporting information regarding an entity's operating
activities. SFAS No. 131 requires that operating segments be defined at the
same level and in a similar manner as management evaluates operating
performance. Currently, the Bank is operating as a single segment.
SFAS 133: Effective October 1, 1998, the Bank adopted FASB SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. Adoption of this statement did not result in a material impact
on the Bank's earnings, capital resources or liquidity. See Note 3.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS: In October 1998,
the FASB issued SFAS No. 134, Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise (an amendment of FASB Statement No. 65). This statement is effective
for the first fiscal quarter beginning after December 31, 1998. This statement
conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. The adoption of this
statement is not expected to have a material impact on the Bank's financial
position.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of cash and cash equivalents
is estimated to be equal to the carrying value, due to their short term nature.
The fair value of investment securities is based upon estimated market prices
obtained from independent safekeeping agents. The fair value of Federal Home
Loan Bank stock is considered to be equal to its carrying value, since it may be
redeemed at that value. The fair value of loans is estimated using present value
methods which discount the estimated cash flows, including prepayments as well
as contractual principal and interest, using current interest rates appropriate
for the type and maturity of the loans.
For demand and savings deposits, fair value is considered to be carrying value.
The fair values of fixed-rate certificates of deposit and FHLB advances are
estimated using present value methods and current offering rates for such
deposits and advances.
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. Material estimates that are particularly susceptible to change
in the near term relate to the determination of the allowance for loan losses.
Actual results could differ from these estimates.
F-8
<PAGE>
Note 2 - Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action ("PCA"), the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures have been established by regulation to ensure capital
adequacy and require the Bank to maintain minimum capital amounts and ratios
(set forth in the table below). The Bank's primary regulatory agency, the Office
of Thrift Supervision ("the OTS"), requires that the Bank maintain minimum
amounts and ratios of tangible capital (as defined in the regulations) of 1.5%,
core capital (as defined) of 3%, and total risk-based capital (as defined) of
8%. The Bank is also subject to PCA capital requirement regulations set forth by
the Federal Deposit Insurance Corporation ("FDIC"). The FDIC requires the Bank
to maintain minimum amounts and ratios of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes that, as of
December 31, 1998 and 1997, the Bank meets all capital adequacy requirements to
which it is subject. The Bank was categorized as "well capitalized" in the most
recent notification by the OTS. There have been no events or conditions since
that notification that management believes would change the Bank's capital
category.
<TABLE>
<CAPTION>
Minimum Capital Required
----------------------------------------------
To Be Categorized as
For Capital "Well Capitalized"
Adequacy Under PCA
(dollars in thousands) Actual Purposes Provisions
- ---------------------- ------------------- ------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Tangible capital (to total assets) $7,548 6.85% $1,652 1.50% N/A N/A
Core capital (to total assets) 7,548 6.85% 3,304 3.00% N/A N/A
Total risk-based capital (to risk
weighted assets) 8,222 12.35% 5,325 8.00% $6,656 10.00%
Tier I risk-based capital (to risk
weighted assets) 7,548 11.34% N/A N/A 3,994 6.00%
Tier I leverage capital (to average
assets) 7,548 6.86% N/A N/A 5,503 5.00%
===================================================================================================================
As of December 31, 1997:
Tangible capital (to total assets) $ 7,212 6.32% $ 1,711 1.50% N/A N/A
Core capital (to total assets) 7,212 6.32% 3,422 3.00% N/A N/A
Total risk-based capital (to risk
weighted assets) 7,963 11.79% 5,405 8.00% $6,756 10.00%
Tier I risk-based capital (to risk
weighted assets) 7,212 10.67% N/A N/A 4,054 6.00%
Tier I leverage capital (to average
assets) 7,212 6.47% N/A N/A 5,571 5.00%
===================================================================================================================
</TABLE>
F-9
<PAGE>
A reconciliation of the Bank's equity capital under generally accepted
accounting principles ("GAAP") to regulatory capital amounts as of December 31,
1998 and 1997 is as follows:
(in thousands) 1998 1997
- -------------- ------ ------
Total equity capital as reported under GAAP ................. $7,250 $7,140
Adjustments for regulatory capital:
Unrealized gains on securities available for sale ....... 298 72
------ ------
Total tangible and core capital ............................. 7,548 7,212
Allowance for loan losses ................................. 674 751
------ ------
Total risk based capital .................................... $8,222 $7,963
====== ======
Note 3 - Investment Securities
Amortized cost and fair values of investment securities available for sale and
held to maturity, including mortgage-backed securities, are summarized as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- -------------- ---- ----- ------ -----
December 31, 1998
Available for sale:
Mortgage-backed securities:
FNMA ............................. $ 3,801 $ 3 $ (103) $ 3,701
FHLMC ............................ 5,269 (174) 5,095
GNMA ............................. 1,638 (16) 1,622
Collateralized mortgage
obligations-privately-issued....... 767 (6) 761
U.S. agencies and corporations:
Callable debentures:
FHLMC .......................... 3,000 (3) 2,997
FHLB ........................... 3,000 1 3,001
SBA pools ........................ 999 7 (7) 999
------- ------- ------- -------
Total available for sale ....... 18,474 11 (309) 18,176
------- ------- ------- -------
Total ........................ $18,474 $ 11 $ (309) $18,176
======= ======= ======= =======
F-10
<PAGE>
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- -------------- ---- ----- ------ -----
December 31, 1997
Available for sale:
Mortgage-backed securities:
FNMA ............................. $ 4,696 $ 10 $ (102) $ 4,604
GNMA ............................. 2,319 21 2,340
Collateralized mortgage obligations-
privately-issued.................. 1,214 (22) 1,192
U.S. agencies and corporations:
FHLMC callable debentures ........ 4,000 (6) 3,994
SBA pools ........................ 1,177 27 1,204
------- ------- ------- -------
Total available for sale ....... 13,406 58 (130) 13,334
Held to maturity:
Mortgage-backed securities:
FNMA ............................. 145 2 147
FHLMC ............................ 6,051 (245) 5,806
------- ------- ------- -------
Total held to maturity ......... 6,196 2 (245) 5,953
------- ------- ------- -------
Total ........................ $19,602 $ 60 $ (375) $19,287
======= ======= ======= =======
As discussed in Note 1, effective October 1, 1998, the Bank adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." Adoption of
the statement had no significant effect on the Bank's financial position or net
income. Concurrent with the adoption of SFAS No. 133, however, investment
securities totaling approximately $5,732,000, amortized cost, which were
previously classified as "held to maturity" were reclassified as "available for
sale." These securities were then marked to market through the unrealized losses
on securities available for sale account in the equity capital section. This
resulted in a transition adjustment of approximately $158,000. This adjustment
is presented in the statement of changes in equity capital for the year ended
December 31, 1998, as a cumulative effect of change in accounting principle. The
action did not indicate an intention to sell these specific securities, but
rather was done to provide more flexibility in managing the entire portfolio,
consistent with the intent of the statement.
