EAGLE BANCORP
Proposed Holding Company for
American Federal Savings Bank
Up to 858,550 Shares of Common Stock
Eagle Bancorp is being formed to own all the stock of American Federal
Savings Bank and to offer shares of Eagle Bancorp to the public. The shares we
are offering to the public represent less than half of the outstanding common
stock that Eagle Bancorp will issue. More than half of the outstanding common
stock of Eagle Bancorp will be owned by Eagle Financial MHC, a mutual holding
company controlled by the members of American Federal. The common stock of Eagle
Bancorp is expected to be quoted for trading on the OTC Bulletin Board.
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TERMS OF THE OFFERING
Price: $8.00 Per Share
Minimum Maximum
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Number of Shares ................................... 551,809 746,566
Underwriting commissions and expenses .............. $ 550,000 $ 550,000
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Net proceeds to Eagle Bancorp ...................... $3,864,472 $5,422,528
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Net proceeds per share to Eagle Bancorp ............ $7.00 $7.26
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The maximum number of shares can be increased to 858,550 shares
with regulatory approval.
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Please read the Risk Factors beginning on Page 10.
These securities are not deposits or savings accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
None of the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined whether this prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
RYAN, BECK & CO.
February 11, 2000
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AMERICAN FEDERAL SAVINGS BANK
Office Locations
[MAP OMITTED]
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SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the
reorganization and stock offering fully, you should read this entire document
carefully, including the financial statements and notes to the financial
statements.
The Reorganization and Stock Offering
Pursuant to a Plan of Reorganization and Stock Issuance, American
Federal Savings Bank will reorganize from a mutual savings bank to a stock
savings bank. In the process, it will create Eagle Financial MHC, a mutual
holding company, and Eagle Bancorp, a federal stock holding company. American
Federal's stock will be owned by Eagle. Public stockholders will own 47% of
Eagle Bancorp's outstanding shares of common stock. The remaining shares, which
are a majority of the outstanding shares of common stock, will be owned by Eagle
Financial MHC. Eagle Financial MHC, will not have any stockholders.
The Stock Offering
We are authorized to issue up to 10,000,000 shares of common stock, par
value $0.01 per share, and 1,000,000 shares of preferred of no par value. We
currently expect to issue between 1,174,063 shares and 1,588,438 shares of
common stock in the reorganization, with the majority shares issued to Eagle
Financial MHC. We are offering between 551,809 and 746,566 shares of common
stock, par value $0.01 per share, of Eagle Bancorp. We are offering the common
stock on a best efforts basis at $8.00 per share. As a result of changes in
market and financial conditions prior to the completion of the reorganization,
or to fill the order of our employee stock ownership plan, and subject to Office
of Thrift Supervision approval, the number of shares of common stock we offer
may increase to 858,550 shares without further notice to you. If this occurs,
you will not have a chance to cancel your stock order.
Persons Who May Purchase in the Offering
We are offering the shares of common stock to those with subscription
rights in the following order of priority:
o Depositors who held aggregate deposit accounts of at least $50
with us on June 30, 1998 (Eligible Account Holders);
o The American Federal Savings Bank employee plans, including the
American Federal Savings Bank employee stock ownership plan or
ESOP;
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o Depositors who are not Eligible Account Holders and who held
aggregate deposit accounts of at least $50 with us on December
31, 1999 (Supplemental Eligible Account Holders); and
o Other members of American Federal Savings Bank on January 31,
2000, which include depositors as of January 31, 2000, and
borrowers as of January 31, 2000, with a continuous borrowing
relationship and whose borrowing was also outstanding on April
18, 1991 (Other Members).
Shares of common stock not subscribed for in the subscription offering
may be offered on a priority basis to members of our community, residents of
Montana, and the general public in a community offering or in a syndicated
community offering. The community offering, should it occur, will take place at
the end of the subscription offering or, at the discretion of Eagle Bancorp,
concurrent with or during the subscription offering.
Ryan, Beck & Co., Inc., our financial and marketing advisor in
connection with the reorganization and the stock offering, will use its best
efforts to assist us in selling our stock.
Revocation of Subscription Offers
Once tendered, subscription offers cannot be revoked without the
consent of American Federal Savings Bank unless the reorganization is not
completed within 45 days of the expiration date.
Termination of the Offering
The offering is expected to end on March 16, 2000. If necessary, it may
be extended. In order for us to complete the offering, we must have valid orders
subscribing for at least 551,809 shares of common stock by April 30, 2000. If
that number of shares is not subscribed for, we may terminate the offering and
return any payment you made to us. Alternatively, we may extend the offering if
permitted by the Office of Thrift Supervision. If we extend the offering, we
will give you notice of the extension and of your rights to cancel or change
your order. During the period of the offering, payments made by authorizing
withdrawals from accounts will continue to earn interest at the contract rate
for the accounts. Payments by check, draft or money order will be placed in a
segregated account at American Federal and will earn interest at the passbook
rate.
Dividends
We currently anticipate that we will pay a quarterly cash dividend
beginning with the first full quarter after completion of the reorganization.
However, we have not determined the initial amount of the dividend. We do not
guarantee that
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dividends will be paid or, if paid, that we will not reduce or eliminate them in
the future. For at least one year following the completion of the
reorganization, we will not pay or take any steps to pay a tax-free dividend
which qualifies as a return of capital.
The Companies
Eagle Bancorp
1400 Prospect Avenue
Helena, MT 59604-4999
Eagle Bancorp, or Eagle, a newly formed federally chartered
corporation, will be the holding company for American Federal Savings Bank when
the reorganization is complete. It is not currently an operating company. It has
not engaged in any business to date.
American Federal Savings Bank
1400 Prospect Avenue
Helena, MT 59604-4999
American Federal Savings Bank has served the financial needs of its
community since its founding in 1922. It operates as a federal mutual savings
bank. Its banking activities are regulated primarily by the Office of Thrift
Supervision. At September 30, 1999, American Federal Savings Bank had total
assets of $148.38 million, deposits of $123.80 million, and equity of $14.08
million. We are currently changing our structure by reorganizing into a stock
savings bank to be wholly-owned by Eagle. We are a community-oriented, full
service, federal savings bank, serving Helena, Bozeman, Butte, and Townsend,
Montana. We have four full service offices and one drive-up facility. Our
business strategy is influenced by our desire to operate more like a commercial
bank than traditional thrifts. We believe traditional thrifts primarily offer
residential loans and generally have a higher concentration of certificate of
deposit accounts than we do.
Business Strategies:
o Emphasis on core deposits. Our core deposits, including IRA
certificates of deposit, were 68.93% of our total deposits, at
September 30, 1999. Core deposits are a stable source of funds,
and are less sensitive to withdrawal when rates fluctuate than
are certificates of deposit.
o Customer Service. Successful banking in our community begins with
providing our customers with outstanding customer service,
convenient locations and operating hours and the promotion of
loan and deposit products and services that suit our customers'
needs and objectives.
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o Emphasis on a Sales Culture. We emphasize a sales culture and
train our staff to make customers more aware of our varied
products and services.
o Emphasizing noninterest income. We believe we have noninterest
related sources of income which are higher than mutual savings
banks and savings associations of comparable size. Unlike income
derived from interest on loans, noninterest income is derived
from sources not directly subject to fluctuations in interest
rates. Our noninterest income is comprised primarily of fees on
checking and other accounts, fees connected with loan
originations and fees from loan servicing. We have achieved these
levels of noninterest income through an internal review of our
sources of such income, a consistent application of our practices
related to fees and growth in activities which produce fee income
such as mortgage servicing. Based on data submitted to the Office
of Thrift Supervision, mutual savings institutions of under $150
million in assets, such as American Federal, had an average ratio
of noninterest income to average assets of .35% at September 30,
1999. Our noninterest income to average assets ratio was .90% for
the three months ended September 30, 1999, and 1.23% for the year
ended June 30, 1999.
o Maintaining high asset quality. Our asset quality is reflected in
our ratio of non-performing loans to total assets, which was .59%
at September 30, 1999, and .54% at June 30, 1999. The ratio of
non-performing loans to total loans was .88% at September 30,
1999; and .83% at June 30, 1999.
o Lending Diversification. We have diversified our loan products
beyond home mortgages since the 1980's, and now offer consumer
loans, commercial loans to businesses, commercial real estate
loans and home equity loans. These loan types comprised 27.39% of
total net loans at September 30, 1999.
Eagle Financial MHC
1400 Prospect Avenue
Helena, MT 59604-4999
Upon completion of the reorganization and stock offering, Eagle
Financial MHC will own more than half of the outstanding shares of Eagle.
Persons who had membership rights in American Federal Savings Bank as of the
date of the reorganization will have these rights automatically exchanged for
substantially similar rights in Eagle Financial MHC. The members of American
Federal Savings Bank consist of its depositors, as well as borrowers whose loans
were outstanding on April 18, 1991, and remain outstanding.
Eagle Financial MHC will not initially engage in any business activity
other than holding more than half of the shares of Eagle.
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Our New Structure
The following chart shows our new structure, after the reorganization
and stock offering. This new structure is commonly referred to as a mutual
holding company structure.
[GRAPHIC OMITTED]
How We Determined the Offering Range and the $8.00 Per Share Offering Price
The independent appraisal of $11,050,000, by Feldman Financial Advisors,
dated as of December 3, 1999, and as subsequently updated, is the basis of our
offering range. The appraisal is based on our financial condition and results of
operations and the effect of the additional capital raised in this offering. Our
board of directors determined the per share price of $8.00. According to Office
of Thrift Supervision regulations, the number of shares to be issued in the
reorganization will be between 1,174,063 and 1,588,438, subject to a 15%
increase to 1,826,073 shares. Therefore, excluding the shares to be held by
Eagle Financial MHC, between 551,809 and 746,566 shares will be outstanding,
subject to a 15% increase to 858,550 shares, under circumstances requiring such
an increase. The offering range must also be based on the appraisal. The board
of directors has decided to offer for sale 47% of Eagle's to-be outstanding
shares. The remaining shares will be owned by Eagle Financial MHC.
Feldman Financial Advisors has provided an independent written
appraisal to the Office of Thrift Supervision which will be updated at the
conclusion of the offering. Feldman Financial's appraisal is expressed in terms
of a dollar amount and indicates the pro forma market value of the common stock.
If the updated estimated valuation range, as set forth in Feldman's
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appraisal, is either below $9,393,000 or above $14,614,000, or if the offering
is extended beyond April 30, 2000, we will notify you and give you the
opportunity to modify or cancel your order.
Minimum and Maximum Purchase
The minimum purchase amount is 25 shares, or $200. The individual
maximum purchase in the subscription offering is 17,500 shares, or $140,000. The
maximum number of shares which may be subscribed for in all categories of the
offering combined by any person together with any associate or group of persons
acting in concert, except for employee plans, is 25,000 shares, or $200,000.
Our Right to Reject Orders for Common Stock
When we process order forms to purchase stock, we review them for
defects or irregularities. As a result of this review of order forms, some
orders may be rejected. We have sole discretion, under our Plan of
Reorganization, subject to authority of the Office of Thrift Supervision, to
accept or reject defective or irregular order forms. In the process of our
review, we may reject order forms which are improperly addressed, incorrectly
completed or executed, received after the expiration date of the offering, not
accompanied by full payment, unable to be delivered and returned to us, and not
mailed pursuant to an account holder's "no mail" instruction. We also reserve
the right to reject illegal orders including those which we believe are designed
to circumvent our plan such as those orders from persons who may have received
subscription rights improperly or who have agreed to transfer subscription
rights to others. Once tendered, subscription orders cannot be revoked without
the consent of American Federal Savings Bank unless the reorganization is not
completed within 45 days of the expiration date.
How Investors May Order and Purchase Common Stock
Use of Order Forms. Rights to subscribe for common stock in the
subscription and community offerings may only be exercised by completion of an
order form. Properly executed order forms and payment are required in order to
purchase stock.
Payment and all properly completed and executed order forms must be
received by us on or prior to the expiration date specified on the order form
unless we extend the date. Payment for shares of common stock may be made
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o by personal check, bank draft or money order, or
o by authorization on the order form of withdrawal from deposit
accounts maintained with American Federal.
Appropriate means by which such withdrawals may be authorized are
provided in the order form. Once a subscriber authorizes a withdrawal, the
subscriber may not use any of the withdrawal amount for any purpose other than
to purchase the common stock for which he or she has subscribed. A hold will be
placed on the funds until the offering has been completed or terminated.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the offering. Persons with IRAs maintained at
American Federal Savings Bank must have their accounts transferred to an entity
such as a broker-dealer able to administer self-directed IRAs.
How We Will Use the Proceeds Raised by the Sale of Our Common Stock
The maximum number of shares we can issue is 1,826,703 shares,
including shares issued to Eagle Financial MHC. We do not contemplate issuing
additional shares and expect to maintain the 47% ratio of shares issued by Eagle
to public stockholders, or 649,188 shares at the midpoint of the estimated
valuation range. Assuming we sell 649,188 shares, the midpoint of the estimated
valuation range, Eagle intends to use the net proceeds received from the stock
offering as follows:
Loan to the American Federal Savings Bank employee
stock ownership plan ......................................... $ 415,480
Investment in stock of American Federal Savings Bank ........... 2,322,000
Working capital for Eagle Bancorp .............................. 1,906,520
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Total .......................................................... $4,644,000
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Eagle Bancorp will to use the working capital initially to invest in
securities. Subsequently, we may use a portion of the proceeds to finance
possible acquisitions, to pay dividends, if declared, to repurchase our common
stock or for other general corporate purposes. American Federal Savings Bank may
use the proceeds it receives for expansion of its business activities.
Market For Common Stock
We expect our common stock to be quoted in the over-the-counter market
on the OTC Bulletin Board. However, a liquid market in our stock may not develop
or be maintained. Ryan, Beck & Co., intends to make a market in our common
stock, but is under no obligation to do so.
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Benefit to Management From the Offering and Dilutive Effect
Benefit plans such as those described below utilize stock ownership as
incentives for employees. Incentives based on stock ownership are not available
to mutual institutions and cannot be provided to American Federal Savings Bank
employees while American Federal Savings Bank is in its current mutual form.
Employee ownership of stock aligns the interests of employees with those of
non-employee shareholders. None of these employee plans, with the exception of
the ESOP, can be implemented unless approved by stockholders.
Our full-time employees, including management, will participate in the
offering through purchases of stock by American Federal's employee stock
ownership plan, which is a form of employee ownership and retirement plan. The
employee stock ownership plan intends to purchase 8% of the shares sold in our
offering. Not less than six months following the completion of the
reorganization, we intend to adopt a stock option plan pursuant to which we may
award stock options to key employees and directors. The number of options
available under this plan will be equal to not more than 10% of the number of
shares sold in the reorganization. This would range from 55,181 shares, assuming
551,809 shares are sold in the reorganization, to 74,657 shares, assuming
746,566 shares are sold in the reorganization. The plan will require stockholder
approval. We also intend to implement a management recognition plan, which will
award restricted shares of our common stock at no cost to the recipient. The
number of shares of restricted stock available under the management recognition
plan will be equal to not more than 4% of the number of shares sold in the
reorganization. This range will be from 22,312 shares, assuming 551,809 shares
sold in the reorganization, to 29,863 shares, assuming 746,566 shares are sold
in the reorganization. However, the management recognition plan and stock option
plan cannot be adopted until at least the six month anniversary of the
completion of the reorganization. Further, both plans are subject to stockholder
approval. Implementation of the employee benefit plans will require either
issuance of additional shares or purchase of shares by the plans in the open
market. To the extent additional shares are issued, the employee plans will have
a dilutive effect on the ownership interests of those who purchase shares in the
offering.
The following table presents the dollar value of the shares to be
granted pursuant to the ESOP, stock option plan and the management recognition
plan . It also shows the percentage of the outstanding common stock which will
be represented by these shares. This table assumes that we sell 649,188 shares,
the midpoint of the estimated valuation range and the ESOP will purchase 8% of
the shares sold in the offering. It also assumes
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4% of the shares issued pursuant to the offering shall be awarded pursuant to
the management recognition plan.
Percentage of Eagle's
Value of Shares Outstanding
Benefit Plan Granted (1) Common Stock
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ESOP ......................... $415,480 3.76%
Option plan .................. 0(2) 4.70
Management recognition plan... 207,740 1.88
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Total plan shares............. $623,220 10.34%
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(1) Assumes shares are granted at $8.00 per share and that shares are sold in
the offering at the midpoint of the offering range.
(2) Recipients of stock options realize value only after the date shares are
exercised and only in the event of an increase in the price of the common
stock in comparison to the price at the grant date.
Stock Information Center
If you have any questions regarding the offering or our reorganization,
please call the stock information center at (800) 635-5930, Monday to Friday,
9:00 a.m. to 4:00 p.m., Montana time.
Important Risks in Owning Eagle Financial Common Stock
To help you decide whether to purchase stock in the offering, you
should read the Risk Factors section on pages 10 to 14 of this Prospectus.
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RISK FACTORS
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In addition to the other information in this document, you should consider
carefully the following risk factors in evaluating an investment in our stock.
- --------------------------------------------------------------------------------
Competition in Montana makes it difficult to achieve desired levels of
profitability.
We believe that Montana poses unique competitive challenges due to its
low total population and numerous competitors. Montana has one of the largest
land areas of any state but has a population of only 880,000. However,
approximately 89 separately-chartered banks, five thrift institutions and 79
credit unions operate in Montana. A number of out-of-state banks also have
Montana operations.
The presence of numerous competitors, particularly in Montana's larger
cities such as Helena, Bozeman and Butte, may make it very difficult to
originate loans in sufficient numbers or to make loans at rates or at risk
levels which we deem acceptable. Markets with fewer banks and credit unions,
larger populations and more loan demand facilitate the origination of loans on a
higher volume basis. For these reasons, if we are not able over time to invest
the proceeds of the offering in loans, we will invest those funds in lower
yielding instruments such as fixed income or mortgage-backed securities.
Our low growth rate may affect the price of our stock after the
reorganization.
Historically, we have grown slowly. We do not anticipate rapid internal
growth, even though we may raise up to $6.87 million, before expenses, in the
offering. Our ability to grow will be dependent on Montana's employment levels,
real estate markets, level of interest rates, competition for loans and
deposits, and availability of suitable acquisition opportunities. If our growth
is limited, our stock price may be negatively impacted.
If mortgage banking activity declines, our fee income will be reduced.
The gains on loan sales and fees we receive from our mortgage banking
operations may decline in a rising rate environment. As a result of rising
interest rates, there is less home mortgage purchase and refinancing activity so
we are less able to sell loans to Fannie Mae and Freddie Mac or other investors.
We may not be able to reduce our loan expenses commensurately and we would not
generate as much income from loan related fees including servicing. This makes
us more dependent on interest income.
Our loan concentration increases our susceptibility to a deterioration
in asset quality in our market area.
Substantially all of American Federal's real estate mortgage loans are
secured by properties located in our market area of southcentral Montana. Our
loan portfolio is not geographically diverse. If economic conditions in our
market area deteriorate, even if conditions
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in other parts of Montana or the United States do not, we could suffer loan
losses. By contrast, banks which lend across broad geographic areas can more
readily withstand an economic downturn in one geographic area by relying on good
performance of loans made in other regions.
The mutual holding company structure may preclude a transaction you and
other minority stockholders might favor.
In our corporate structure, Eagle Financial MHC will at all times own
at least 51% of Eagle Bancorp's common stock, and the board of directors intends
that American Federal Savings Bank remain an independent financial institution.
This is one reason why we chose to reorganize into the mutual holding company
structure instead of conducting a full mutual-to-stock conversion. Because the
mutual holding company is required by law to own a majority of our stock, the
public stockholders of Eagle Bancorp will be minority stockholders. As minority
stockholders, they will have no control in electing directors or controlling the
affairs of Eagle Bancorp. There is no assurance that Eagle Financial MHC will
not take actions which the public stockholders believe are against their
interests. For example, Eagle Financial MHC could prevent the sale of Eagle
Bancorp to another financial institution or defeat a candidate proposed by a
public stockholder for election to the board of directors of Eagle Bancorp. It
could also prevent conversion to fully public stock form or defeat any other
proposals submitted by public stockholders. You should not purchase our stock in
anticipation of a sale of American Federal Savings Bank or Eagle Bancorp.
Expenses from our stock-based benefit plans will reduce our earnings.
We intend to adopt an employee stock ownership plan, or ESOP, as part
of the reorganization. If we receive stockholder approval, we also intend to
adopt other stock-based benefit plans in the future including a stock option
plan and a management recognition plan. We will not be able to invest the money
that we use to buy stock to fund our ESOP or management recognition plan. Also,
our future salary and benefit expenses will increase as a result of our adopting
these benefit plans. This expense will vary based on our stock price. These
factors will cause our earnings to be lower than they would be if we chose not
to adopt stock-based benefit plans. Because we are required to have over 50% of
our shares owned by Eagle Financial MHC, we expect, upon shareholder approval,
to purchase shares in the open market to fund the stock option plan and the
management recognition plan. Provided shareholder approval is obtained, the
employee plans, which include the ESOP, will account for approximately 10.34% of
the total shares issued. American Federal Savings Bank also has an employment
agreement with its President, Mr. Dreyer, and a profit sharing plan for
employees. Neither the contract nor the profit sharing plan is anticipated to
have a material effect on future earnings. See "Pro Forma Data" and "Management
- - Executive Compensation - Employee Stock Ownership Plan."
Future changes in interest rates may reduce our profits.
Our ability to be profitable largely depends on our net interest
income. Net interest income is the difference between:
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o the interest income we earn on our assets, primarily mortgage and
consumer loans and investment securities; and
o the interest expense we pay on our interest-bearing deposits and
borrowings.
Most of our mortgage loans have terms which are significantly longer
than the terms of our deposit accounts. Because our loans and investments
generally have fixed rates of interest and mature later than our
interest-bearing deposits and borrowings, the yield on our assets, primarily our
loans, generally will adjust more slowly to changes in interest rates than the
cost of our interest-bearing deposits and borrowings. As a result, our net
interest income can be reduced when interest rates increase significantly and
for long periods of time. In addition, rising interest rates can reduce our
earnings because in such an environment there may be less customer demand for
loans. Also, such an environment would reduce the value of our mortgage backed
and investment securities. Declining interest rates may also lower our net
interest income if adjustable rate or fixed rate mortgage loans are refinanced
at lower rates. If these loans are prepaid, our reinvestment of those funds
could be in assets which earn lower rates of interest. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Management of Interest Rate Risk and Market Risk."
If Eagle Financial MHC converts to stock form in the future, our public
stockholders will have their ownership interest reduced.
If Eagle Financial MHC converts from a mutual company to a stock
company in the future, our stockholders will exchange their Eagle shares for
shares in the converted Mutual Holding Company pursuant to an exchange ratio
that may cause the ownership interest of public stockholders to be reduced. The
reduction may take place because the Office of Thrift Supervision requires that
the exchange ratio be reduced for any dividends which we declared but Eagle
Financial MHC elected not to receive and the value of any assets owned by Eagle
Financial MHC, such as dividends received by it, which will be transferred to
the stock company. As dividends declared but not paid to Eagle Financial MHC
increase, the reduction in the exchange ratio will also increase. For example, a
stockholder who owned 1% of the total issued shares of Eagle Bancorp could own
less than 1% of the shares issued by the converted Mutual Holding Company.
Management and the board of directors have significant discretion over
the investment of the offering proceeds and may not be able to achieve
acceptable returns on the proceeds from the offering.
The board of directors and management of Eagle Bancorp will have
discretion in the investment of the additional capital we raise in the offering.
Although management and the board will seek to invest this capital prudently,
its deployment is dependent on competitive opportunities and there can be no
assurance that investment opportunities will be present or that management and
the board of directors of Eagle will be able to achieve earnings and returns on
equity that are acceptable to shareholders without taking undue risk. We will
initially invest in
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various short-term investments and mortgage backed securities until we are able
to originate loans and expect our returns on equity to be below the industry
average.
Our charter and bylaws contain numerous provisions designed to make
takeovers more difficult to achieve.
Our charter and bylaws contain several provisions which will discourage
a takeover attempt or make it more difficult or costly even though a majority of
our shareholders might view such takeovers favorably, particularly if a takeover
allows our shares to be sold at a profit.
Our charter and bylaws prevent takeovers in several ways. For example,
they allow directors to stay in office by only authorizing about one-third of
our board to be eligible for election each year. This is known as a staggered or
classified board. They also restrict for five years the ability of anyone to
acquire more than 10% of our stock. We are also allowed to issue up to 1,000,000
shares of non-voting preferred stock which might increase both the cost of and
the number of votes required to complete a takeover.
The small amount of stock being issued to the public may make it
difficult to buy or sell our stock in the future.
Due to the relatively small size of the offering to the public, we
expect our stock to be quoted on the OTC Bulletin Board. The OTC Bulletin Board
is a market with generally less depth, liquidity, and orderliness, and fewer
buyers and sellers. By contrast, markets such as the Nasdaq have numerous buyers
and sellers at any given time. Generally, Nasdaq has an active and liquid market
for the stocks quoted thereon. These conditions are less likely to develop on
the OTC Bulletin Board. Even if a liquid market develops for our stock, there is
no assurance that it can be maintained. An active, orderly trading market
depends on the presence and participation of willing buyers and sellers which
neither Eagle nor the market makers can control. This may affect your ability to
sell your shares on short notice and the sale of a large number of shares at one
time could temporarily depress the market price. For these reasons, our stock
should not be viewed as a short-term investment. See "Market for the Stock."
Recent stock market volatility may adversely affect the price of your
stock.
Publicly traded stocks, including stocks of financial institutions,
have recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of particular
companies whose shares are publicly traded. In several cases, common stock
issued by recently converted financial institutions traded at prices that were
below the price at which such shares were sold in the initial offerings of those
companies. The aggregate purchase price of our common stock in the offering is
based on the independent appraisal by Feldman Financial Advisors. After our
shares begin trading, the trading price of our common stock will be determined
by the marketplace. In the marketplace, the trading price may be influenced by
many factors, including prevailing interest rates, investor perceptions of
Eagle, and general industry and economic conditions. Due to possible continued
market volatility, we cannot assure you that, following the conversion, the
trading price of our common stock will be at or above the $8.00 per share
initial offering price.
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Banking reform legislation may increase competition.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. To the extent that the legislation permits banks, securities firms
and insurance companies to affiliate, the financial services industry may
experience further consolidation. Larger firms that offer a wider variety of
products than we do can aggressively compete in the markets we currently serve.
This could adversely impact our profitability.
SELECTED FINANCIAL DATA
The following is a summary of selected financial data. It reflects in
summary form all material financial information. Detailed financial statements
and accompanying notes begin on page F-1. The selected financial information at
September 30, 1999, and for the three months ended September 30, 1999, and 1998
have been derived from unaudited financial statements. In our opinion, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial condition and results of operations for the
unaudited periods presented have been included. The results of operations for
the three months ended September 30, 1999, are not necessarily indicative of the
results which may be expected for any other period. Our asset quality ratios are
calculated using end of period balances. Except where indicated, all other
ratios are based on the average balances and are annualized where appropriate.
Selected Financial Data
-----------------------
At September 30, At June 30,
---------------- -------------------
1999 (unaudited) 1999 1998
---------------- ---- ----
(In thousands)
Interest-bearing deposits with banks ...... $ 550 $ 4,175 $ 4,400
Loans receivable, net ..................... 99,864 97,036 95,049
Investment securities available-for-sale .. 16,349 16,590 15,880
Investment securities held-to-maturity .... 14,601 14,498 11,366
Federal Home Loan Bank stock .............. 1,325 1,301 1,207
Property and equipment, net ............... 7,242 7,361 7,168
Total assets .............................. 148,379 148,891 144,425
Deposit accounts .......................... 123,804 120,822 114,729
Federal Home Loan Bank advances ........... 8,508 12,574 14,841
Total liabilities ......................... 134,303 134,998 131,570
Total equity .............................. 14,075 13,894 12,855
14
<PAGE>
Summary Of Operations
---------------------
For the Three For the
Months Ended Years Ended
September 30, June 30,
-------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited)
(In thousands)
Total interest and
dividend income ................... $ 2,508 $ 2,583 $10,022 $10,267
Total interest
expense ........................... 1,288 1,345 5,193 5,439
------- ------- ------- -------
Net interest income ............. 1,220 1,238 4,829 4,828
Provision for loan
losses ............................ 15 15 60 60
------- ------- ------- -------
Net interest income
after provision
for loan losses ................ 1,205 1,223 4,769 4,768
Total noninterest income ........... 333 455 1,802 1,646
Total noninterest expense .......... 1,209 1,136 4,611 4,257
Income before provision
for income taxes .................. 329 542 1,960 2,157
Provision for income taxes ......... 120 202 708 915
------- ------- ------- -------
Net income ...................... $ 209 $ 340 $ 1,252 $ 1,242
======= ======= ======= =======
15
<PAGE>
Key Operating Ratios
------------------------------------
At or for the At or for the
Three Months Ended Years Ended
September 30, June 30,
------------------ ---------------
1999 1998 1999 1998
------ ------ ------ ------
(unaudited)
Performance Ratios:
Return on average assets .............. 0.56% 0.95% 0.85% 0.88%
Return on average equity .............. 5.98 10.44 9.36 10.15
Ratio of average interest-earning
assets to average interest-bearing
liabilities .......................... 106.32 105.68 106.11 104.41
Net interest rate spread(1) ........... 3.36 3.55 3.42 3.56
Net interest margin(2) ................ 3.61 3.78 3.67 3.74
Noninterest income to average assets .. .90 1.27 1.23 1.17
Ratio of noninterest expense to average
total assets ........................ 3.25 3.16 3.14 3.02
Efficiency ratio(3) ................... 77.85 67.10 69.54 65.76
Asset Quality Ratios:
Non-performing loans to total assets .. 0.59 0.20 0.54 0.18
Non-performing loans to total loans ... 0.88 0.30 0.83 0.28
Allowance for loan losses to total
loans ............................... 0.75 0.74 0.76 0.71
Allowance for loan losses to
non-performing loans ................ 85.19 247.02 91.55 253.93
Capital Ratios:
Equity to total assets at end of period 9.49 9.33 9.33 8.90
Average equity to average assets ...... 9.50 9.28 9.56 8.82
Other Data:
Number of full service offices ........ 4 4 4 4
- ----------
(1) The net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities during the period.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets for the period.
(3) The efficiency ratio represents noninterest expense divided by the sum of
net interest income and noninterest income.
16
<PAGE>
RECENT DEVELOPMENTS
The summary information presented below at or for each of the three and
six month periods ended December 31, 1999 and 1998, are derived from the
unaudited consolidated financial statements of American Federal Savings Bank. In
our opinion, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial condition and results of
operations for the unaudited periods presented have been included. The results
of operations and other data presented for the three and six months ended
December 31, 1999, do not necessarily indicate the results that may be expected
for the year ending June 30, 2000. Our asset quality ratios are calculated using
end of period balances. Except where indicated, all other ratios are based on
average balances and are annualized where appropriate.