The following table summarizes the amortized cost and fair values of investment
securities by maturity group at December 31, 1998:
(in thousands) Amortized Cost Fair Value
- -------------- -------------- ----------
Amount with final maturity:
Within one year $ 6,000 $ 5,998
After five but within ten years 354 354
After ten years 12,120 11,824
------- ------
Total $18,474 $18,176
======= =======
Maturities of mortgage backed securities are classified based on their final
contractual maturities. Actual maturities may vary due to prepayment of the
underlying loans.
There were no sales of securities during 1998 or 1997. The Bank does not have a
trading security portfolio.
F-11
<PAGE>
Note 4 - Loans
Loans are summarized as follows:
(in thousands) December 31, 1998 1997
- --------------------------- ---- ----
Real estate:
Permanent:
One-to-four-family residential ............... $34,252 $40,891
Multifamily residential ...................... 2,485 2,281
Commercial nonresidential .................... 10,683 13,751
Land ........................................... 2,589 1,093
Construction:
One-to-four-family residential ............... 957 1,513
Multifamily residential ...................... 1,079 1,980
Commercial nonresidential .................... 439 --
Commercial business ............................ 4,282 2,618
Consumer:
Home equity .................................. 8,401 8,435
Boat ......................................... 5,058 5,547
Automobile ................................... 978 959
Other ........................................ 307 403
------- -------
Loans ........................................ $71,510 $79,471
======= =======
Loans held for sale ............................ $ 899 $ 440
======= =======
Loans are net of deferred loan fees and other discounts amounting to $315,000
and $331,000 at December 31, 1998 and 1997, respectively.
Interest income from tax-exempt loans was $101,000 and $105,000 in 1998 and
1997, respectively.
Real estate loans are secured primarily by properties located in southeast
Alaska. Commercial real estate loans are generally secured by warehouse, retail,
and other improved commercial properties. Other commercial loans are generally
secured by equipment, inventory, accounts receivable, or other business assets.
At December 31, 1998, the Bank had no impaired loans.
MORTGAGE LOAN SERVICING: The Bank services one-to-four-family residential
mortgage loans for Alaska Housing Finance Corporation ("AHFC"), U.S. Government
agencies, and institutional and private investors totaling $83,437,000 and
$82,034,000 as of December 31, 1998 and 1997, respectively. These loans are the
assets of the investors and, accordingly, are not included in the accompanying
balance sheets. Related servicing income, net of amortization of mortgage
servicing rights, amounted to $232,000 and $259,000 for 1998 and 1997,
respectively.
The amortized cost of mortgage servicing rights, which approximates fair value,
is $237,000 and $96,000 at December 31, 1998 and 1997, respectively. The amount
of servicing assets recognized during 1998 was $164,000 and amortization was
$23,000 for the year. The amount of servicing assets recognized during 1997 was
$102,000 and amortization was $6,000 for the year. It has been determined that a
valuation allowance for impairment is not required at December 31, 1998 or 1997.
F-12
<PAGE>
Included in loans serviced for others at December 31, 1998 are 48 loans with
current balances totaling $3,133,000 for which the Bank is subservicer under
agreements with AHFC. Of these, 24 loans totaling $1,846,000 are owned by the
Government National Mortgage Association ("GNMA") and 24 loans totaling
$1,287,000 are owned by the Federal National Mortgage Association ("FNMA").
RELATED PARTY LOANS: In the ordinary course of business, the Bank makes loans to
executive officers and directors of the Bank and to their associated companies.
Such loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions. The
aggregate dollar amount of these loans was $967,000 and $1,593,000 at December
31, 1998 and 1997, respectively. During the year ended December 31, 1998, new
loans of this type were $160,000 and repayments were $786,000.
Note 5 - Allowance for Loan Losses
Following is an analysis of the changes in the allowance for loan losses:
(in thousands) Years ended December 31, 1998 1997
- --------------------------------------- ---- ----
Balance at beginning of year ................... $ 751 $ 723
Provision for loan losses ...................... 60 25
Loans charged off .............................. (141) (2)
Recoveries ..................................... 4 5
----- -----
Balance at end of year ......................... $ 674 $ 751
===== =====
Note 6 - Premises and Equipment
The following is a summary of premises and equipment:
(in thousands) December 31, 1998 1997
- --------------------------- ---- ----
Land ........................................... $ 676 $ 676
Buildings ...................................... 3,852 3,777
Leasehold improvements ......................... 1,354 1,323
Furniture, fixtures and equipment .............. 1,990 1,666
------- -------
7,872 7,442
Less accumulated depreciation .................. (4,566) (4,215)
------- -------
$ 3,306 $ 3,227
======= =======
Depreciation and amortization expense for the years ended December 31, 1998 and
1997 amounted to $351,000 and $366,000, respectively.
F-13
<PAGE>
Note 7 - Deposits
Certificates of deposit in excess of $100,000 amounted to $5,420,000 and
$5,488,000 at December 31, 1998 and 1997, respectively.
The scheduled maturities of certificates of deposit as of December 31, 1998, are
as follows:
(in thousands) Year ending December 31,
- ---------------------------------------
1999 $28,969
2000 4,149
2001 2,948
2002 226
2003 and thereafter 491
-------
$36,783
=======
Deposits in excess of $100,000 are not federally insured.
Interest expense on deposits consists of the following for the years ended
December 31, 1998 and 1997:
(in thousands) 1998 1997
- -------------- ------ ------
Interest-bearing demand ..................................... $ 529 $ 552
Money market ................................................ 520 520
Savings ..................................................... 586 575
Certificates of deposit ..................................... 2,007 1,917
------ ------
$3,642 $3,564
====== ======
The weighted average interest rates paid on deposits for the years ended
December 31, 1998 and 1997, are as follows:
1998 1997
---- ----
Interest-bearing demand ..................................... 2.22% 2.23%
Money market ................................................ 3.75 3.90
Savings ..................................................... 3.23 3.27
Certificates of deposit ..................................... 5.47 5.49
Note 8 - Federal Home Loan Bank Advances
FHLB Advances at December 31, 1997 consisted of $9,000,000 of one-year advances
at interest rates ranging from 6.02% to 6.13%. No advances were outstanding at
December 31, 1998. Under a blanket pledge agreement, all funds on deposit at
FHLB, as well as all unencumbered qualifying loans and investment securities,
are available to collateralize FHLB advances.
F-14
<PAGE>
Note 9 - Retirement Plan
The bank has a salary deferral 401(k) plan. Employees who are at least 18 years
of age and have completed three months of service are eligible to participate in
the plan. Employees may contribute on a pretax basis up to 17% of their annual
salary up to a maximum limit under the law. The Bank matches 75% of the first
$2,667 of employee contribution. For the years ended December 31, 1998 and 1997,
the Bank contributed $47,000 and $39,000, respectively, to the plan.
Note 10 - Operating Leases
The Bank leases certain of its premises and equipment under noncancellable
operating leases with terms in excess of one year. Future minimum lease payments
under these leases are summarized as follows:
(in thousands) Year ending December 31,
- ---------------------------------------
1999 $ 364
2000 375
2001 376
2002 376
2003 306
2004 and thereafter 1,370
------
$3,167
======
Rent expense was $363,000 and $333,000 for the years ended December 31, 1998 and
1997, respectively. Rental income on owned premises amounted to $97,000 and
$116,000 for the years ended December 31, 1998 and 1997, respectively.
Note 11 - Income Tax
The provision for income tax consisted of the following:
(in thousands) Years ended December 31, 1998 1997
- --------------------------------------- ---- ----
Taxes paid or currently payable .................. $ -- $ --
Change in deferred taxes ......................... 110 196
Adjustment of valuation allowance ................ (110) (296)
----- -----
Income tax benefit ............................. $ -- $(100)
===== =====
F-15
<PAGE>
A reconciliation of taxes computed at federal statutory corporate tax rates (34%
in 1998 and 1997) to tax expense, as shown in the accompanying statements of
income and changes in equity capital, is as follows:
(in thousands) Years ended December 31, 1998 1997
- --------------------------------------- ---- ----
Income tax expense at statutory rate ....................... $ 114 $ 204
Income tax effect of:
Interest on municipal obligations ........................ (34) (36)
Other .................................................... 7 28
Reduction of valuation allowance for deferred taxes ........ (87) (296)
----- -----
Income tax benefit ..................................... $ -- $(100)
===== =====
The Bank's effective tax rate was 0% and (17%) for 1998 and 1997, respectively.
Deferred federal income tax is provided for the temporary differences between
the tax basis and financial statement carrying amounts of assets and
liabilities. Components of the Bank's net deferred tax assets consisted of the
following:
(in thousands) Years ended December 31, 1998 1997
- --------------------------------------- ---- ----
Deferred tax assets:
Net operating loss carryforward .................... $ 1,706 $ 1,733
Bad debt reserves .................................. 293 326
Discount on loans .................................. 27 31
Depreciation ....................................... 25 27
Accrued vacation ................................... 31 32
Other .............................................. 27 27
------- -------
Gross deferred tax assets ................... 2,109 2,176
Deferred tax liabilities:
Deferred loan fees ................................. (110) (103)
FHLB stock dividends ............................... (381) (340)
Other .............................................. (15) (20)
------- -------
Gross deferred tax liabilities .............. (506) (463)
------- -------
Deferred tax asset, before valuation allowance ...... 1,603 1,713
Valuation allowance ................................ (1,303) (1,413)
------- -------
Net deferred tax assets .......................... $ 300 $ 300
======= =======
In August 1996, the Small Business Job Protection Act of 1996 (the Act) was
signed into law. Under the Act, the percentage taxable income method of
accounting for tax basis bad debts is no longer available effective for the
years ending after December 31, 1995. As a result, the Bank is required to use
the experience method of accounting for tax basis bad debts for 1997 and later
years. The tax deduction under this method was approximately $122,000 for 1998.
There was no tax deduction under this method for 1997. In addition, the Act
requires the recapture of post-1987 (the base year) additions to the tax bad
debt reserves made pursuant to the percentage of taxable income method. The Bank
is not be subject to this recapture in 1998 or 1997, as its tax bad debt
reserves do not exceed its base year reserve. As a result of the bad debt
deductions, equity capital as of December 31, 1998, includes accumulated
earnings of approximately $1,759,000 for which federal income tax has not been
provided. If, in the future, this portion of retained earnings is used for any
purpose other than to absorb losses on loans or on property acquired through
foreclosure, federal income tax may be imposed at then-applicable rates.
F-16
<PAGE>
For federal income tax purposes, the Bank had net operating loss carryforwards
at December 31, 1998, which expire as follows:
(in thousands) Year ending December 31,
- ---------------------------------------
2002 $ 505
2003 23
2005 1,267
2006 766
2007 227
2008 836
2009 203
2011 81
2012 29
------
$3,937
======
Note 12 - Commitments and Contingencies
COMMITMENTS: Commitments to extend credit in the form of lines of credit total
$1,492,000 and $810,000 at December 31, 1998 and 1997, respectively. Commitments
to extend credit are arrangements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee by the customer. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates creditworthiness for
commitments on an individual customer basis.
Undisbursed loan proceeds, primarily for real estate construction loans, total
$949,000 and $865,000 at December 31, 1998 and 1997, respectively. These amounts
are excluded from the balance of loans receivable at year end.