SELECTED FINANCIAL DATA
At December 31, At June 30,
--------------- -----------
1999 1999
---- ----
(In thousands)
Interest-bearing deposits with banks ....... $ 0 $ 4,175
Loans receivable, net ...................... 101,974 97,036
Investment securities available-for-sale ... 17,357 16,590
Investment securities held-to-maturity ..... 10,915 14,498
Federal Home Loan Bank stock ............... 1,349 1,301
Property and equipment, net ................ 7,134 7,361
Total assets ............................... 149,553 148,891
Deposit accounts ........................... 122,842 120,822
Federal Home Loan Bank advances ............ 11,041 12,574
-------- --------
Total liabilities .......................... 135,321 134,998
-------- --------
Total equity ............................... 14,232 13,894
======== ========
17
<PAGE>
Summary Of Operations
---------------------
For the For the
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited)
(In thousands)
Total interest and
dividend income ................... $2,529 $2,539 $5,037 $5,122
Total interest expense ............. 1,277 1,324 2,565 2,669
------ ------ ------ ------
Net interest income ............. 1,252 1,215 2,472 2,453
Provision for loan losses .......... 0 15 15 30
------ ------ ------ ------
Net interest income
after provision for
loan losses .................... 1,252 1,200 2,457 2,423
Total noninterest income ........... 358 470 690 925
Total noninterest expense .......... 1,205 1,128 2,413 2,264
------ ------ ------ ------
Income before provision
for income taxes ............... 405 542 734 1,084
Provision for income taxes ......... 110 187 230 389
------ ------ ------ ------
Net income ......................... $ 295 $ 355 $ 504 $ 695
====== ====== ====== ======
Key Operating Ratios
--------------------
At or for the At or for the
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited)
Performance Ratios:
Return on average assets .......... 0.7 % 0.99% 0.68% 0.96%
Return on average equity .......... 8.34 10.58 7.1 10.48
Ratio of average interest-earning
assets to average interest-
bearing liabilities ............. 105.37 106.48 105.85 106.12
Net interest rate spread(1) ....... 3.54 3.44 3.46 3.49
Net interest margin(2) ............ 3.74 3.70 3.67 3.74
Noninterest income to average
assets ........................... 0.96 1.30 0.92 1.28
Noninterest expense to average
assets ........................... 3.24 3.13 3.23 3.13
Efficiency ratio(3) ............... 74.84 66.94 76.31 67.02
Asset Quality Ratios:
Non-performing loans to total
assets ........................... 0.39 0.38 0.39 0.38
Non-performing loans to total
loans ............................ 0.57 0.57 0.57 0.57
Allowance for loan losses to
total loans ...................... 0.73 0.73 0.73 0.73
Allowance for loan losses to
non-performing loans ............. 129.19 128.16 129.19 128.16
Capital Ratios:
Equity to total assets at end
of period ........................ 9.51 9.43 9.5 9.43
Average equity to average
assets ........................... 9.50 9.32 9.4 9.16
Other Data:
Number of full service offices .... 4 4 4 4
- ---------------
(1) The net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities during the period.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets for the period.
(3) The efficiency ratio represents noninterest expense divided by the sum of
net interest income and noninterest income.
18
<PAGE>
The table below sets forth American Federal Savings Bank's capital
position relative to the Office of Thrift Supervision capital requirements at
the date indicated. The definitions of the terms used in the table are those
provided in the capital regulations issued by the Office of Thrift Supervision.
See "Regulation -- Regulation of American Federal Savings Bank -- Regulatory
Capital Requirements."
Regulatory Capital
------------------
At December 31, 1999
-----------------------
Percent of
Amount Assets
------ ------
(Dollars in thousands)
GAAP capital ............................. 14,232 9.51%
Tangible capital:
Capital level ......................... 14,603 9.74
Requirement ........................... 2,249 1.50
------ -----
Excess ................................ 12,354 8.24%
====== =====
Core capital:
Capital level ......................... 14,603 9.74
Requirement ........................... 4,498 3.00
------ -----
Excess ................................ 10,105 6.74%
====== =====
Risk capital:
Capital level ......................... 15,303 17.48
Requirement ........................... 7,003 8.00
------ -----
Excess ................................ 8,300 9.48%
====== =====
19
<PAGE>
Year 2000 Developments
American Federal Savings Bank, as required of all federally insured
financial institutions, undertook extensive preparations in connection with the
Year 2000 date change. On the date change, and as of January 31, 2000, we have
not experienced any material problems in any aspect of banking operations
associated with the date change. We have incurred no material costs, other than
the cost of preparation, as a result of the date change.
Financial Condition
For the three month period ending December 31, 1999, total assets
increased by $1.17 million, or 0.79%, from $148.38 million at September 30,
1999, to $149.55 million at December 31, 1999. This increase was due primarily
to an increase in loans receivable of $2.11 million, which was the result of
selling a smaller percentage of mortgage loan originations. Total liabilities
increased by $1.02 million, or 0.76%, from $134.30 million at September 30, 1999
to $135.32 million at December 31, 1999. The increase was due to an increase in
borrowings from the Federal Home Loan Bank of $2.53 million, which was partially
offset by a decrease in deposits. Total deposits decreased by $962,000, or
0.78%, from $123.80 million at September 30, 1999, to $122.84 million at
December 31, 1999. The decrease was primarily due to seasonal declines in
transaction accounts.
For the six month period ending December 31, 1999, total assets
increased by $662,000, or 0.44%, from $148.89 million at June 30, 1999, to
$149.55 million at December 31, 1999. The increase was due to an increase in
loans receivable of $4.94 million, which was the result of selling a smaller
percentage of mortgage loan originations and slower repayments on existing
loans. The increase in loans was partially offset by a decline in
interest-bearing deposits with banks of $4.18 million. These deposits were used
to fund loan growth and to provide increased liquidity at year-end to meet
possible withdrawals for Year 2000 purposes. Total liabilities increased by
$323,000, or 0.22%, from $135.00 million at June 30, 1999, to $135.32 million at
December 31, 1999. The slight increase was due to the decrease in Federal Home
Loan Bank borrowings of $1.53 million, which was offset by an increase in
deposits. Total deposits increased by $2.02 million, or 1.67%, from $120.82
million at June 30,1999, to $122.84 million at December 31, 1999. The increase
was primarily due to increases in checking accounts and certificate of deposit
accounts.
Comparison of Operating Results for the Three Months Ended December 31, 199 and
December 31, 1998
Net Income. We had net income of $295,000 for the three months ended
December 31, 1999, compared to net income of $355,000 for the three months ended
December 31, 1998. This decrease of $60,000, or 16.90%, was due to a decrease of
$112,000 in noninterest income and an increase of $77,000 in noninterest
expense. These decreases were partially offset by a decrease in provision for
income taxes of $77,000 and an increase in net interest income of $37,000.
Net Interest Income. Our net interest income increased by $37,000, or
3.05%, for the three months ended December 31, 1999, as compared to the same
three months in 1998. This was due primarily to a decline in interest expense
related to a decline in the average balance of Federal Home Loan Bank advances.
Interest and Dividend Income. Total interest and dividend income was
$2.53 million for the three months ended December 31, 1999, compared to $2.54
million for the three months ended December 31, 1998, representing a decrease
of $10,000, or .36%. This decrease was due, in part, to a decrease in interest
on deposits with banks, which was almost offset by an increase in interest from
securities.
20
<PAGE>
Interest Expense. Total interest expense decreased from $1.32 million
for the three months ended December 31, 1998, to $1.28 million for the three
months ended December 31, 1999, a decrease of $47,000 or 3.56%. This decrease
was primarily the result of a decrease in average rates paid.
Provision for Loan Losses. The provision for loan losses decreased by
$15,000 to zero for the three months ended December 31, 1999. Management's
review of American Federal's asset quality and the balance of the current
allowance for loan losses and an assessment of the local economy resulted in a
determination that the current allowance was adequate.
Noninterest Income. Noninterest income decreased by $112,000, or
23.83%, from $470,000 for the three months ended December 31, 1998, to $358,000
for the three months ended December 31, 1999. The decrease was due to a decrease
in net gain on sale of loans of $140,000 because of a decrease in the amount of
loan originations for the period ended December 31, 1998. This was partially
offset by an increase of $12,000 in mortgage servicing fees and an increase in
demand deposit service charges of $13,000. "Other" noninterest income increased
$3,600, or 4.42%, from $81,300 for the three months ended December 31, 1998 to
$84,900 for the three months ended December 31, 1999. Commission income
increased $3,900 from $9,700 to $13,600. Credit card fee income increased $3,200
from $3,500 to $6,700. Contract collection fee income declined by $1,800 from
$5,900 to $4,100.
Noninterest Expense. Noninterest expense increased by $77,000, or
6.83%, from $1.13 million for the three months ended December 31, 1998, to $1.21
million for the three months ended December 31, 1999. This was primarily due to
an increase of $70,000 in salaries and employee benefits and $30,000 in other
noninterest expenses. The increase in salaries and employee benefits was due to
a decrease in mortgage loan originations which accelerated recognition of salary
related loan origination costs. This was partially offset by a decline in the
amortization of mortgage servicing rights of $20,000 and a decrease in legal and
accounting fees of $7,100. "Other" noninterest expense increased $30,500, or
20.00%, from $152,500 for the three months ended December 31, 1998 to $183,000
for the three months ended December 31, 1999. Office supplies increased $7,600
from $14,000 to $21,600. Consumer loan expenses increased $7,600 from $3,800 to
$11,400. Credit card expense increased $5,000 from $5,200 to $10,200. Furniture,
fixture and equipment expense increased $2,200 from $17,200 to $19,400.
Income Taxes. Income tax expense decreased $77,000, or 41.18%, from
$187,000 for the three months ended December 31, 1998, to $110,000 for the
three months ended December 31, 1999. The decrease was attributable, in part, to
a decrease in net income before taxes of $137,000 from the three months ended
December 31, 1998, to the same three months in 1999. The provision for income
taxes also includes an adjustment made upon completion of the tax return for
calendar year 1999, which resulted in a decrease in tax expense.
Comparison of Operating Results for the Six Months Ended December 31, 1999 and
1998
Net Income. American Federal Savings Bank had net income of $504,000
for the six months ended December 31, 1999, as compared to $695,000 for the same
six months in 1998. This decrease of $191,000, or 27.48%, was due to a decrease
in noninterest income of $235,000
21
<PAGE>
and an increase in noninterest expense of $149,000. This was partially offset by
a decrease in provision for income taxes of $159,000 and an increase in net
interest income of $19,000.
Net Interest Income. Net interest income increased $19,000, or 0.77%,
to $2.47 million for the six months ended December 31, 1999, as compared to the
same six months in 1998. Interest expense declined by $103,000, while interest
income decreased by $84,000. The decrease in interest expense was due primarily
to a decrease in the average daily balance of Federal Home Loan Bank advances.
Interest income declined due to lower interest rates in all interest-earning
categories.
Interest and Dividend Income. Interest and dividend income was $5.12
million for the six months ended December 31, 1998, compared to $5.04 million
for the six months ended December 31, 1999, a decrease of $84,000, or 1.66%.
This decrease was a result of a decrease in interest from deposits with banks
offset somewhat by an increase in interest from securities available for sale.
Interest Expense. Total interest expense decreased from $2.67 million
for the six months ended December 31, 1998, to $2.57 million for the six months
ended December 31, 1999, a decrease of $103,000, or 3.86%. This decrease was the
result of a decrease in interest paid on Federal Home Loan Bank advances from
$431,000 for the six months ended December 31, 1998, to $308,000 for the six
months ended December 31, 1999, slightly offset by an increase in interest paid
on deposits.
Provision for Loan Losses. The provision for loan losses decreased by
$15,000 from $30,000 for the six months ended December 31, 1998, to $15,000 for
the six months ended December 31, 1999. This was due to management's review of
lending and loss activity as well as the strength of the local economy and the
resultant determination to make no loan loss provision during the three months
ended December 31, 1999.
Noninterest Income. Noninterest income decreased by $235,000, or
25.41%, from $925,000 for the six months ended December 31, 1999, to $690,000
for the six months ended December 31, 1999. This was due to a decrease in the
net gain on sale of loans of $240,000 due to a decline in the origination of
loans qualified for sale in the secondary market and an increase in the loss on
securities sales of $25,000. This was partially offset by increase in demand
deposit service charges of $12,000 and mortgage loan servicing fees $27,000.
"Other" noninterest income decreased $10,000, or 5.66%, from $176,600 for the
six months ended December 31, 1998 to $166,600 for the six months ended December
31, 1999. Miscellaneous non-operating income decreased $8,000 from $8,900 to
$900. Small Business Administration servicing income declined by $3,100 from
$9,900 to $6,800. Contract collection fees decreased by $2,900 from $11,000 to
$8,200. ATM and debit card fee income increased by $3,500 from $17,900 to
$21,400.
Noninterest Expense. Noninterest expense increased by $149,000, or
6.58%, to $2.41 million for the six months ended December 31, 1999, from $2.26
million for the six months ended December 31, 1998. Increases included $109,000
for salaries and employee benefits, $25,000 for furniture and equipment
depreciation, and $18,300 for "other" noninterest expenses. The increase in
salaries and employee benefits was due to a slowdown in mortgage loan
originations which accelerated recognition of salary related loan origination
costs
22
<PAGE>
and to a lesser degree to normal salary increases. Furniture and equipment
depreciation expenses were higher because of the installation of the Windows NT
system in late 1998. "Other" noninterest expense increased $18,300, or 5.47%,
from $334,400 for the six months ended December 31, 1998 to $352,700 for the six
months ended December 31, 1999. Consumer loan expense increased $8,300 from
$8,000 to $16,300. Credit card expenses increased $4,400 from $9,500 to $13,900.
Miscellaneous operating expenses increased $3,800 from $37,900 to $41,700.
Directors fees increased $2,900 from $47,100 to $50,000. Real estate loan
expenses decreased $4,100 from $24,100 to $20,000.
Income Taxes. Income tax expense decreased $159,000, or 40.87%, from
$389,000 for the six months ended December 31, 1998, to $230,000 for the six
months ended December 31, 1999. The decrease was attributable, in part, to a
decrease in net income before taxes of $350,000 from the six months ended
December 31, 1999, from the same six months in 1998. The provision for income
taxes also includes an adjustment made upon the completion of the tax return for
calendar year 1999, which resulted in a decrease in tax expense.
HOW WE INTEND TO USE THE PROCEEDS OF THE OFFERING
We cannot determine the actual amount of proceeds from the sale of the
shares of common stock until we complete the reorganization and stock offering.
We estimate that we will receive net proceeds from the sale of the common stock
of between $3,864,000 at the minimum of the offering range and $5,423,000 at the
maximum, of the offering range. See "Pro Forma Data" and "The Reorganization."
Assuming the sale of $5,194,000 of common stock at the midpoint of the offering
range and the purchase of 8% of the shares by the employee stock ownership plan,
the following table shows the manner in which we will use the net proceeds:
Loan to employee stock ownership plan ............ $ 415,000
Investment in stock of American Federal .......... 2,322,000
Working capital for Eagle Bancorp ................ 1,906,520
----------
Total ............................................ $4,644,000
==========
Approximately 41% of the net proceeds of the offering have no
specifically earmarked purpose and will be used initially as working capital.
This working capital will be invested by us in U.S. government and federal
agency securities, marketable securities, or a combination of both. Over time we
anticipate the potential uses of the proceeds retained by Eagle to include
possible acquisitions among the various financial institutions located in
Montana, the payment of dividends to stockholders and the repurchase of our
common stock. However, there are no current agreements or arrangements regarding
acquisitions. These potential uses of proceeds may change, depending on market
conditions after the reorganization.
23
<PAGE>
The funds received by American Federal Savings Bank from us in return
for the purchase of all of American Federal's stock will be used for general
corporate purposes, including lending and investing in securities. These funds
will increase American Federal's total capital to expand investment and support
lending and internal growth.
The net proceeds will vary because total expenses of the reorganization
may be more or less than those estimated. Payments for shares made through
withdrawals from existing American Federal Savings Bank deposit accounts will
not result in the receipt of new funds for investment by American Federal.
Withdrawals will reduce American Federal's deposits and interest expense as
funds are transferred from certificates or other deposit accounts.
We believe that the reorganization and stock offering provide several
important business benefits including allowing American Federal Savings Bank to
become a stock institution, increasing capital without risking a loss of control
and providing for an incremental increase in capital.
OUR POLICY REGARDING DIVIDENDS
We will have the authority to declare dividends on our common stock
upon completion of the offering. We currently anticipate we will pay a cash
dividend on our common stock beginning in the first full quarter after
completion of the reorganization. However, the amount of the dividend has not
been established. We cannot, however, guarantee we will in fact pay a dividend
or that we will not reduce or eliminate any dividends in the future. Dividends
will be subject to determination and declaration by our board of directors. In
making its decision, the board of directors will consider several factors,
including:
o Eagle's financial condition and results of operations;
o Eagle's long-term business plan;
o tax considerations;
o industry standards; and
o economic conditions.
Eagle Financial MHC, as a stockholder of Eagle Bancorp, is entitled to
receive dividends from Eagle when and if Eagle declares dividends. The board of
directors of Eagle Financial MHC may decide to waive the receipt of dividends in
order to pay a higher dividend to the public stockholders of Eagle. If Eagle
Financial MHC elects not to waive receipt of dividends from Eagle or if the
Office of Thrift Supervision does not approve such a waiver, the amount of
dividends may be adversely affected. See "Waiver of Dividends by Eagle Financial
MHC."
Eagle's ability to pay dividends also depends on the receipt of
dividends from American Federal. American Federal Savings Bank is, in turn,
subject to a variety of regulatory limitations on the payment of dividends. See
"Regulation -- Regulation of American Federal Savings Bank -- Dividend and Other
Capital Distribution Limitations." Furthermore, as a condition to Office
24
<PAGE>
of Thrift Supervision approval of the reorganization, we have agreed that we
will not initiate any action within one year of completion of the reorganization
to pay a special distribution or a return of capital to stockholders of Eagle.
See also "Waiver of Dividends by Eagle Financial MHC."
In addition, earnings of American Federal Savings Bank appropriated to
bad debt reserves and deducted for federal income tax purposes are not available
for payment of cash dividends or other distributions to stockholders without
payment of taxes at the then-current tax rate by American Federal Savings Bank
on the amount of earnings deemed to be removed from the reserves for such
distribution. See "Taxation" and Note 11 of American Federal's financial
statements. American Federal Savings Bank does not contemplate any distribution
out of its bad debt reserve which would cause such tax liability.
WAIVER OF DIVIDENDS BY THE MUTUAL HOLDING COMPANY
The board of directors of Eagle Financial MHC, prior to the declaration
of any dividends by Eagle Bancorp, will decide whether to apply to the Office of
Thrift Supervision for permission to waive the receipt of its portion of any
dividends each time Eagle Bancorp declares a dividend. Any waiver of dividends,
if approved by the Office of Thrift Supervision, will be subject to various
conditions. There can be, however, no assurances that the Office of Thrift
Supervision will approve such application or if such approval is obtained, that
Eagle Financial MHC will continue to waive dividends. In waiving dividends, the
board of directors must conclude, among other things, that a dividend waiver by
Eagle Financial MHC, which permits retention of capital by Eagle Bancorp and
American Federal, is in the best interest of Eagle Financial MHC because, among
other reasons:
o Eagle Financial MHC has no need for cash for its business
operations;
o The cash that would be received by Eagle Financial MHC could be
invested by Eagle Bancorp at a more favorable rate of return;
o The waiver preserves the capital of American Federal Savings Bank
and enhances American Federal's business; and
o The waiver preserves the net worth of Eagle Financial MHC through
its principal asset (Eagle's common stock), which would be
available for distribution in the unlikely event of a voluntary
liquidation of American Federal Savings Bank after satisfaction
of claims of depositors, other creditors and minority
stockholders.
If Eagle Financial MHC determines that the waiver of dividends is in
the best interest of the parties involved:
o Eagle Financial MHC will make prior application to the Office of
Thrift Supervision for approval to waive any dividends declared
on our common
25
<PAGE>
stock. An application will be made on an annual basis with
respect to any year in which Eagle Financial MHC intends to waive
such dividends.
o Dividends waived by Eagle Financial MHC are not available for
payment to minority stockholders and will be excluded from the
capital accounts of American Federal Savings Bank for purposes of
calculating any dividend payments by Eagle to minority
stockholders.
o American Federal Savings Bank will, so long as Eagle Financial
MHC remains in existence, establish a restricted capital account
in the cumulative amount of any dividends waived by Eagle
Financial MHC for the benefit of the members of Eagle Financial
MHC. The restricted capital account would be senior to the claims
of minority stockholders of Eagle and would not decrease even if
American Federal's deposits decrease. This restricted capital
account would be added to any liquidation account in American
Federal Savings Bank established in connection with a conversion
of Eagle Financial MHC to stock form and would not be available
for distribution to minority stockholders.
Immediately after the reorganization, it is expected that Eagle
Financial MHC's operations will consist of activities relating to its investment
in a majority of Eagle's common stock and the investment of its initial
capitalization. In the future, Eagle Financial MHC may accept dividends paid by
Eagle to be used for other purposes, including purchasing common stock from time
to time in the open market or from Eagle, if permitted.
MUTUAL HOLDING COMPANY CONVERSION TO STOCK FORM
Following completion of the reorganization, Eagle Financial MHC may
elect to convert to stock form in accordance with applicable laws and
regulations. American Federal Savings Bank's current directors, who will be the
initial directors of Eagle Financial MHC and Eagle Bancorp, have no current
plans to convert Eagle Financial MHC to stock form. The terms of any conversion
cannot be determined at this time and we cannot assure you that a conversion
will ever occur. If Eagle Financial MHC converts to stock form, minority
stockholders will be entitled to exchange their shares of common stock for
shares of the newly converted mutual holding company. The exchange of shares is
required to be done in a manner that is fair and reasonable to both minority
stockholders and Eagle Financial MHC. The Office of Thrift Supervision requires
that this exchange include a downward adjustment in the exchange ratio to
account for:
o the amount of waived, dividends if any; and
o assets received by Eagle Financial MHC, such as dividends
received, which will be transferred to the newly converted
company.
26
<PAGE>
Further, if Eagle Financial MHC converts to stock form, any options or other
convertible securities held by any director, officer, or employee of ours, will
be convertible into the right to acquire shares of the newly converted mutual
holding company, or its successor. These options or securities will be
convertible on the same basis as outstanding common stock pursuant to applicable
exchange ratios. However, if these shares are not converted, the holders of the
options or other convertible securities will be entitled to receive cash equal
to the fair value of such options or convertible securities. Any exchange or
redemption is subject to the approval of the Office of Thrift Supervision and
the Office of Thrift Supervision has made no determination as to the
permissibility of any such exchange or redemption.
Although the plan of reorganization addresses the possibility of a
conversion of this nature, there can be no assurances when, if ever, a
conversion will occur, or what conditions may be imposed upon us by the Office
of Thrift Supervision should we convert. If we never convert, Eagle Financial
MHC will always own a majority of our common stock.
MARKET FOR THE COMMON STOCK
Neither American Federal Savings Bank nor Eagle have previously issued
capital stock. For this reason they have no stockholders. We anticipate that
after the reorganization our common stock will be quoted in the over-the-counter
market on the OTC Bulletin Board, an electronic inter-dealer market that
displays real-time quotes, last sale price and volume information. A requirement
for inclusion on the OTC Bulletin Board is that there be at least one market
maker. Making a market involves maintaining bid and asked quotations, being able
as principal to effect transactions in reasonable quantities at these quoted
prices, subject to various securities laws, and other regulatory requirements.
Although it is under no obligation to do so, Ryan, Beck & Co. has stated its
intention to use its best efforts to make a market in our common stock, so long
as the volume of trading and other market-making conditions justify such
activity. We also intend to encourage other brokerage firms to make a market in
the common stock. There can be no assurance, however, that any other firm will
do so. A public trading market for the securities of any issuer, having the
desirable characteristics of depth, liquidity and orderliness, depends upon the
presence in the marketplace of both willing buyers and willing sellers at any
given time. The presence in the marketplace of a sufficient number of buyers and
sellers at any given time is a factor over which neither Eagle nor any market
marker has any control. An active and liquid market for the stock may not
develop or be maintained. Under such circumstances, you may have difficulty
selling shares on short notice. Therefore, you should not consider the stock as
a short-term investment. Trying to sell a large number of shares at one time may
also temporarily depress the market price of the stock.
The aggregate price of the stock is based on an independent appraisal
of the pro forma market value of the stock. However, there can be no assurance
that an investor will be able to sell the stock purchased in the offering at
prices in the range of the pro forma book values of the stock or at or above the
initial purchase price of $8.00. See "Pro Forma Data" and "The Offering -- Stock
Pricing and Number of Shares to be Offered."
27
<PAGE>
CAPITALIZATION
Set forth below is the historical capitalization of American Federal
Savings Bank as of September 30, 1999, and the pro forma capitalization of Eagle
after giving effect to the offering, assuming the sale of shares to minority
stockholders at $8.00 per share. Eagle Financial MHC will be issued between
662,254 and 841,872 shares subject to increase to 968,153 shares, and will not
pay cash consideration for its shares. The table also gives effect to the
assumptions set forth under "Pro Forma Data." A change in the number of shares
sold in the offering may materially affect the pro forma capitalization.
28
<PAGE>
<TABLE>
<CAPTION>
Eagle Bancorp Pro Forma Consolidated Capitalization
at September 30, 1999 Based On The Sale Of:
---------------------------------------------------------------------
1,174,063 shares 1,381,250 shares 1,588,438 shares 1,826,703 shares
to be issued; to be issued; to be issued; to be issued;
American Federal 551,809 shares 649,188 shares 746,566 shares 858,550 shares
Historical to be sold at to be sold to be sold to be sold
Capitalization Minimum of Midpoint Maximum Maximum, as
September 30, 1999 Range of Range of Range adjusted (1)
------------------ -------------- -------------- -------------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2) .............................. $123,804 $123,804 $123,804 $123,804 $123,804
Borrowings:
Federal Home Loan Bank advances ......... 8,508 8,508 8,508 8,508 8,508
-------- -------- -------- -------- --------
Total deposits and borrowings ............. $132,312 $132,312 $132,312 $132,312 $132,312
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock, par value $.01,
1,000,000 shares authorized;
none issued ............................. 0 0 0 0 0
Common stock, par value $.01 per share,
10,000,000 shares authorized; shares
to be issued as reflected(3)(4)(5) ...... 0 12 14 16 18
Additional paid-in capital(3)(6) .......... 0 3,843 4,620 5,397 6,291
Retained earnings (substantially
restricted) ............................. 14,308 14,308 14,308 14,308 14,308
Unrealized loss on available
for sale securities ..................... (233) (233) (233) (233) (233)
Less:
Common stock acquired by ESOP(3) ........ 0 (353) (415) (478) (549)
Common stock acquired by the
Management Recognition Plan(3) ......... 0 (177) (208) (239) (275)
-------- -------- -------- -------- --------
Total stockholders' equity ................ $ 14,075 $ 17,400 $ 18,086 $ 18,771 $ 19,560
======== ======== ======== ======== ========
</TABLE>
- ----------
(Footnotes on next page)
29
<PAGE>
(1) As adjusted to give effect to an increase in the number of shares that
could occur due to an increase in the estimated valuation range, of up to
15% to reflect changes in market and financial conditions prior to the
completion of the reorganization or to fill the order of the ESOP.
(2) No effect is given to possible withdrawals from deposit accounts to
purchase the common stock. Any such withdrawals will reduce pro forma
deposits by the amounts thereof.
(3) Assumes that 8% and 4% of the shares sold in the reorganization will be
purchased by the ESOP and the management recognition plan, respectively. No
shares will be purchased by the management recognition plan as of, or at,
the time of the reorganization. It is assumed on a pro forma basis that our
management recognition plan will be adopted by the board of directors,
approved by the stockholders at a special or annual meeting no earlier than
six months after completion of our reorganization and reviewed by the
Office of Thrift Supervision. It is assumed that the management recognition
plan will purchase common stock in the open market in order to give an
indication of its effects on capitalization. The pro forma presentation
does not show the impact of: (i) results of operations after the
reorganization; (ii) changes in market prices of shares of the common stock
after the reorganization; or (iii) a smaller than 4% purchase by the
management recognition plan. The pro forma assumes that the funds used to
acquire the ESOP shares will be borrowed from Eagle for a ten year term at
the prime rate as published in The Wall Street Journal. For an estimate of
the impact of the ESOP on earnings, see "Pro Forma Data." We intend to make
contributions to the ESOP sufficient to service and ultimately retire its
debt. The amount of shares to be acquired by the ESOP and the management
recognition plan is reflected as a reduction in stockholder equity. The
issuance of authorized but unissued shares for the management recognition
plan in an amount equal to 4% of the outstanding shares of common stock
will have the effect of diluting existing stockholders' interests. There
can be no assurance that approval of the management recognition plan will
be obtained. See "Management of American Federal Savings Bank-- Proposed
Future Stock Benefit Plans."
(4) Does not reflect additional shares of common stock that possibly could be
purchased by participants in the stock option plan if implemented under
which the directors, executive officers and other employees could be
granted options to purchase an aggregate amount of common stock equal to
10% of the shares sold in the reorganization (64,919 shares at the
midpoint of the estimated value range) at exercise prices equal to the
market price of the common stock on the date of grant. Implementation of
the stock option plan will require regulatory and stockholder approval. See
"Management Of American Federal Savings Bank-- Proposed Future Stock
Benefit Plans."
(5) Reflects shares issued to Eagle Financial MHC, Eagle Financial MHC will not
pay cash consideration for its shares of common stock of Eagle Bancorp.
(6) Based upon estimated net proceeds of $3.86 million at the minimum of the
range, $4.64 million at the midpoint of the range, $5.42 million and the
maximum of the range and $6.32 million at the maximum of the range, as
adjusted, less the par value of the shares sold. See "Pro Forma Data" for
assumptions used in calculating the net proceeds. Pro forma information
gives effect to Eagle Financial MHC's retention of $10,000 of net proceeds.
-------------
30
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents American Federal's historical and pro
forma capital position relative to its capital requirements as of September 30,
1999. Pro forma capital levels assume receipt by American Federal Savings Bank
of 50% of the net proceeds of the offering. Pro forma capital levels are then
reduced by employee stock ownership plan purchases of stock and the management
recognition plan expected to be adopted. For a discussion of the assumptions
underlying the pro forma capital calculations presented below, see "How We
Intend to Use the Proceeds of the Offering," "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 American Federal, see "Regulation --
Regulation of American Federal Savings Bank-- Regulatory Capital Requirements."
31
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1999
-------------------------------------------------------------------------------
858,550 Shares
Historical 551,809 Shares 649,188 Shares 746,566 Shares (15% above
at September 30, 1999 (Minimum of Range) (Midpoint of Range) (Maximum of Range) Maximum of Range)
--------------------- ------------------ ------------------- ------------------ ------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets Amount(1) Assets Amount(1) Assets Amount(1) Assets Amount(1) Assets
------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital ............... $14,075 9.45% $15,477 10.30% $15,744 10.47% $16,070 10.65% $16,410 11.84%
Tangible capital:
Capital level ............ $14,308 9.61 $15,710 10.45 $16,007 10.63 $16,303 10.80 $16,643 11.00
Requirement .............. 2,233 1.50 2,250 1.50 2,255 1.50 2,259 1.50 2,264 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ................... $12,075 8.11% $13,406 9.10% $13,752 9.13% $14,044 9.30% $14,379 9.50%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital:
Capital level ............ $14,308 9.61 $15,710 10.45 $16,007 10.63 $16,303 10.80 $16,643 11.00
Requirement .............. 4,467 3.00 4,500 3.00 4,510 3.00 4,518 3.00 4,528 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ................... $ 9,841 6.61% $11,210 7.45% $11,447 7.63% $11,785 7.80% $12,115 8.00%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====-
Risk capital:
Capital level ............ $15,056 17.63 $16,459 19.21 $16,755 19.54 $17,051 19.87 $17,391 20.25
Requirement(2) ........... 6,833 8.00 6,855 8.00 6,860 8.00 6,865 8.00 6,870 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ................... $ 8,223 9.63% $ 9,604 11.21% $ 9,895 11.54% $10,186 11.87% $10,521 12.25%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
(1) Pro forma capital levels include the impact of the ESOP, management
recognition plan and assume receipt by us of the net proceeds of the
reorganization and the retention of 50% of the proceeds by American
Federal.
(2) Assumes reinvestment of proceeds with 20% risk weighted assets as if such
proceeds had been received and applied on September 30, 1999.
-------------
32
<PAGE>
PRO FORMA DATA
We will not know how much we will actually raise from the sale of the
common stock until our offering is completed. However, we currently estimate
that our net investable proceeds will be between $3.34 million and $4.70 million
(or $5.49 million if the independent valuation is increased by 15%). We base
this estimate on the following assumptions:
o an amount equal to 4% of the shares offered will be awarded
pursuant to the restricted stock program or, management
recognition plan adopted no sooner than six months following the
offering, through open market purchases;
o Ryan, Beck & Co. will receive an advisory and marketing fee of
$165,000 in connection with the sale of stock in the offering;
o all shares will be sold in the subscription and community
offerings;
o estimated expenses will be $385,000, excluding the fee paid to
Ryan, Beck & Co.;
o Eagle Financial MHC will be capitalized at approximately $10,000,
which will not be included in the assets and equity of Eagle and
American Federal; and
o Eagle will loan the ESOP the funds for purchase of 8% of the
shares sold.