CONCENTRATIONS: Greater than 75% of all loans in the Bank's portfolio are
secured by properties located in communities of southeast Alaska.
Note 13 - Fair Value of Financial Instruments
The following information is presented in accordance with the requirements of
SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Bank using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Bank could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
F-17
<PAGE>
(in thousands) December 31, 1998 1997
- -------------------------- ------------------ ------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets
Cash and cash equivalents .............. $14,584 $14,584 $10,130 $10,130
Investment securities available for sale 18,176 18,176 13,334 13,334
Investment securities held to maturity . -- -- 6,196 5,953
Federal Home Loan Bank stock ........... 1,265 1,265 1,173 1,173
Loans, including held for sale ......... 72,409 72,807 79,911 79,686
Accrued interest receivable ............ 593 593 698 698
Financial Liabilities
Demand and savings deposits ............ 65,162 65,162 59,820 59,820
Certificates of deposit ................ 36,783 36,970 37,139 37,258
Federal Home Loan Bank Advances ........ -- -- 9,000 9,005
Line of credit commitments.............. -- 1,492 -- 810
Although management is not aware of any subsequent events that would
significantly affect the estimated fair value amounts as of December 31, 1998,
such amounts have not been comprehensively revalued since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
Note 14 - Subsequent Events
Conversion to Capital Stock Form of Ownership. The Board of Directors of the
Bank adopted a Plan of Conversion on February 19, 1999, to convert from a
federal chartered mutual savings bank to a federal capital stock savings bank,
subject to approval by the regulatory authorities and members of the Bank. The
conversion is expected to be accomplished through amendment of the Bank's
federal mutual charter, the formation of a bank holding company (the Holding
Company) which will purchase all of the common stock of the Bank, and the sale
of the Holding Company's stock in an amount equal to the pro forma market value
of the Holding Company after giving effect to the conversion. A subscription of
the shares of common stock will be offered initially to the Bank's depositors,
employee benefit plans and to certain other eligible subscribers. It is
anticipated that any shares not purchased in the subscription offering will be
offered in a community offering, and then any remaining shares offered to the
general public in a syndicated community offering.
At the time of the conversion, the Bank will establish a liquidation account in
an amount equal to its capital as of the last date of the statement of financial
condition appearing in the final prospectus. The liquidation account will be
maintained for the benefit of eligible account holders who continue to maintain
their accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation of the Holding Company, each eligible account
holder will be entitled to receive a distribution from the liquidation account
in an amount proportionate to the current adjusted qualifying balances for
accounts then held.
F-18
<PAGE>
Subsequent to the conversion, dividends will be subject to certain regulatory
restrictions. Generally, the Holding Company may not declare dividends if such
declaration would result in noncompliance with regulatory capital requirements.
There were no significant costs of conversion incurred as of December 31, 1998.
The costs of conversion will be deferred until the conversion is accomplished
and then deducted from the proceeds of the stock sale. In the event that the
conversion is not accomplished, all deferred costs will be written off as a
current period expense.
Resolution to sell building: In January 1999, the Board of Directors of the bank
adopted a resolution to sell the building that houses the Ketchikan branch of
the Bank.
F-19
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by Alaska Pacific Bancshares, Inc. or Alaska Federal Savings Bank.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby to any person or in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this prospectus nor any sale hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of Alaska Pacific Bancshares, Inc. or Alaska Federal
Savings Bank since any of the dates as of which information is furnished herein
or since the date hereof.
[Logo for Alaska Pacific Bancshares, Inc.]
(Proposed Holding Company for
Alaska Federal Savings Bank)
595,000 to 925,750 Shares of
Common Stock
----------
Prospectus
----------
CHARLES WEBB & COMPANY
A Division of Keefe, Bruyette & Woods, Inc.
May 14, 1999
Until the later of August 19, 1999, or 90 days after commencement of the
syndicated community offering of common stock, if any, all dealers that buy,
sell or trade these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
<PAGE>
ALASKA FEDERAL SAVINGS BANK REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ALASKA FEDERAL
SAVINGS BANK ("ALASKA FEDERAL") FOR USE ONLY AT A SPECIAL MEETING OF MEMBERS TO
BE HELD ON JUNE 21, 1999 AND ANY ADJOURNMENT THEREOF ("SPECIAL MEETING").
The undersigned being a member of Alaska Federal Savings Bank ("Alaska
Federal"), hereby authorizes the Board of Directors of Alaska Federal or any
successors in their respective positions, as proxy, with full powers of
substitution, to represent the undersigned at the Special Meeting of Members of
Alaska Federal to be held at Alaska Federal's main office at 2094 Jordan Avenue,
Juneau, Alaska on, June 21, 1999, at 2:00 p.m., Alaska Time, and at any
adjournment of said meeting, to act with respect to all votes that the
undersigned would be entitled to cast, if then personally present, as set forth
below:
(1) To approve a Plan of Conversion adopted by the Board of Directors on
February 19, 1999, and subsequently amended on April 16, 1999, providing for the
conversion of Alaska Federal from a federally chartered mutual savings bank to a
federally chartered capital stock savings bank to be known as "Alaska Pacific
Bank," and to be held as a wholly-owned subsidiary of a new holding company,
Alaska Pacific Bancshares, Inc., including the adoption of a Federal Stock
Charter and Bylaws for Alaska Federal, pursuant to the laws of the United States
and the rules and regulations of the Office of Thrift Supervision.
FOR [ ] AGAINST [ ]
(2) To vote, in its discretion, upon such other business as may properly
come before the Special Meeting or any adjournment thereof. Management is not
aware of any other such business that may come before the Special Meeting.
FOR [ ] AGAINST [ ]
This proxy, if executed, will be voted "FOR" adoption of the Plan and for
adjournment of the Special Meeting, if necessary, if no choice is made herein.
Please date and sign this proxy on the reverse side and return it in the
enclosed envelope.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
ALASKA FEDERAL SAVINGS BANK REVOCABLE PROXY
Any member giving a proxy may revoke it at any time before it is voted by
delivering to the Secretary of Alaska Federal either a written revocation of the
proxy, or a duly executed proxy bearing a later date, or by voting in person at
the Special Meeting.
The undersigned hereby acknowledges receipt of a Notice of Special Meeting of
Members of Alaska Federal Savings Bank to be held on the 21st day of June, 1999
and a proxy statement for the Special Meeting prior to the signing of this
proxy.
----------------------------------------
Signature Date
----------------------------------------
Signature Date
NOTE: Please sign exactly as your
name appears on this Proxy. Only one
signature is required in the case of
a joint account. When signing in a
representative capacity, please give
title.
IMPORTANT: Please Detach, Sign and Return "ALL" proxies from
"ALL" packets received in the enclosed blue envelope.
FAILURE TO VOTE IS EFFECTIVELY THE SAME AS A "NO" VOTE.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
Alaska Pacific Bancshares, Inc.
2094 Jordan Avenue
Juneau, AK 99801
(888) 277-8625
STOCK ORDER FORM
- --------------------------------------------------------------------------------
Deadline: The Subscription Offering ends at 12:00 Noon, Alaska Time, on June 16,
1999. Your original Stock Order and Certification Form, properly executed and
with the correct payment, must be received (not postmarked) at the address on
the top of this form, or at any Alaska Federal Savings Bank branch office, by
the deadline, or it will be considered void. Faxes or copies of this form will
not be accepted.
- --------------------------------------------------------------------------------
(1) Number of Shares Price Per Share (2) Total Amount Due
-------------------- --------------------
X $10.00 =
-------------------- --------------------
Minimum = 25 shares Maximum = Generally 12,500 shares, however, see the Stock
Order Form Instructions (blue sheet) and the Prospectus.
- --------------------------------------------------------------------------------
Method of Payment
(3) [ ] Enclosed is a check, bank draft or money order payable to Alaska Pacific
Bancshares, Inc. for $___________.
(4) [ ] I authorize Alaska Federal to make withdrawals from my Alaska Federal
certificate or savings account(s) shown below, and understand that the
amounts will not otherwise be available for withdrawal:
Account Number(s) Amount(s)
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
Total Withdrawal
There is NO penalty for early withdrrawal. ---------
- --------------------------------------------------------------------------------
(5) Purchaser Information (check one)
(a) [ ] Eligible Account Holder -- Check here if you were a depositor with
$50,000 or more on deposit with Alaska Federal as of December 31, 1997.
Enter information in section 8 for all deposit accounts that you had at
Alaska Federal on December 31, 1997.
(b) [ ] Supplemental Eligible Account Holder -- Check here if you were a
depositor with $50,000 or more on deposit with Alaska Federal as of
March 31, 1999 but are not an Eligible Account Holder. Enter information
in section 8 for all deposit accounts that you had at Alaska Federal on
March 31, 1999.
(c) [ ] Other Member -- Check here if you were a depositor of Alaska Federal as
of April 30, 1999 or a borrower whose loan was outstanding as of October
20, 1993 which continued to be outstanding at April 30, 1999, but are
not an Eligible Account Holder. Enter information in section 8 for all
accounts that you had at Alaska Federal on April 30, 1999.
(d) [ ] General Community -- Check here if a, b or c do not apply.
- --------------------------------------------------------------------------------
(6) [ ] Check here if you are a director, officer or employee of Alaska Federal
or a member of such person's immediate family (same household).
- --------------------------------------------------------------------------------
(7) [ ] NASD Affiliation -- see description on reverse side of this form.
- --------------------------------------------------------------------------------
<PAGE>
(8) Please review the preprinted account information listed below. The accounts
printed below may not be all of your qualifying accounts or even your
accounts as of the earliest of the three dates if you have changed names on
the accounts. You should list any other accounts that you may have or had
with Alaska Federal in the box below. SEE THE STOCK ORDER FORM INSTRUCTIONS
SHEET FOR FURTHER INFORMATION (blue sheet). All subscription orders are
subject to the provisions of the Plan of Conversion.
------------------------------------------------------------------------
------------------------------------------------------------------------
Additional Qualifying Accounts
Account Title (Names on Accounts) Account Number
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
Please Note: Failure to list all of you accounts may result in the
loss of part or all of your subscription rights. (additional space
on back of form)
- --------------------------------------------------------------------------------
(9) Stock Registration -- Please Print Legibly and Fill Out Completely
(Note: The stock certificate and all correspondence related to this stock
order will be mailed to the address provided below)
[ ] Individual [ ] Corporation
[ ] Joint Tenants [ ] Partnership
[ ] Tenants in Common [ ] Individual Retirement Account
[ ] Uniform Transfer to Minors Act [ ] Fiduciary/Trust (Under
[ ] Uniform Gift to Minors Act Agreement Dated______________)
----------------------------------------------------------------------------
Name Social Security or Tax I.D.
----------------------------------------------------------------------------
Name Social Security or Tax I.D.
----------------------------------------------------------------------------
Mailing Daytime
Address Telephone
----------------------------------------------------------------------------
Zip Evening
City State Code County Telephone
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Acknowledgment By signing below, I acknowledge receipt of the Prospectus dated
____________, 1999 and understand I may not change or revoke my order once it is
received by Alaska Pacific Bancshares, Inc. I also certify that this stock order
is for my account and there is no agreement or understanding regarding any
further sale or transfer of these shares. Applicable regulations prohibit any
persons from transferring, or entering into any agreement directly or indirectly
to transfer, the legal or beneficial ownership of subscription rights or the
underlying securities to the account of another person. Alaska Pacific
Bancshares, Inc. will pursue any and all legal and equitable remedies in the
event it becomes aware of the transfer of subscription rights and will not honor
orders known by it to involve such transfer. Under penalties of perjury, I
further certify that: (1) the social security number or taxpayer identification
number given above is correct; and (2) I am not subject to backup withholding.
You must cross out this item, (2) above, if you have been notified by the
Internal Revenue Service that you are subject to backup withholding because of
underreporting interest or dividends on your tax return. By signing below, I
also acknowledge that I have not waived any rights under the Securities Act of
1933 and the Securities Exchange Act of 1934, both as amended.