The following table shows our historical net income and equity prior to
the reorganization and our pro forma consolidated net income and stockholders'
equity following the reorganization. This table is based on the following
assumptions:
o We have calculated pro forma earnings assuming the stock had been
sold at the beginning of the period and 100% of the net proceeds
had been invested at an average yield of 5.19% for the three
months ended September 30, 1999, and 5.09% for the year ended
June 30, 1999. This approximates the yield on a one-year U.S.
Treasury bill for these periods. We have used the yield on a
one-year U.S. Treasury bill, rather than an arithmetic average of
the average yield on interest-earning assets and average rate
paid on deposits to estimate income on net proceeds because we
believe that the one-year U.S. Treasury bill rate more accurately
reflects the estimate of the rate that would be obtained on an
investment of net proceeds from the offering.
o We assumed a pro forma after-tax yield on the net proceeds of
3.21% for the three months ended September 30, 1999, and 3.16%
for the year ended June 30, 1999. This was based on our effective
tax rate of 38%.
33
<PAGE>
o We did not reflect any withdrawals from deposit accounts to
purchase shares in the offering.
o We calculated historical and pro forma per share amounts by
dividing historical and pro forma amounts by the indicated number
of shares of stock, as adjusted, to give effect to the purchase
of shares by the employee stock ownership plan and the
anticipated issuance of shares to the management recognition
plan.
o We calculated pro forma stockholders' equity amounts as if the
stock had been sold on September 30, 1999 and June 30, 1999.
The following pro forma data relies on the assumptions we outlined
above. This data does not represent the fair market value of the common stock or
the current value of assets or liabilities. The pro forma data does not predict
how much we will earn in the future.
The following tables summarize historical data of American Federal
Savings Bank and pro forma data of Eagle at or for the three months ended
September 30, 1999 and at or for the year ended June 30, 1999, based on the
assumptions set forth above and in the tables and should not be used as a basis
for projections of market value of the stock following the reorganization. No
effect has been given in the tables to the possible issuance of additional stock
pursuant to a stock option plan that may be adopted by our board of directors
and approved by the stockholders no earlier than six months following the
reorganization, nor does book value give any effect to the bad debt reserve in
liquidation. See "The Reorganization -- Effects of Reorganization -- Liquidation
Rights" and "Management of American Federal Savings Bank-- Potential Stock
Benefit Plans -- Stock Option Plans."
34
<PAGE>
<TABLE>
<CAPTION>
At or for the Three Months Ended September 30, 1999
-------------------------------------------------------------------
858,550 Shares
551,809 Shares 649,188 Shares 746,566 Shares (Super Maximum
(Minimum of (Midpoint of (Maximum of of Range),
Range) Range) Range) as adjusted
-------------- -------------- -------------- ----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ............................................. $ 4,414 $ 5,194 $ 5,973 $ 6,868
Less: Estimated expenses ................................. (550) (550) (550) (550)
-------- -------- -------- --------
Estimated net proceeds ..................................... 3,864 4,644 5,423 6,318
Less: Common stock acquired by ESOP(1) ................... (353) (415) (478) (549)
Common stock acquired by Management
Recognition Program(2) ............................ (177) (208) (239) (275)
-------- -------- -------- --------
Net investable proceeds .................................... $ 3,334 $ 4,021 $ 4,706 $ 5,494
-------- -------- -------- --------
Consolidated net income:
Historical ............................................... $ 209 $ 209 $ 209 $ 209
Pro forma income on net investable proceeds .............. 27 32 38 44
Pro forma ESOP adjustments(1) ............................ (5) (6) (7) (9)
Pro forma Management Recognition Program adjustments(2) .. (5) (6) (7) (9)
-------- -------- -------- --------
Pro forma net income ....................................... $ 224 $ 228 $ 231 $ 236
-------- -------- -------- --------
Consolidated net income per share:
Historical .............................................. $ 0.19 $ 0.16 $ 0.14 $ 0.12
Pro forma income on net investable proceeds ............. 0.02 0.02 0.03 0.03
Pro forma ESOP adjustments(1) ........................... (0.00) (0.00) (0.00) (0.01)
Pro forma Management Recognition Program adjustment(2) .. (0.00) (0.00) (0.00) (0.01)
-------- -------- -------- --------
Pro forma net income per share ............................. $ 0.21 $ 0.18 $ 0.17 $ 0.13
-------- -------- -------- --------
Number of shares outstanding for pro forma net income
per share(1)(2)........................................... 1,110,053 1,305,944 1,501,836 1,727,111
--------- --------- --------- ---------
Consolidated stockholders' equity
Historical ............................................... $ 14,075 $ 14,075 $ 14,075 $ 14,075
Estimated net investable proceeds(2)(4)................... 3,854 4,634 5,413 6,309
Less: Common stock acquired by ESOP(1) ................... (353) (415) (478) (549)
Common stock acquired by Management
Recognition Program(2) ............................ (177) (208) (239) (275)
-------- -------- -------- --------
Pro forma stockholders' equity(3) ...................... $ 17,400 $ 18,086 $ 18,771 $ 19,560
-------- -------- -------- --------
Consolidated stockholders' equity per share:
Historical ............................................... $ 11.98 $ 10.18 $ 8.85 $ 7.70
Estimated net investable proceeds(2)(4) .................. 3.28 3.36 3.40 3.46
Less: Common stock acquire by ESOP(1) .................... (0.30) (0.30) (0.30) (0.30)
Common stock acquired by Management
Recognition Program(2) ............................ (0.15) (0.15) (0.15) (0.15)
-------- -------- -------- --------
Pro forma stockholders' equity per share(3) ................ $ 14.82 $ 13.09 $ 11.82 $ 10.71
-------- -------- -------- --------
Offering price as a percentage of pro forma
stockholders' equity per share(5) ......................... 53.98% 61.12% 67.74% 74.70%
Offering price as a multiple of pro forma net
income per share(5) ....................................... 9.52x 11.11x 11.76x 15.38x
-------- -------- -------- --------
Number of shares outstanding for pro forma
stockholders' equity per share............................. 1,174,063 1,381,250 1,588,438 1,826,703
--------- --------- --------- ---------
</TABLE>
35
<PAGE>
(1) Assumes 8% of the shares sold in the reorganization are purchased by the
ESOP, and that the funds used to purchase such shares are borrowed from
Eagle. The approximate amount expected to be borrowed by the ESOP is not
reflected as a liability but is reflected as a reduction of capital. We
intend to make annual contributions to the ESOP over a ten year period in
an amount at least equal to the principal and interest requirement of the
debt. The pro forma net income assumes: (i) that 1,104, 1,298, 1,493 and
1,717 shares at the minimum, mid-point, maximum and maximum, as adjusted,
of the estimated offering range, were committed to be released during the
three months ended September 30, 1999, at an average fair value of $8.00
per share in accordance with Statement of Position 93-6 of the American
Institute of Certified Public Accountants; (ii) the effective tax rate was
38% for the period; and (iii) only the ESOP shares committed to be released
were considered outstanding for purposes of the per share net earnings. The
pro forma stockholders' equity per share calculation assumes all ESOP
shares were outstanding, regardless of whether such shares would have been
released. Because we will be providing the ESOP loan, only principal
payments on the ESOP loan are reflected as employee compensation and
benefits expense. As a result, to the extent the value of the shares
appreciates over time, compensation expense related to the ESOP will
increase. For purposes of the preceding tables, it was assumed that a
ratable portion of the ESOP shares purchased in the reorganization were
committed to be released during the periods ended September 30, 1999. If it
is assumed that all of the ESOP shares were included in the calculation of
earnings per share for the period ended September 30, 1999, earnings per
share would have been $ 0.20, $0.17, $0.15 and $0.13 for the period then
ended, based on the sale of shares at the minimum, midpoint, maximum and
the maximum, as adjusted, of the estimated value range . See "Management --
Employee Stock Ownership Plan."
(2) Assumes issuance to the management recognition plan of 22,072, 25,968,
29,863 and 34,342 at the minimum, mid-point, maximum, and maximum, as
adjusted, of the estimated valuation range . The assumption in the pro
forma calculation is that (i) shares were purchased by us following the
reorganization, in the open market; (ii) that 1,104, 1,298, 1,493 and 1,717
shares at the minimum, mid-point, maximum and maximum, as adjusted, of the
estimated offering range, were committed to be released during the three
months ended September 30, 1999, at an average fair value of $8.00 per
share in accordance with Statement of Position 93-6 of the American
Institute of Certified Public Accountants; (iii) the purchase price for the
shares purchased by the management recognition plan was equal to the
purchase price of $8.00 per share and (iv) 20% of the amount contributed
was an amortized expense during such period. Such amount does not reflect
possible increases or decreases in the value of such stock relative to the
purchase price. As we accrue compensation expense to reflect the five year
vesting period of such shares pursuant to the management recognition plan,
the charge against capital will be reduced accordingly. Implementation of
the management recognition plan within one year of reorganization will
require regulatory and stockholder approval at a meeting of our
stockholders to be held no earlier than six months after the
reorganization. For purposes of this table, it is assumed that the
management recognition plan will be adopted by the board of directors,
reviewed by the Office of Thrift Supervision, and approved by the
stockholders, and that the management recognition plan will purchase the
shares in the open market within the year following the reorganization. If
the shares to be purchased by the management recognition plan are assumed
at October 1, 1999, to be newly issued shares purchased from us by the
management recognition plan at $8.00, at the minimum, midpoint, maximum and
maximum, as adjusted, of the estimated offering range, pro forma
stockholders' equity per share would have been $14.69, $13.00, $11.75 and
$10.66 and pro forma earnings per share would have been $0.20, $0.17, $0.15
and $0.13, for the three months ended September 30, 1999. As a result of
the management recognition plan, stockholders' interests will be diluted by
approximately 1.0%. See "Management -- Proposed Future Stock Benefit
Plans."
(3) No effect has been given to the stock option plan. We intend to adopt the
stock option plan, which if implemented within one year of reorganization
would be subject to regulatory review
36
<PAGE>
and Board of Director and stockholder approval, and that such plan would be
considered and voted upon at a meeting of our stockholders to be held no
earlier than six months after the reorganization. Under the stock option
plan, employees and directors could be granted options to purchase an
aggregate amount of shares equal to 10% of the shares issued in the
reorganization at an exercise price equal to the market price of the shares
on the date of grant. In the event the shares issued under the stock option
plan were awarded and exercised, the interests of existing stockholders
would be diluted.
(4) Reflects $10,000 initial capitalization of Eagle Financial MHC, which is
not included in the Pro Forma Historical estimated net proceeds of Eagle
Bancorp.
(5) Assuming 100% of the outstanding common stock of Eagle Bancorp is issued to
the public rather than 47% the offering price, as a percentage of pro forma
stockholders' equity per share, would be 43.10% at the minimum of the
estimated valuation range, 47.53% at the midpoint of the estimated
valuation range, 51.43% at the maximum of the estimated valuation range,
and 55.39% at 15% above the maximum of the estimated valuation range, and
the ratio of the offering price as a multiple of pro forma net income per
share would be 8.40x at the minimum of the estimated valuation range, 9.58x
at the midpoint of the estimated valuation range, 10.72x at the maximum of
the estimated valuation range, and 11.87x at 15% above the maximum of the
estimated valuation range.
37
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30, 1999
--------------------------------------------------------------------------
858,550 Shares
551,809 Shares 649,188 Shares 746,566 Shares (Super Maximum
(Minimum of (Midpoint of (Maximum of of Range),
Range) Range) Range) as adjusted
-------------- -------------- -------------- ----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ......................................... $ 4,414 $ 5,194 $ 5,973 $ 6,868
Less: Estimated expenses ............................. (550) (550) (550) (550)
-------- -------- -------- --------
Estimated net proceeds ................................. 3,864 4,644 5,423 6,318
Less: Common stock acquired by ESOP(1) ............... (353) (415) (478) (549)
Common stock acquired by
Management Recognition Plan(2) ................ (177) (208) (239) (275)
-------- -------- -------- --------
Net investable proceeds ................................ $ 3,334 $ 4,021 $ 4,706 $ 5,494
Consolidated net income:
Historical ........................................... $ 1,252 $ 1,252 $ 1,252 $ 1,252
Pro forma income on net investable proceeds .......... 105 127 149 174
Pro forma ESOP adjustments(1) ........................ (22) (26) (30) (34)
Pro forma Management Recognition Plan
adjustments(2) ...................................... (22) (26) (30) (34)
-------- -------- -------- --------
Pro forma net income ................................... $ 1,313 $ 1,327 $ 1,341 $ 1,358
-------- -------- -------- --------
Consolidated net income per share:
Historical .......................................... $ 1.12 $ 0.95 $ 0.83 $ 0.72
Pro forma income on net investable proceeds ......... 0.09 0.10 0.10 0.10
Pro forma ESOP adjustments(1) ....................... (0.02) (0.02) (0.02) (0.02)
Pro forma Management Recognition Plan
adjustment(2) ...................................... (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Pro forma net income per share ......................... $ 1.17 $ 1.01 $ 0.89 $ 0.78
-------- -------- -------- --------
Number of shares outstanding for pro forma net income
per share (1)(2) ...................................... 1,116,674 1,313,735 1,510,795 1,737,414
-------- -------- -------- --------
Consolidated stockholders' equity:
Historical .. ........................................ $ 13,894 $ 13,894 $ 13,894 $ 13,894
Estimated net investable proceeds(2)(4) .............. 3,854 4,634 5,413 6,308
Less: Common stock acquired by ESOP(1) ............... (353) (415) (478) (549)
Common stock acquired by Management
Recognition Plan(2) ........................... (177) (208) (239) (275)
-------- -------- -------- --------
Pro forma stockholders' equity(3) .................... $ 17,218 $ 17,905 $ 18,590 $ 19,378
-------- -------- -------- --------
Consolidated stockholders' equity per share:
Historical ........................................... $ 11.83 $ 10.05 $ 8.74 $ 7.60
Estimated net investable proceeds(2)(4) .............. 3.29 3.36 3.41 3.46
Less: Common stock acquired by ESOP(1) ............... (0.30) (0.30) (0.30) (0.30)
Common stock acquired by Management
Recognition Plan(2) ........................... (0.15) (0.15) (0.15) (0.15)
-------- -------- -------- --------
Pro forma stockholders' equity per share(3) ............ $ 14.67 $ 12.96 $ 11.70 $ 10.61
-------- -------- -------- --------
Offering price as a percentage of pro forma
Stockholders' equity per share(5) .................... 54.53% 61.73% 68.38% 75.40%
Offering price as a multiple of pro forma
net income per share(5) ............................... 6.84x 7.92x 8.99x 10.26x
-------- -------- -------- --------
Number of shares outstanding for pro forma stockholder's
equity per share ...................................... 1,174,063 1,381,250 1,588,438 1,826,703
-------- -------- -------- --------
</TABLE>
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<PAGE>
(1) Assumes 8% of the shares sold in the reorganization are purchased by the
ESOP, and that the funds used to purchase such shares are borrowed from
Eagle. The approximate amount expected to be borrowed by the ESOP is not
reflected as a liability but is reflected as a reduction of capital. We
intend to make annual contributions to the ESOP over a ten year period in
an amount at least equal to the principal and interest requirement of the
debt. The pro forma net income assumes: (i) that 4,414, 5,194, 5,973 and
6,868 shares at the minimum, mid-point, maximum and maximum, as adjusted,
of the estimated offering range, were committed to be released during the
year ended June 30, 1999, at an average fair value of $8.00 per share in
accordance with Statement of Position 93-6 of the American Institute of
Certified Public Accountants; (ii) the effective tax rate was 38% for the
period; and (iii) only the ESOP shares committed to be released were
considered outstanding for purposes of the per share net earnings. The pro
forma stockholders' equity per share calculation assumes all ESOP shares
were outstanding, regardless of whether such shares would have been
released. Because we will be providing the ESOP loan, only principal
payments on the ESOP loan are reflected as employee compensation and
benefits expense. As a result, to the extent the value of the shares
appreciates over time, compensation expense related to the ESOP will
increase. For purposes of the preceding tables, it was assumed that a
ratable portion of the ESOP shares purchased in the reorganization were
committed to be released during the period ended June 30, 1999. If it is
assumed that all of the ESOP shares were included in the calculation of
earnings per share for the period ended June 30, 1999, earnings per share
would have been $1.14, $0.98, $0.86, and $0.75, for the period then ended,
based on the sale of shares at the minimum, midpoint, maximum and the
maximum, as adjusted, of the estimated offering range. See "Management --
Employee Stock Ownership Plan."