Signature: THIS FORM MUST BE SIGNED AND DATED BELOW AND ON THE BACK OF THIS
FORM. This order is not valid if the Stock Order Form and Certification Form are
not both signed and properly completed. Your order will be filled in accordance
with the provisions of the Plan of Conversion as described in the Prospectus. An
additional signature is required only if payment is by withdrawal from an
account that requires more than one signature to withdraw funds.
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Office Use Only Check # _______________ _______________
Date Rec'd ___/___/___ Ck. Amt _______________ _______________
Batch # ______________ Order # ___________ Category ___________
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Item (7) continued -- NASD Affiliation (this section only applies to those
individuals who meet the delineated criteria)
Check the box if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
conditions under which an exemption from the NASD's Interpretation With Respect
to Free-Riding and Withholding is available, you agree, if you have checked the
NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for a
period of three months following the issuance and (2) to report this
subscription in writing to the applicable NASD member within one day of the
payment therefor.
- --------------------------------------------------------------------------------
Item (8) continued; Purchaser Information
Account Title (Names on Accounts) Account Number
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CERTIFICATION FORM
(This Certification Form Must Be Signed In Addition to the Stock Order Form)
I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF
ALASKA PACIFIC BANCSHARES, INC. ARE NOT DEPOSITS OR AN ACCOUNT AND ARE NOT
FEDERALLY INSURED OR GUARANTEED BY ALASKA FEDERAL OR BY THE FEDERAL GOVERNMENT.
If anyone asserts that the shares of Common Stock are federally insured or
guaranteed, or are as safe as an insured deposit, I should call the Office of
Thrift Supervision West Regional Director, Charles A. Deardorff, at (415)
616-1500.
I further certify that, before purchasing the shares of Common Stock of Alaska
Pacific Bancshares, Inc. I received a copy of the Prospectus dated ____________,
1999 which discloses the nature of the Common Stock being offered and describes
the following risks involved in an investment in the Common Stock under the
heading "Risk Factors" beginning on page 1 of the Prospectus:
1. Alaska Federal's Business Depends Heavily on the Economic Condition of its
Primary Market Area and Weak Market Area Demographics has Hurt Core
Earnings and Limits Growth Prospects.
2. Alaska Federal's Recent Grown in Commercial Business and Consumer Lending
Poses Greater Risks Than Residential Lending.
3. Loss of Key Personnel May Hurt Alaska Federal's Operations.
4. Possible Loss of a Tax Benefit in the Form of Net Operating Loss
Carryforwards.
5. Implementation of Benefit Plans will Increase Future Compensation Expense
and May Lower Alaska Federal's Net Income.
6. Issuance of Shares for Benefit Programs May Lower Your Ownership Interest.
7. Possible Voting Control by Management and Employees May Make Takeover
Attempts More Difficult to Achieve.
8. Provisions in Alaska Pacific Bancshares' Articles of Incorporation and
Statutory Provisions that Could Discourage Takeover Attempts by Other
Parties.
9. Employment Agreement, Severance Agreements and Severance Plan Could Make
Takeover Attempts More Difficult to Achieve.
10. Limited and Inactive Market for Alaska Pacific Bancshare Common Stock May
Lower Market Price.
11. Your Subscription Funds Could be Held for an Extended Time Period if
Completion of the Conversion is Delayed.
12. Rising Interest Rates Could Hurt Alaska Federal's Profits.
13. Alaska Federal's Return on Equity Will Be Below Average After Conversion
Because of High Capital Levels.
- ------------------------------------- -------------------------------------
Signature Date Signature Date
- ------------------------------------- -------------------------------------
(Note: If shares are to be held jointly, both parties must sign)
EXECUTION OF THIS CERTIFICATION FORM WILL NOT CONSTITUTE A WAIVER OF ANY RIGHTS
THAT A PURCHASER MAY HAVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
<PAGE>
================================================================================
Alaska
Pacific Stock Ownership Guide and Stock Order Form Instructions
Bancshares,
Inc.
================================================================================
Stock Order Form Instructions - All subscription orders are subject to the
provisions of the Plan of Conversion.
- --------------------------------------------------------------------------------
Item 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 ordered by the subscription price of $10.00 per share. The minimum
purchase is 25 shares. Generally, the maximum purchase for any person is 12,500
shares. No person, together with associates, as defined in the Prospectus, and
no person acting in concert may purchase more than 25,000 shares. For additional
information, see "Alaska Federal's Conversion - Limitations on Purchases of
Shares" in the Prospectus.
Item 3 - Payment for shares may be made in cash (only if delivered by you in
person, although we request you to exchange the cash for a check with any of the
tellers at Alaska Federal Savings Bank (the "Savings Bank")), by check, bank
draft or money order payable to ALASKA PACIFIC BANCSHARES, INC. DO NOT MAIL
CASH. Your funds will earn interest at the applicable account rate until the
Conversion is completed.
Item 4 - To pay by withdrawal from a savings account or certificate at the
Savings Bank, insert the account number(s) and the amount(s) you wish to
withdraw from each account. If more than one signature is required for a
withdrawal, all signatories must sign in the signature box on the front of this
form. To withdraw from an account with checking privileges, please write a
check. The Savings Bank will waive any applicable penalties for early withdrawal
from certificate accounts. A hold will be placed on the account(s) for the
amount(s) you indicate to be withdrawn. Payments will remain in account(s) until
the stock offering closes.
Item 5 - Please check the appropriate box to tell us the earliest of the three
dates that applies to you. Borrowers, having a loan as of October 20, 1993 that
was active on April 30, 1999, are Other Members.
Item 6 - Please check this box if you are a director, officer or employee of the
Savings Bank, or a member of such person's household.
Item 7 - Please check this box if you have a National Association of Securities
Dealers, Inc. ("NASD") affiliation (as defined on the reverse side of the Stock
Order Form).
Item 8 - Please review the preprinted qualifying account information. The
accounts listed may not be all of your qualifying accounts or even your accounts
as of the earliest of the three dates if you have changed their ownership. You
should list any other qualifying accounts that you may have or had with the
Savings Bank in the blue box located under the heading "Additional Qualifying
Accounts". These may appear on other stock order forms you have received. For
example, if you are ordering stock in just your name, you should list all of
your accounts as of the earliest of the three dates that you were a depositor.