(2) Assumes issuance to the management recognition plan of 22,072, 25,968,
29,863 and 34,342 at the minimum, mid-point, maximum, and maximum, as
adjusted, of the estimated offering range. The assumption in the pro forma
calculation is that (i) shares were purchased by us following the
reorganization; (ii) that 4,414, 5,194, 5,973 and 6,868 shares at the
minimum, mid-point, maximum and maximum, as adjusted, of the estimated
offering range, or estimated valuation range, were committed to be released
during the year ended June 30, 1999, at an average fair value of $8.00 per
share in accordance with Statement of Position 93-6 of the American
Institute of Certified Public Accountants; )iii) the purchase price for the
shares purchased by the management recognition plan was equal to the
purchase price of $8.00 per share and (iv) 20% of the amount contributed
was an amortized expense during such period. Such amount does not reflect
possible increases or decreases in the value of such stock relative to the
purchase price. As we accrue compensation expense to reflect the five year
vesting period of such shares pursuant to the management recognition plan,
the charge against capital will be reduced accordingly. Implementation of
the management recognition plan within one year of reorganization will
require regulatory and stockholder approval at a meeting of our
stockholders to be held no earlier than six months after the
reorganization. For purposes of this table, it is assumed that the
management recognition plan will be adopted by the board of directors,
reviewed by the Office of Thrift Supervision, and approved by the
stockholders, and that the management recognition plan will purchase the
shares in the open market within the year following the reorganization. If
the shares to be purchased by the management recognition plan are assumed
at October 1, 1999, to be newly issued shares purchased from us by the
management recognition plan at $8.00, at the minimum, midpoint, maximum and
maximum, as adjusted, of the estimated offering range, pro forma
stockholders' equity per share would have been $14.54, $12.87, $11.63 and
$10.56 , and pro forma earnings per share would have been $1.15, $0.99,
$0.87 and $0.77 for the year ended June 30, 1999. As a result of the
management recognition plan, stockholders' interests will be diluted. See
"Management -- Proposed Future Stock Benefit Plans."
(3) No effect has been given to the stock option plan. We intend to adopt the
stock option plan, which if implemented within one year of reorganization
would be subject to regulatory review and Board of Director and stockholder
approval, and that such plan would be considered and
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<PAGE>
voted upon at a meeting of our stockholders to be held no earlier than six
months after the reorganization. Under the stock option plan, employees and
directors could be granted options to purchase an aggregate amount of
shares equal to 10% of the shares issued in the reorganization at an
exercise price equal to the market price of the shares on the date of
grant. In the event the shares issued under the stock option plan were
awarded and exercised, the interests of existing stockholders would be
diluted.
(4) Reflects $10,000 initial capitalization of Eagle Financial MHC, which is
not included in the Pro Forma Historical estimated net proceeds of Eagle
Bancorp.
(5) Assuming 100% of the outstanding common stock of Eagle Bancorp is issued to
the public rather than 47%, the offering price, as a percentage of pro
forma stockholders' equity per share, would be 43.48% at the minimum of the
estimated valuation range, 47.93% at the midpoint of the estimated
valuation range, 51.85% at the maximum of the estimated valuation range,
and 55.79% at 15% above the maximum of the estimated valuation range, and
the ratio of the offering price as a multiple of pro forma net income per
share would be 6.00x at the minimum at the estimated valuation range, 6.19x
at the midpoint of the estimated valuation range, 7.79x at the maximum of
the estimated valuation range, and 8.75x at 15% above the maximum of the
estimated valuation range.
-------------
THE REORGANIZATION
The board of directors of American Federal Savings Bank has adopted a
plan authorizing the reorganization and the offering, subject to the approval of
the Office of Thrift Supervision and by a majority of the votes eligible to be
cast by American Federal Savings Bank's members (depositors at January 31, 2000,
and borrowers as of April 18, 1991 with a continuous borrowing relationship) at
a special meeting of members to be held on March 22, 2000, and the satisfaction
of other conditions. Office of Thrift Supervision approval, however, does not
mean the Office of Thrift Supervision recommends or endorses American Federal's
plan to reorganize.
General
On September 16, 1999, the board of directors of American Federal
Savings Bank adopted the plan of reorganization and stock issuance. American
Federal Savings Bank will reorganize from a federally-chartered mutual savings
bank to a federally-chartered stock savings bank. American Federal Savings Bank
will be a wholly owned subsidiary of Eagle Bancorp. The majority of Eagle
Bancorp's common stock will be owned by Eagle Financial MHC. The plan was
approved in amended and restated form on December 7, 1999, by the board of
directors of American Federal. Concurrently with the reorganization, Eagle
Bancorp will sell a minority percentage of its common stock in the offering to
American Federal's members and the general public. The board of directors
unanimously adopted the plan. In doing so they considered the advantages and
disadvantages of the reorganization, the offering and alternative transactions,
including a full conversion from the mutual to the stock form of organization.
The reorganization is contingent upon receipt of all the required
regulatory approvals and the approval of the plan by American Federal's members,
If these and all other conditions are
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satisfied, American Federal Savings Bank will complete the reorganization as
follows or in any other manner that is consistent with applicable federal law
and regulations and the intent of the plan of reorganization:
o by exchanging its federal mutual savings bank charter for a
federal stock savings bank charter and becoming a 100% owned
subsidiary of Eagle. Eagle Bancorp will then become a majority
owned subsidiary of Eagle Financial MHC, and the depositors of
American Federal Savings Bank will receive liquidation interests
in Eagle Financial MHC similar to their liquidation interests in
American Federal Savings Bank before the reorganization; or
o in any other manner consistent with the plan of reorganization
and applicable regulations. See "-- Description of the
Reorganization."
When the reorganization and the offering are complete, Eagle will begin
business as a savings bank holding company. American Federal Savings Bank will
continue its business in its new form, as a federally-chartered stock savings
bank. Eagle Financial MHC will begin business as the 53% owner of Eagle
Bancorp's outstanding stock. The reorganization will be completed according to
American Federal's plan, applicable laws and regulations, and the policies of
the Office of Thrift Supervision. For additional information concerning the
offering, see "The Offering."
Purposes of the Reorganization
The board of directors of American Federal Savings Bank determined the
reorganization to be in the best interests of American Federal. It has several
business purposes for the reorganization, including, but not limited to the
following:
o the reorganization will convert American Federal Savings Bank to
the stock form, a structure which is used by commercial banks,
most major business corporations and an increasing number of
savings institutions;
o the reorganization will allow Eagle to issue stock, which is a
source of capital for our organization. This source of capital is
not available to mutual savings institutions and will increase
our strong capital base to support increased lending and
investments;
o the reorganization will enable American Federal Savings Bank to
achieve the benefits of a stock company without the loss of
control that sometimes follows full mutual to stock conversions.
The benefits of American Federal's mutual form of ownership will
be preserved in Eagle Financial MHC. Eagle Financial MHC must
continue to control at least a majority of Eagle's outstanding
stock so long as Eagle Financial MHC remains a mutual
institution. This means that it has no stockholders;
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o American Federal Savings Bank is committed to being an
independent, community-oriented institution, and the board of
directors believes that the mutual holding company structure is
best suited for this purpose. Unlike a full mutual-to-stock
conversion, the reorganization will not result in our
organization becoming a fully public company. Eagle Financial MHC
must own at least a majority of Eagle's outstanding voting stock,
as long as it remains a mutual institution. As a result of Eagle
Financial MHC's majority ownership, Eagle can remain independent.
Following a full conversion, some locally based, independent
savings institutions have been acquired by larger, regional
financial institutions. Acquisitions can result in closed
branches, fewer choices for consumers, employee layoffs and the
loss of community support and involvement by a financial
institution;
o because of Eagle Financial MHC's required ownership interest,
only a minority of our to-be outstanding shares will be offered
for sale. By contrast, in a full conversion, all shares must be
sold. Selling all of our to-be outstanding shares would
substantially increase net proceeds. Because we would have much
more capital from these increased proceeds, it would make it more
difficult to achieve a desirable return on equity. Subject to
Eagle Financial MHC's required majority ownership interest, Eagle
Bancorp will have the flexibility to sell additional common stock
in the future;
o the reorganization will not preclude Eagle Financial MHC from
converting to the fully public stock form in the future subject
to member and regulatory approvals;
o the mutual holding company structure will provide us with
additional flexibility. It allows us to diversify our business
activities through newly formed subsidiaries, holding company
activities, or through acquisitions of, or mergers with other
financial institutions, as well as other companies. We have no
current arrangements or understandings to do any of these things
after the reorganization. We will, however, be able to take
advantage of opportunities that may arise after the
reorganization subject to our financial condition at that time
and regulatory requirements;
o the reorganization will enable American Federal Savings Bank to
achieve the benefits of a stock company, such as stock-related
benefit plans, which will help us to attract and retain qualified
personnel.
Eagle Bancorp is offering for sale up to 47% of its to be issued common
stock at an aggregate dollar amount based on an independent appraisal. Proceeds
from the sale of common stock of Eagle will provide American Federal Savings
Bank with new equity capital, which will support future growth and expanded
operations. American Federal Savings Bank currently exceeds all regulatory
capital requirements. New equity capital, coupled with the accumulation of
future earnings, represents a means for the orderly preservation and expansion
of American
42
<PAGE>
Federal's capital base. It also allows flexibility to respond to sudden and
unanticipated capital needs. The investment of the net proceeds of the offering
also will provide additional income.
The ability of Eagle to issue stock also will enable it to establish
stock benefit plans for management and employees of Eagle and American Federal,
including incentive stock option plans, stock award plans, and an employee stock
ownership plan.
The board of directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure, which include:
o the inability of Eagle to sell to the public shares of common
stock representing 50% or more of its total outstanding shares so
long as Eagle Financial MHC remains in existence;
o the more limited liquidity of the stock, as compared to a full
mutual-to-stock conversion where all shares are sold to the
public; and
o the inability of public stockholders to obtain a majority
ownership of Eagle, which may result in the perpetuation of the
existing management and board of directors of Eagle and American
Federal Savings Bank and may prevent minority stockholders from
participating in transactions such as the acquisition of Eagle by
another financial institution that they would approve.
Eagle Financial MHC will be able to elect all members of the board of
directors of Eagle. It will also be able to control the outcome of all matters
presented to the stockholders of Eagle for resolution by vote, except for
matters which by regulation must be approved by a majority of the shares owned
by persons other than Eagle Financial MHC. For example, matters relating to
stock compensation plans and votes regarding a conversion to stock form by Eagle
Financial MHC can be approved only by shareholders other than Eagle Financial
MHC. No assurance can be given that Eagle Bancorp will not take action adverse
to the interests of the minority stockholders. For example, Eagle Bancorp can
revise the dividend policy, prevent the sale of control of Eagle Bancorp or
defeat a candidate for the board of directors of Eagle Bancorp or other
proposals made by the minority stockholders.
Description of the Reorganization
We need to receive approvals from the government agencies that regulate
us and the approval of the plan of reorganization by American Federal's members
before we can proceed with the reorganization. The reorganization is required to
be completed in a manner approved by the Office of Thrift Supervision that is
consistent with the purposes of the plan of reorganization as amended and
applicable laws and regulations. American Federal's intention is to complete the
reorganization using a series of mergers, although it may elect to use any
method consistent with applicable regulations, subject to Office of Thrift
Supervision approval.
43
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For a detailed description of the merger structure, see "-- Federal and
State Tax Consequences of the Reorganization." After the reorganization, the
legal existence of American Federal Savings Bank will not terminate. The
converted stock bank will be a continuation of American Federal. Further, all
property and rights of American Federal Savings Bank of any nature whatsoever
will continue to be owned by American Federal Savings Bank as the survivor of
the merger. American Federal, as a stock institution, will continue to have,
succeed to, and be responsible for all the rights, liabilities, and obligations
of American Federal Savings Bank in its mutual form. American Federal Savings
Bank will maintain its headquarters operations in its present location.
The foregoing description of the reorganization is qualified in its
entirety by reference to the plan and the charter and bylaws of American
Federal, Eagle Financial MHC and Eagle Bancorp to be effective after the
reorganization.
Effects of the Reorganization
General. The reorganization will not have any effect on American
Federal's present business of accepting deposits and investing its funds in
loans and other investments permitted by law. The reorganization will not result
in any change in the existing services provided to depositors and borrowers, or
in existing offices, management, and staff. After the reorganization, American
Federal Savings Bank will continue to be subject to regulation, supervision, and
examination by the Office of Thrift Supervision and the FDIC.
Deposits and Loans. Each holder of a deposit account in American
Federal Savings Bank at the time of the reorganization will continue as an
account holder in American Federal Savings Bank after the reorganization, and
the reorganization will not affect the deposit balance, interest rate, or other
terms of such accounts. Each such account will be insured by the FDIC to the
same extent as before the reorganization. Depositors will continue to hold their
existing certificates, passbooks, checkbooks, and other evidence of their
accounts. The reorganization will not affect the loans of any borrower from
American Federal. The amount, interest rate, maturity, security for, and
obligations under each loan will remain contractually fixed as they existed
prior to the reorganization. See "-- Voting Rights" and "-- Liquidation Rights"
below for a discussion of the effects of the reorganization on the voting and
liquidation rights of the depositors and borrowers of American Federal.
Voting Rights. As a federally chartered mutual savings bank, American
Federal Savings Bank has no authority to issue capital stock and thus it has no
stockholders. Control of American Federal Savings Bank in its mutual form is
vested in the board of directors of American Federal. The directors are elected
by American Federal's members. Holders of deposits in American Federal Savings
Bank and borrowers of American Federal Savings Bank whose loans were outstanding
on April 18, 1991, which remain outstanding are members of American Federal. In
the consideration of all questions requiring action by members of American
Federal, each holder of a qualifying deposit is permitted to cast one vote for
each $100, or fraction thereof, of the withdrawal value of the voting
depositor's account. Voting borrowers are entitled to cast one vote. No member
may cast more than 1,000 votes.
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<PAGE>
After the reorganization and stock issuance, members of American
Federal Savings Bank will have no voting rights in American Federal Savings Bank
or Eagle. For this reason, they will be unable to elect directors of American
Federal Savings Bank or Eagle or to control their affairs. After the
reorganization, the affairs of American Federal Savings Bank will still be under
the direction of the board of directors of American Federal Savings Bank but all
voting rights as to American Federal Savings Bank will be vested exclusively in
Eagle, the holder of all the outstanding voting capital stock of American
Federal. Eagle will elect American Federal's board of directors who will direct
the business of American Federal. By virtue of its ownership of a majority of
the outstanding shares of common stock of Eagle, Eagle Financial MHC will be
able to elect all members of the board of directors of Eagle and generally will
be able to control the outcome of most matters presented to the stockholders of
Eagle for resolution by vote, excluding matters where shares held by Eagle
Financial MHC are not counted. The common stock of Eagle held by Eagle Financial
MHC and public stockholders is separate and apart from any deposit accounts in
American Federal, and cannot be and is not insured by the FDIC or any other
government agency.
Eagle Financial MHC will be controlled by its board of directors, which
will initially consist of the current directors of American Federal. Eagle
Financial MHC will have no stockholders. All members of American Federal Savings
Bank at the time of the reorganization will become members of and have voting
rights transferred to Eagle Financial MHC. The directors of Eagle Financial MHC
will be elected by its members, which could allow the current management of
Eagle Financial MHC, Eagle Bancorp and American Federal Savings Bank to maintain
control over these companies indefinitely.
Liquidation Rights. In the unlikely event of a complete liquidation of
American Federal Savings Bank in its present mutual form, existing holders of
deposit accounts of American Federal Savings Bank are entitled to share in a
liquidating distribution of any assets of American Federal Savings Bank
remaining after the payment of claims of all creditors, including the claims of
all deposit account holders, are satisfied. Each account holder's pro rata share
of such liquidating distribution is in the same proportion as the value of his
or her deposit accounts was to the total value of all deposit accounts in
American Federal Savings Bank at the time of liquidation.
After a complete liquidation of American Federal Savings Bank following
the reorganization, Eagle, as holder of American Federal's common stock, will be
entitled to any assets remaining after a liquidation or dissolution of American
Federal. No depositor, except as discussed below, will have a claim to the
assets of American Federal. However, after a voluntary or involuntary
liquidation, dissolution or winding up of Eagle Financial MHC after the
reorganization, each depositor will have a claim up to the pro rata value of his
or her accounts, in the assets of Eagle Financial MHC remaining after the claims
of the creditors of Eagle Financial MHC are satisfied. Depositors who have
liquidation rights in American Federal Savings Bank immediately prior to the
reorganization will continue to have such rights in Eagle Financial MHC after
the reorganization for so long as they maintain deposit accounts in American
Federal Savings Bank after the reorganization.
45
<PAGE>
After a complete liquidation of Eagle Bancorp, each holder of shares of
the common stock are entitled to receive a pro rata share of Eagle's assets,
following payment of all debts, liabilities and claims of greater priority of or
against Eagle.
Stockholders of Eagle have no liquidation or other rights with respect
to Eagle Financial MHC unless they are also depositors of American Federal.
Federal and State Tax Consequences of the Reorganization
The reorganization may be completed in any manner approved by the
Office of Thrift Supervision that is consistent with the purposes of the plan
and applicable laws, regulations, and policies. However, American Federal
Savings Bank intends to complete the reorganization using a series of mergers as
described below. This structure allows American Federal Savings Bank to retain
all of its historical tax attributes and produces significant savings to
American Federal Savings Bank because it simplifies regulatory approvals and
conditions associated with the reorganization.
The reorganization will be completed as follows:
o American Federal Savings Bank will organize Eagle Financial MHC
initially as a temporary federal stock institution;
o Eagle Financial MHC will then organize a stock corporation under
federal law (i.e., Eagle) as its 100% owned subsidiary; and
o Eagle Financial MHC will also organize a temporary federal stock
institution as its 100% owned subsidiary;
The following transactions will then occur simultaneously:
o American Federal Savings Bank will exchange its charter for a
federal stock savings institution charter;
o Eagle Financial MHC's 100% owned temporary federal stock
institution will merge with and into American Federal, with
American Federal Savings Bank surviving;
o the initially issued stock of American Federal, which will be
constructively received by former members of American Federal
Savings Bank when American Federal Savings Bank becomes a stock
institution, will initially be issued to Eagle Financial MHC in
exchange for liquidation interests in Eagle Financial MHC which
will be held by American Federal's members;
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o Eagle Financial MHC will then contribute 100% of the stock of
American Federal Savings Bank to Eagle which will be a wholly
owned subsidiary of Eagle Financial MHC; and
o Eagle will subsequently offer for sale 47% of its common stock
pursuant to the plan of reorganization.
As a result of these transactions:
o American Federal Savings Bank will be a wholly owned subsidiary
of Eagle;
o Eagle will be a majority-owned subsidiary of Eagle Financial MHC;
and
o the former depositors of American Federal Savings Bank will hold
liquidation interests in Eagle Financial MHC.
Under this structure the reorganization is intended to be a tax-free
reorganization under Internal Revenue Code section 368(a)(1)(F). Also, the
exchange of the shares of American Federal's initial common stock will be deemed
constructively received by American Federal's depositors for liquidation
interests in Eagle Financial MHC is intended to be a tax-free exchange under
Internal Revenue Code section 351.
The reorganization is conditioned on, among other things, the prior
receipt by American Federal Savings Bank of either a private letter ruling from
the IRS and Montana tax authorities or an opinion of American Federal's tax
advisors as to the federal and Montana income tax consequences of the
reorganization to American Federal Savings Bank (in both its mutual and stock
form), Eagle and the Eligible Account Holders and Supplemental Account Holders.
In Revenue Procedure 99-3, the IRS announced that it will not rule on whether a
transaction qualifies as a tax-free reorganization under Internal Revenue Code
section 368(a)(1)(F) or as a tax-free exchange of stock for stock in the
formation of a holding company under Internal Revenue Code section 351. The IRS
indicated that it will rule on significant sub-issues that must be resolved to
determine whether the transaction qualifies under either of these Internal
Revenue Code sections.
Nixon Peabody LLP has issued its opinion regarding federal income tax
consequences of the reorganization. In the following discussion, "Mutual Bank"
refers to American Federal Savings Bank before the reorganization and "Stock
Bank" refers to American Federal Savings Bank after the reorganization.
With regard to the reorganization, Nixon Peabody LLP has issued an
opinion that:
o the reorganization will constitute a reorganization under
Internal Revenue Code section 368(a)(1)(F), and American Federal
Savings Bank (in either its status as Mutual Bank or Stock Bank)
will recognize no gain or loss as a result of the reorganization;
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<PAGE>
o the basis of each asset of Mutual Bank received by Stock Bank in
the reorganization will be the same as Mutual Bank's basis for
such asset immediately prior to the reorganization;
o the holding period of each asset of Mutual Bank received by Stock
Bank in the reorganization will include the period during which
such asset was held by Mutual Bank prior to the reorganization;
o for purposes of Internal Revenue Code section 381(b), Stock Bank
will be treated as if there had been no reorganization and,
accordingly, the taxable year of the Mutual Bank will not end on
the effective date of the reorganization and the tax attributes
of Mutual Bank (subject to application of Internal Revenue Code
sections 381, 382, and 384) will be taken into account by Stock
Bank as if the reorganization had not occurred;
o Mutual Bank's qualifying depositors will recognize no gain or
loss upon their constructive receipt of shares of Stock Bank
common stock solely in exchange for their interest (i.e.,
liquidation rights) in Mutual Bank; and no gain or loss will be
recognized by depositors of Mutual Bank upon the issuance to them
of deposits in Stock Bank in the same dollar amount as their
deposits in the Mutual Bank.
Unlike private rulings of the IRS, an opinion of counsel is not binding
on the IRS and the IRS could disagree with conclusions reached therein. Further,
the opinion is based on the Internal Revenue Code, regulations now in effect or
proposed, current administrative rulings and practice and judicial authority,
all of which are subject to change and any change may be made with retroactive
effect. Additionally, if the IRS disagrees with our attorney's opinion, there is
no guarantee that the IRS would not prevail in a judicial or administrative
proceeding.
Anderson ZurMuehlen & Co., P.C. has issued an opinion that, for
purposes of the Montana corporate income tax, the reorganization will not become
a taxable transaction to American Federal Savings Bank (in either its status as
Mutual Bank or Stock Bank), Eagle Financial MHC, Eagle, the stockholders of the
Stock Bank or the depositors of American Federal. This opinion is not binding on
the Montana taxing authorities. These taxing authorities could disagree with the
conclusions reached in the opinion of Anderson ZurMuehlen & Co., P.C.
Eagle and American Federal Savings Bank have received a letter from
Feldman Financial Advisors, stating its belief that the subscription rights to
be received by members of American Federal Savings Bank do not have any value.
Feldman's letter is based on the fact that these rights are acquired by the
recipients without cost, are nontransferable and of short duration. Further,
such rights give the recipients the right only to purchase the common stock at a
price equal to its estimated fair market value, which will be the same price as
the purchase price for the unsubscribed shares of common stock. If the
subscription rights granted to eligible subscribers are deemed to have an
ascertainable value, receipt of these rights would be taxable only to those
eligible subscribers who exercise the subscription rights, either as a capital
gain or
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ordinary income, in an amount equal to such value. In this case, Eagle and
American Federal Savings Bank could recognize gain on any distribution. Eligible
subscribers are encouraged to consult with their own tax advisor as to the tax
consequence in the event that subscription rights are deemed to have an
ascertainable value. Unlike private rulings, the letter of Feldman Financial
Advisors is not binding on the IRS, and the IRS could disagree with conclusions
reached in the letter. In the event of any disagreement, there can be no
assurance that the IRS would not prevail in judicial or administrative
proceeding.
Accounting Consequences
The reorganization will be accounted for in a manner similar to a
pooling-of-interests under Generally Accepted Accounting Principles.
Accordingly, the value on the books of American Federal of its assets,
liabilities, and capital will be unaffected by the reorganization and will be
reflected in Eagle's and American Federal's consolidated financial statements
based on their historical amounts.
Conditions to the Reorganization
Before we can complete the reorganization, Eagle and American Federal
Savings Bank must receive all the required approvals from the government
agencies that regulate us, including various approvals or non-objections from
the Office of Thrift Supervision. The receipt of such approvals or
non-objections from the Office of Thrift Supervision does not constitute a
recommendation or endorsement of the plan of reorganization by the Office of
Thrift Supervision. Consummation of the reorganization also is subject to
approval of the plan by a majority of the total votes eligible to be cast by
members at a special meeting called for the purpose of approving the plan, as
well as the receipt of satisfactory rulings or opinions with respect to the tax
consequences of the reorganization, as discussed under "-- Federal and State Tax
Consequences" above. The board of directors may decide to consummate the
reorganization even if the offering is terminated. If this happens Eagle
Financial MHC will own all the stock of Eagle and Eagle will own all the stock
of American Federal. Eagle, subject to regulatory approvals, would have the
right to hold a new offering in the future.
Capital and Financial Resources of the Eagle Financial MHC
Eagle Financial MHC may be capitalized with up to $200,000 in the
reorganization. We currently anticipate capitalizing Eagle Financial MHC with
$10,000. After the reorganization, Eagle Financial MHC's capital and financial
resources will initially depend on the earnings from the investment of its
initial capitalization and future dividends from Eagle. The payment of dividends
by Eagle will be subject to declaration by Eagle's board of directors. See "Our
Policy Regarding Dividends."
Additional financial resources also may be available to Eagle Financial
MHC through Eagle's additional stock or debt offerings, or from borrowings from
an unaffiliated lender or
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lenders. In connection with any such borrowings, Eagle Financial MHC can grant a
security interest in the assets of Eagle Financial MHC, including the common
stock held by Eagle Financial MHC. However, a mutual holding company generally
may not pledge the stock of a subsidiary savings bank. It also may not be able
to pledge the stock of Eagle Bancorp unless the proceeds of the loan secured by
the pledge are infused into the institution whose stock is pledged. Further, the
Office of Thrift Supervision must be notified of such pledge within 10 days. Any
borrowings of Eagle Financial MHC would be serviced with available resources,
which initially will consist of dividends from Eagle Bancorp, subject to
applicable regulatory and tax considerations.
Amendment or Termination of the Plan of Reorganization
If deemed necessary or desirable by the board of directors of American
Federal, the plan may be amended by a vote of American Federal's board of
directors, with the concurrence of the Office of Thrift Supervision, at any time
prior to or after submission of the plan to members of American Federal Savings
Bank for approval. The plan may be terminated by the board of directors of
American Federal Savings Bank at any time prior to or after approval by the
members, by a vote with the concurrence of the Office of Thrift Supervision.
Management of Eagle Financial MHC
After the reorganization, Eagle Financial MHC will operate under
essentially the same mutual organization structure as was previously applicable
to American Federal. Directors of Eagle Financial MHC will be classified into
three classes as equal in size as is possible, with one of such classes being
elected on an annual basis for three-year terms by the board of directors of
Eagle Financial MHC. All current members of the board of directors of American
Federal Savings Bank will be the initial members of the board of directors of
Eagle Financial MHC. For information about these persons, whose terms as
directors of Eagle Financial MHC will be the same as their terms as directors of
American Federal, see "Management." The initial executive officers of Eagle will
be persons who are executive officers of American Federal Savings Bank
immediately before the reorganization.
It is not anticipated that the directors and executive officers of
Eagle Financial MHC will receive separate compensation. They may receive
compensation at a later date if Eagle Financial MHC becomes more active.
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THE OFFERING
General. Concurrently with the reorganization, we, are offering shares
of common stock to persons other than Eagle Financial MHC. We are offering
between a minimum of 551,809 shares and an anticipated maximum of 746,566 shares
of common stock in the offering (subject to adjustment to up to 858,550 shares
if our estimated pro forma market value has increased at the conclusion of the
offering). The offering will expire at 10:00 a.m., Montana time, on March 16,
2000, unless extended. The shares of common stock that will be sold in the
offering will constitute 47% of the shares that will be outstanding after
completion of the offering. The minimum purchase is 25 shares of common stock
(minimum investment of $200). Our common stock is being offered at a fixed price
of $8.00 per share in the offering.
Subscription funds may be held by American Federal Savings Bank for up
to 45 days after the last day of the subscription offering in order to
consummate the reorganization and offering and thus, all orders will be
irrevocable until April 30, 2000. The reorganization and offering may not be
completed until American Federal Savings Bank receives approval from the Office
of Thrift Supervision. If the Office of Thrift Supervision does not issue a
letter of approval within 45 days after the offering is completed, or it
requires a material change to the offering prior to the issuance of its approval
or we have not received orders for at least 551,809, we may decide to extend the
offering. In that case, we will resolicit subscribers giving them the right to
modify or rescind their subscriptions and to have their subscription funds
returned with interest at American Federal's passbook rate and withdrawal
authorizations from deposit accounts will be canceled.
We may cancel the offering at any time. If we cancel the offering, we
will return funds and cancel withdrawal authorizations and subscriptions, as
described above.
Conduct of the Offering
Subject to the limitations of the plan, shares of common stock are
being offered in descending order of priority in the subscription offering to:
o Depositors who held aggregate deposit accounts of at least $50
dollars with us on June 30, 1998 (Eligible Account Holders);
o The American Federal Savings Bank employee stock ownership plan;
o Depositors who are not Eligible Account Holders and who held
aggregate deposit accounts of at least $50 dollars with us on
December 31, 1999 (Supplemental Eligible Account Holders); and
o Other members of American Federal Savings Bank which includes
depositors as of January 31, 2000, and borrowers as of January
31, 2000, whose borrowing was also outstanding on April 18, 1991
(Other Members).
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To the extent that shares remain available and subject to market
conditions during or at the completion of the subscription offering, we will
conduct a community and/or syndicated community offering.
Subscription Offering
Subscription Rights. Non-transferable rights to subscribe for the
purchase of common stock have been granted under the plan of reorganization to
the following persons:
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
be given the opportunity to purchase up to 17,500 shares, or $140,000, of common
stock; subject to the overall limitations described under" - Limitations on
Purchases of Common Stock." If there are insufficient shares available to
satisfy all subscriptions of Eligible Account Holders, shares will be allocated
so as to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of 100 shares
or the number of shares ordered. Thereafter, unallocated shares will be
allocated to remaining subscribing Eligible Account Holders whose subscriptions
remain unfilled. These allocations will be provided in the same proportion that
each such subscriber's qualifying deposit bears to the total dollar amount of
qualifying deposits of all subscribing Eligible Account Holders, whose
subscriptions remain unfilled. Subscription rights received by executive
officers and directors and their associates, based on their increased deposits
in American Federal Savings Bank in the one year preceding the eligibility
record date will be subordinated to the subscription rights of other Eligible
Account Holders. To ensure proper allocation of stock, each Eligible Account
Holder must list on his order form all accounts in which he had an ownership
interest as of June 30, 1998, the Eligibility Record Date.
Priority 2: The Employee Plans. The employee plans, including the
employee stock ownership plan, will be given the opportunity to receive, without
payment therefor, the right to purchase up to 10% of the common stock issued in
the offering. It is expected that the employee stock ownership plan will
purchase 8% of the common stock issued in the offering.
Subscription rights received pursuant to this category shall be
subordinated to all rights received by Eligible Account Holders to purchase
shares pursuant to Priority No. 1. However, notwithstanding any other provision
of the plan of reorganization, the employee plans will have a first priority
subscription right to the extent that the total number of shares of common stock
sold in the offering is increased up to 15% above the maximum of the estimated
valuation range as set forth in this prospectus. In the event that the total
number of shares in the offering is so increased, the employee stock ownership
plan will have a priority right to purchase the additional shares in order to
fill its order for stock.