This may include accounts on which you were a joint owner, your own regular
individual accounts or your IRA accounts. Similarly, if you are ordering stock
jointly with another depositor, you should list all accounts on which either of
you are owners, i.e. individual accounts, joint accounts, etc. If you are
ordering stock in your minor child's or grandchild's name under the Uniform Gift
to Minors Act ownership, the minor must have had an account on one of the three
dates and you should list only their accounts. If you are ordering stock
corporately, you need to list just that corporation's accounts, as your
individual accounts do not qualify. Failure to list all of your qualifying
accounts may result in the loss of part or all of your subscription rights.
Item 9 - The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Alaska Pacific
Bancshares' common stock. Please complete this section 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 phone numbers. 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. Subscription
rights are not transferable. If you are an eligible or supplemental eligible
account holder or other member, to protect your priority over other purchasers
as described in the Prospectus, you must take ownership in at least one of the
account holder's names.
(See Reverse Side for Stock Ownership Guide)
<PAGE>
================================================================================
Alaska
Pacific Stock Ownership Guide and Stock Order Form Instructions
Bancshares,
Inc.
================================================================================
Stock Ownership Guide
- --------------------------------------------------------------------------------
Individual - The stock is to be registered in an individual's name only. You may
not list beneficiaries for this ownership.
Joint Tenants - Joint tenants with rights of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common - Tenants in common may also identify two or more owners. When
stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or sale
of shares held by tenants in common. You may not list beneficiaries for this
ownership.
Uniform Gift to Minors Act - For residents of Alaska and many states, stock may
be held in the name of a custodian for the benefit of a minor under the Uniform
Gift to Minors Act. For residents in other states, stock may be held in a
similar type of ownership under the Uniform Transfer to Minors Act of the
individual state. For either ownership, the minor is the actual owner of the
stock with the adult custodian being responsible for the investment until the
child reaches legal age. Only one custodian and one minor may be designated.
Instructions: On the first name line, print the first name, middle initial and
last name of the custodian, with the abbreviation "CUST" after the name. Print
the first name, middle initial and last name of the minor on the second name
line followed by the notation UGMA-AK or UTMA-Other State. List only the minor's
social security number.
Corporation/Partnership - Corporations/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. To have depositor
rights, the Corporation/Partnership must have an account in the legal name.
Please contact the Stock Information Center to verify depositor rights and
purchase limitations.
Individual Retirement Account - Individual Retirement Account ("IRA") holders
may make stock purchases from their deposits through a prearranged
"trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA.
Please contact the Stock Information Center if you have any questions about your
IRA account and please do not delay in exploring this option.
Registration for IRA's: On Name Line 1 - list the name of the broker or trust
department followed by CUST or TRUSTEE.
On Name Line 2 - FBO (for benefit of) YOUR NAME IRA
a/c #_____________.
Address will be that of the broker/trust department to
where the stock certificate will be sent.
The Social Security/Tax I.D. number(s) will be either
yours or your trustees, as they direct.
Please list your phone numbers.
Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or pursuant
to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first name line, print the first name, middle initial and
last name of the fiduciary if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first name line. Following the
name, print the fiduciary title such as trustee, executor, personal
representative, etc. On the second name line, print the name of the maker, donor
or testator or the name of the beneficiary. Following the name, indicate the
type of legal document establishing the fiduciary relationship (agreement, court
order, etc.). In the blank after "Under Agreement Dated," fill in the date of
the document governing the relationship. The date of the document need not be
provided for a trust created by a will.
(See Reverse Side for Stock Order Form Instructions)
<PAGE>
[LOGO]
Charles Webb & Company
A Division of
KEEFE, BRUYETTE & WOODS, INC.
To Members and Friends of
Alaska Federal Savings Bank
- --------------------------------------------------------------------------------
Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc., a member of
the National Association of Securities Dealers, Inc. ("NASD"), is assisting
Alaska Federal Savings Bank ("Alaska Federal") in its conversion from a
federally chartered mutual to a federally chartered stock savings bank to be
known as Alaska Pacific Bank which will become a wholly-owned subsidiary of a
new holding company, Alaska Pacific Bancshares, Inc. ("Alaska Pacific"). In
connection with the conversion, Alaska Pacific is offering shares of its common
stock in a subscription offering pursuant to a Plan of Conversion.
At the request of Alaska Pacific, we are enclosing materials explaining this
process and your options, including an opportunity to invest in shares of Alaska
Pacific common stock, which is being offered to customers through 12:00 Noon,
Alaska Time, on June 16, 1999. Please read carefully the enclosed offering
materials, including the Prospectus, for a complete discussion of the stock
offering. Alaska Pacific has asked us to forward these documents to you in
accordance with certain requirements of the securities laws in your state.
Should you have any questions, please call us toll free at (888) 277-8625,
Monday through Friday from 10:00 am to 5:30 pm, Alaska Time, or stop by the
Stock Information Center located at 2094 Jordan Avenue in Juneau.
Very truly yours,
Charles Webb & Company
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY GOVERNMENT
AGENCY.
- ------------------- Investment Bankers and Financial Advisors ------------------
<PAGE>
May 21, 1999
Dear Friend:
We are pleased to announce that Alaska Federal Savings Bank ("Alaska
Federal") is converting from a federally chartered mutual to a federally
chartered stock savings bank to be known as Alaska Pacific Bank and will become
a wholly-owned subsidiary of a new holding company, Alaska Pacific Bancshares,
Inc. ("Alaska Pacific"). In connection with the conversion, Alaska Pacific is
offering shares of its common stock in a subscription offering pursuant to a
Plan of Conversion.
Because of your subscription rights as a former member of Alaska Federal,
we are sending you the following materials which describe the stock offering.
PROSPECTUS: This document provides detailed information about Alaska
Federal's operations and the proposed stock offering.
STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase Alaska
Pacific common stock by returning it with your payment in the enclosed
business reply envelope. The deadline for ordering common stock is 12:00
Noon, Alaska Time, on June 16, 1999.
As a former depositor of Alaska Federal, you have the opportunity to buy
stock directly from Alaska Pacific Bancshares, Inc. in the conversion without
commission or fee. If you have additional questions regarding the stock
offering, please call us toll free at (888)277-8625, Monday through Friday from
10:00 a.m. to 5:30 p.m., Alaska Time, or stop by the Stock Information Center
located at 2094 Jordan Avenue in Juneau.
Sincerely,
/s/ Craig E. Dahl
Craig E. Dahl
President and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY OTHER GOVERNMENT
AGENCY.
<PAGE>
May 21, 1999
Dear Prospective Investor:
We are pleased to announce that Alaska Federal Savings Bank ("Alaska
Federal") is converting from a federally chartered mutual to a federally
chartered stock savings bank tp be known as Alaska Pacific Bank and will become
a wholly-owned subsidiary of a new holding company, Alaska Pacific Bancshares,
Inc. ("Alaska Pacific"). In connection with the conversion, Alaska Pacific is
offering shares of its common stock in a subscription offering pursuant to a
Plan of Conversion.
We have enclosed the following materials that will help you learn more
about the merits of Alaska Pacific common stock as an investment. Please read
and review the materials carefully.
PROSPECTUS: This document provides detailed information about Alaska
Pacific's operations and a complete discussion on the proposed stock
offering.
STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase Alaska
Pacific common stock by returning it with your payment in the enclosed
business reply envelope. The deadline for ordering common stock is 12:00
Noon, Alaska Time, on June 16, 1999.
We invite you and other local community members to become charter
shareholders of Alaska Pacific. Through this offering you have the opportunity
to buy stock directly from Alaska Pacific without a commission or a fee. The
Board of Directors and Senior Management of Alaska Federal fully support the
stock offering.
If you have additional questions regarding the stock offering, please call
us toll free at (888)277-8625, Monday through Friday from 10:00 a.m. to 5:30
p.m., Alaska Time, or stop by the Stock Information Center located at 2094
Jordan Avenue in Juneau.
Sincerely,
/s/ Craig E. Dahl
Craig E. Dahl
President and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY OTHER GOVERNMENT
AGENCY.
<PAGE>
May 21, 1999
Dear Member:
We are pleased to announce that Alaska Federal Savings Bank ("Alaska
Federal") is converting from a federally chartered mutual to a federally
chartered stock savings bank to be known as Alaska Pacific Bank and will become
a wholly-owned subsidiary of a new holding company, Alaska Pacific Bancshares,
Inc. ("Alaska Pacific"). In connection with the conversion, Alaska Pacific is
offering shares of its common stock in a subscription offering pursuant to a
Plan of Conversion.
Unfortunately, Alaska Pacific is unable to either offer or sell its common
stock to you because the small number of eligible subscribers in your
jurisdiction makes registration or qualification of the common stock under the
securities laws of your jurisdiction impractical, for reasons of cost or
otherwise. Accordingly, this letter should not be considered an offer to sell or
a solicitation of an offer to buy the common stock of Alaska Pacific.
However, as a member of Alaska Federal you have the right to vote on the
Plan of Conversion at the Special Meeting of Members to be held on June 21,
1999. Therefore, enclosed is a Proxy Card, a Proxy Statement (which includes the
Notice of the Special Meeting) and a Prospectus (which contains information
incorporated into the Proxy Statement), including a complete discussion of the
offering and a return envelope for your Proxy Card.
I invite you to attend the Special Meeting on June 21, 1999. However,
whether or not you are able to attend, please complete the enclosed Proxy Card
and return it in the enclosed envelope to ensure your vote is counted at the
Special Meeting.
Sincerely,
/s/ Craig E. Dahl
Craig E. Dahl
President and Chief Executive Officer
<PAGE>
May 21, 1999
Dear Member:
We are pleased to announce that Alaska Federal Savings Bank ("Alaska
Federal") is converting from a federally chartered mutual to a federally
chartered stock savings bank to be known as Alaska Pacific Bank and will become
a wholly-owned subsidiary of a new holding company, Alaska Pacific Bancshares,
Inc. ("Alaska Pacific"). In connection with the conversion, Alaska Pacific is
offering shares of its common stock in a subscription offering pursuant to a
Plan of Conversion.
To accomplish the conversion, we need your participation in an important
vote. Enclosed is a proxy statement describing the Plan of Conversion and your
voting and subscription rights. The Plan has been approved by the Office of
Thrift Supervision and now must be approved by you. YOUR VOTE IS VERY IMPORTANT.
Enclosed, as part of the material, is your proxy card which is located
behind the window of your mailing envelope. This proxy card needs to be signed
and returned to us prior to the Special Meeting to be held on June 21, 1999.
Please take a moment to sign all of the enclosed proxy cards and return them to
us in the blue postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME
EFFECT AS VOTING AGAINST THE PLAN.
The Board of Directors believes the conversion will offer a number of
advantages such as an opportunity for depositors and certain borrowers of Alaska
Federal to become shareholders. Please remember:
o Your accounts at Alaska Federal will continue to be insured up to the
maximum legal limit by the Federal Deposit Insurance Corporation
("FDIC").
o There will be no change in the balance, interest rate, or maturity of
any deposit accounts because of the conversion.
o Members have a right, but no obligation, to buy Alaska Pacific common
stock and may do so without a commission or fee before it is offered
to the general public.
o Like all stock, shares of Alaska Pacific common stock issued in this
offering will not be insured by the FDIC.
Enclosed is a prospectus containing a complete discussion of the stock
offering. We urge you to read this material carefully. If you are interested in
purchasing Alaska Pacific common stock, your enclosed Stock Order and
Certification Form and payment for the shares must be received by Alaska Federal
prior to 12:00 Noon, Alaska Time, on June 16, 1999.
If you have additional questions regarding the stock offering, please call
us toll free at (888)277-8625, Monday through Friday from 10:00 a.m. to 5:30
p.m., Alaska Time, or stop by the Stock Information Center located at 2094
Jordan Avenue in Juneau.
Sincerely,
/s/ Craig E. Dahl
Craig E. Dahl
President and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY OTHER GOVERNMENT
AGENCY.