Priority 3: Supplemental Eligible Account Holders. If any stock is
available after satisfaction of subscriptions by Eligible Account Holders and
the employee stock ownership plan, each Supplemental Eligible Account Holder
will have the opportunity to purchase up to 17,500 shares, or $140,000, of
common stock. This purchase is subject to the overall limitations
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described under "Limitations on Purchases of Common Stock." If Supplemental
Eligible Account Holders subscribe for a number of shares which, when added to
the shares subscribed for by Eligible Account Holders and the employee stock
ownership plan, is in excess of the total number of shares offered in the
offering, the shares of common stock will be allocated among subscribing
Supplemental Eligible Account Holders. The allocation will permit each
subscribing Supplemental Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares ordered. Thereafter, unallocated shares will be allocated to
each subscribing Supplemental Eligible account Holder whose subscription remains
unfilled in the same proportion that each subscriber's qualifying deposit bears
to the total dollar amount of qualifying deposits of all subscribing
Supplemental Eligible Account Holders, in each case on December 31, 1999, whose
subscriptions remain unfilled. To ensure proper allocation of stock each
Supplemental Eligible Account Holder must list on his order form all deposit
accounts in which he had an ownership interest as of December 31, 1999.
Priority 4: Other Members. If any stock is available after satisfaction
of all subscriptions by the Eligible Account Holders, the employee plans, and
Supplemental Eligible Account Holders, each Other Member, who is not an Eligible
or Supplemental Eligible Account Holder will have the opportunity to purchase up
to 17,500 shares, or $140,000, of common stock. This purchase is subject to the
overall limitation described under "Limitations on Purchases of Common Stock."
If Other Members subscribe for a number of shares which, when added to the
shares subscribed for by in the preceding categories, is in excess of the total
number of shares offered in the offering, available shares will be allocated
among subscribing Other Members. The allocation will permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his total allocation of common stock equal to the lesser of 100 shares
or the number of shares ordered. Any shares remaining will be allocated among
the subscribing Other Members whose subscriptions remain unsatisfied on a 100
share (or whatever lesser amount is available) per order basis until the
remaining shares have been allocated.
State Securities Laws. We will make reasonable efforts to comply with
the securities laws of any state in the United States in which American Federal
Savings Bank members reside, and will only offer and sell the common stock in
states in which the offers and sales comply with state securities laws. However,
we are not required to offer stock to a person who resides in a foreign country
or resides in a state of the United States with respect to which:
o the number of persons otherwise eligible to subscribe for shares
under the plan is small;
o the offer or sale of shares of common stock to such persons would
require us or American Federal Savings Bank or our employees to
register, under the securities laws of such state, as a broker or
dealer or to register or otherwise qualify its securities for
sale in such jurisdiction; and
o such registration or qualification in the sole judgment of Eagle
would be impracticable or unduly burdensome for reasons of cost
or otherwise.
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Where the number of persons eligible to subscribe for shares in a state
is small, we will base our decision as to whether or not to offer the common
stock in that state on a number of factors. These factors will include, but not
be limited to, the size of accounts held by account holders in the state, the
cost of registering or qualifying the shares or the need to register Eagle or
American Federal, its officers, directors or employees as brokers, dealers or
salesmen.
Restrictions Against Transfer of Subscription Rights and Shares. The
plan prohibits any person with subscription rights, including Eligible Account
Holders, Supplemental Eligible Account Holders, and Other Members, from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the plan
or the shares of common stock to be issued when they are exercised. Subscription
rights may be exercised only by the person to whom they are granted and only for
his or her account. Each person subscribing for shares will be required to
certify that such person is purchasing shares solely for his or her own account
and that such person has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of common stock. We will pursue any and all
legal and equitable remedies in the event we become aware of the transfer of
subscription rights. We will not honor orders which we determine involve the
transfer of such rights.
Expiration Date. The subscription offering will expire at 10:00 a.m.,
Montana time, on March 16, 2000, unless it is extended, up to an additional 45
days with the approval of the Office of Thrift Supervision, if necessary, but
without additional notice to subscribers. Extensions after such date will
require resolicitation of subscribers. Subscription rights will become void if
not exercised prior to the extended expiration date.
Community Offering
If less than the total number of shares of common stock offered are
subscribed for in the subscription offering, shares remaining unsubscribed may
be made available for purchase in the community offering to members of the
public. The community offering is expected to take place immediately after the
end of the subscription offering. However, it may also begin at any time during
the subscription offering, subject to the discretion of Eagle Bancorp. The
maximum amount of common stock that any person may purchase in the community
offering is 17,500 shares, or $140,000, subject to the overall limitation of
$200,000 described in "Limitations on Purchases of Common Stock." In the
community offering, if any, we may give preference first, to borrowers of
American Federal Savings Bank as of January 31, 2000; second to natural persons
residing in Lewis and Clark, Gallatin, Jefferson, Silverbow and Broadwater
counties in Montana and third, to other natural persons residing in the State of
Montana. Shares may also be made available to the general public. We will
attempt to issue common stock in such a manner as to promote a wide distribution
of common stock.
If purchasers in the community offering, whose orders would otherwise
be accepted, subscribe for more shares than are available for purchase, the
shares available to them will be allocated among persons submitting orders in
the community offering in an equitable manner to
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be determined by us. Such allocations will be made giving priority in the manner
described above. To the extent the person is a corporation or other business
entity, the principal place of business or headquarters shall be in these
counties. We may utilize depositor loan records or such other evidence to make a
determination as to whether a person is a resident. In all cases, the
determination of resident status will be made by us in our sole discretion.
The community offering, if any, may commence simultaneously with,
during or subsequent to the completion of the subscription offering. The
community offering must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by the Office of Thrift
Supervision. We may conclude the community offering as soon as we receive orders
for at least the minimum number of shares available for sale.
We, in our absolute discretion, reserve the right to reject any or all
community offering orders in whole or in part in our sole discretion , at the
time of receipt or as soon as practicable following the completion of the
community offering.
Syndicated Community Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the subscription offering, we may offer
shares in a syndicated community offering on a best-efforts basis through a
group of broker dealers to be managed by Ryan, Beck & Co. in a manner which will
promote a wide distribution of the common stock. Orders received in connection
with the syndicated community offering, if any, will receive a lower priority
than orders received in the subscription offering and community offering. Common
stock sold in the syndicated community offering will be sold at the same price
as all other shares in the subscription offering. We have the right to reject
orders, in whole or in part, in our sole discretion in the syndicated community
offering. No person will be permitted to purchase more than 17,500 shares, or
$140,000, of common stock in the syndicated community offering. Neither Ryan,
Beck & Co. nor any other broker-dealer will be obligated to purchase any shares
in the syndicated community offering. The syndicated community offering may
commence during or after the community offering, if any. It must be completed
within 45 days of the completion of the subscription offering unless extended by
the Office of Thrift Supervision. If a syndicated community offering cannot be
effected or is deemed inadvisable, we will seek to make other arrangements for
distribution of the shares.
Limitations on Purchases of Common Stock
The following limitations have been imposed on purchases of shares of
common stock:
o The aggregate amount of our outstanding common stock owned or
controlled by persons other than Eagle Financial MHC at the close
of the offering will be less than 50% of Eagle's total
outstanding common stock.
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o The maximum number of shares of common stock which may be
purchased in the subscription offering by any person in the
first, third and fourth priorities cannot exceed 17,500 shares,
or $140,000.
o The maximum number of shares of common stock which may be
purchased in the community offering by any person cannot exceed
17,500 or $140,000.
o The maximum number of shares of common stock which may be
purchased in the syndicated community offering by any person
cannot exceed 17,500 shares, or $140,000.
o The maximum number of shares of common stock which may be
subscribed for or purchased in all categories of the offering
combined by any person together with any associate or group of
persons acting in concert is 25,000 shares, or $200,000. However,
our employee plans may subscribe for up to 10% of the common
stock issued in the offering, although the employee stock
ownership plan currently intends to purchase only 8% of such
shares.
o The maximum number of shares of common stock which may be
purchased in all categories in the offering by executive officers
and directors of American Federal Savings Bank and their
associates in the aggregate shall not exceed 33% of the total
number of shares of common stock issued in the offering
o A minimum of 25 shares of common stock must be subscribed for
each person ordering shares in the offering.
o Depending on market or financial conditions, the board of
directors of American Federal may decrease or increase the
maximum purchase limitations in the plan, provided that the
purchase limitations may not be increased to a percentage in
excess of 5% of the offering or 42,928 shares. If we increase the
maximum purchase limitations, we are only required to resolicit
persons who subscribed for the maximum purchase amount in the
subscription offering and may, in our sole discretion, resolicit
other large subscribers.
o If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation
range to up to 858,550 shares the additional shares will be
allocated in the following order of priority:
o to fill the employee plan's subscription;
o if there is an oversubscription at the Eligible Account
Holder level, to fill unfilled subscriptions of Eligible
Account Holders;
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o if there is an oversubscription at the Supplemental Eligible
Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders;
o if there is an oversubscription at the Other Member level,
to fill unfilled subscriptions of Other Members; and
o to fill unfilled subscriptions in the community offering.
o No person shall be entitled to purchase any common stock to the
extent such purchase would be illegal under any federal law or
state law or regulation or would violate regulations or policies
of the National Association of Securities Dealers, particularly
those regarding free riding and withholding. Eagle or American
Federal Savings Bank and or its agents may ask for an acceptable
legal opinion from any purchaser as to the legality of such
purchase and may refuse to honor any purchase order if such
opinion is not timely furnished.
o The board of directors has the right to reject any order
submitted by a person whose representations the board of
directors believes to be false or who the Board otherwise
believes is violating, circumventing, or intends to violate,
evade, or circumvent the terms and conditions of the plan.
o The foregoing restrictions on purchases by any person also apply
to purchases by persons acting in concert under applicable
regulations of the Office of Thrift Supervision.
The term "acting in concert" is defined in the plan and OTS rules.
Acting in concert will occur when there is knowing participation in a joint
activity or interdependent conscious parallel action toward a common goal
whether or not pursuant to an express agreement. It also may occur where there
is a combining or pooling of voting interests in securities of an issuer for a
common purpose pursuant to any contract, understanding, relationship, agreement
or other arrangement, whether written or otherwise. The term "associate" of a
person is defined in the plan. The term associate also applies to any
corporation or organization other than American Federal Savings Bank or a
majority-owned subsidiary of American Federal Savings Bank of which such person
is an officer or partner or is, directly or indirectly, the beneficial owner of
10% or more of any class of equity securities, any trust or other estate of
which such person is a substantial beneficiary for which that person serves as
trustee or in a similar fiduciary capacity. It excludes tax-qualified employee
stock benefit plans or tax-qualified employee stock benefit plans of which a
person is a substantial beneficiary or serves as a trustee. Also, except for
purposes of aggregating total shares that may be held by officers and directors,
the term associate does not include any tax-qualified employee stock benefit
plan. The term associate also includes any relative or spouse of such person or
any relative of such spouse, who has the same home as such person or who is a
trustee or officer of American 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 such person, and therefore, all shares purchased by such
corporation would be included with the number of shares which such person
individually could purchase under the above limitations. We have the right, in
our sole discretion, to determine whether prospective purchasers are
"associates" or "acting in concert All such determinations are in our sole
discretion and may be based on whatever evidence we believe to be relevant.
Under regulations of the Office of Thrift Supervision, directors of American
Federal Savings Bank are not deemed to be affiliates or a group acting in
concert with other directors solely as a result of membership on the board of
directors of American Federal.
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Each person purchasing shares of the common stock in the offering will
be deemed to confirm that such purchase does not conflict with the maximum
purchase limitation. If this purchase limitation is violated by any person or
any associate or group of persons affiliated or otherwise acting in concert with
such persons, we will have the right to purchase from such person at the
purchase price per share all shares acquired by such person in excess of such
purchase limitation. Further, we will have the right, if such excess shares have
been sold by such person, to receive the difference between the purchase price
per share paid for such excess shares and the price at which such excess shares
were sold by such person. Our right to purchase these excess shares will be
assignable.
Common stock purchased in the offering will be freely transferable,
except for shares purchased by directors and officers of American Federal. For
restrictions on the common stock purchased by directors and officers, see "--
Restrictions on Transferability by Directors and Officers."
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering a properly executed order form and payment by mail
or overnight courier to the address designated on the order form or may deliver
the order form in person to any office of American Federal. If the employee
stock ownership plan subscribes for shares during the subscription offering, it
will not be required to pay for the shares until the completion of the offering.
Once tendered, subscription orders cannot be revoked without the consent of
American Federal Savings Bank unless the reorganization is not completed within
45 days of the expiration date.
If a stock order form:
o is not delivered and is returned to American Federal Savings Bank
by the U.S. Postal Service;
o is not received or is received after the applicable expiration
date;
o is not completed correctly or executed;
o is not accompanied by the full payment in the manner described on
the order form including instances where account or certificate
balance withdrawal is authorized; or
o is not mailed pursuant to a "no mail" order placed in effect by
the account holder,
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the subscription rights for the person to whom the rights have been granted will
lapse as though such person failed to return the completed order form within the
time period specified.
However, we may, but will not be required to, waive any irregularity on
any order form or require the submission of corrected order forms or the
remittance of full payment for subscribed shares by such date as we may
otherwise specify. The waiver of an irregularity on an order form in no way
obligates us to waive any other irregularity on any other order form. Waivers
will be considered on a case by case basis. We reserve the right in our sole
discretion to accept or reject orders received on photocopy or facsimile order
forms. Our interpretation of the terms and conditions of the plan and of the
acceptability of the order forms will be final, subject to the authority of the
Office of Thrift Supervision.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
prospectus.
Payment for Shares. For subscriptions to be valid, payment and all
properly completed and executed order forms, must be received by us on or prior
to the expiration date specified on the order form unless we extend the date.
Payment for shares of common stock may be made
o by personal check, bank draft or money order, or
o by authorization on the order form for withdrawal from deposit
accounts maintained with American Federal.
Payment by Withdrawal From American Federal Savings Bank Deposit
Accounts. Appropriate means by which such withdrawals may be authorized are
provided in the order form. Once a subscriber authorizes a withdrawal, the
subscriber may not use any of the withdrawal amount for any purpose other than
to purchase the common stock for which he or she has subscribed. A hold will be
placed on the funds until the offering has been completed or terminated. In the
case of payments authorized to be made through withdrawal from savings accounts,
all sums authorized for withdrawal will continue to earn interest at the
contract rate until the offering has been completed. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares. If a partial withdrawal
results in a certificate account with a balance less than the applicable minimum
balance requirement, the certificate will be canceled at the time of withdrawal,
without penalty. The remaining balance will then earn interest at the passbook
savings account rate subsequent to the withdrawal.
Payment By Check. In the case of payments made by check, bank draft or
money order, such funds will be placed in a segregated account and interest will
be paid at the passbook savings account rate from the date payment is received
until the offering is completed. An executed order form, once we receive it, may
not be modified, amended, or rescinded without our consent. However, if the
offering is not completed within 45 days after the conclusion of the
subscription offering, subscribers will be given the opportunity to maintain,
increase, decrease,
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or rescind their subscription for a specified period of time. If a response is
not received, a subscriber will be deemed to have rescinded his order. If the
offering is not completed for any reason, all funds submitted pursuant to the
offerings will be promptly refunded with interest as described above.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the offering. Persons with IRAs maintained at
American Federal Savings Bank must have their accounts transferred to an entity
such as a broker-dealer able to administer self-directed IRAs and to transact
the purchase of shares of common stock in the offering. There will be no early
withdrawal or IRS interest penalties for such transfers. Assistance on how to
purchase stock in the offering through an IRA can be obtained from our stock
information center. Depositors interested in using funds in an American Federal
Savings Bank IRA to purchase common stock should contact the stock information
center as soon as possible because IRA purchases take time.
Federal regulations prohibit American Federal Savings Bank from lending
funds or extending credit to any person to purchase the common stock in the
reorganization.
Stock Information Center. The stock information center is located at
1400 Prospect Avenue, Helena, Montana. Its phone number is (800) 635-5930.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed to the persons entitled thereto at the
address noted on the order form, as soon as practicable following consummation
of the offering. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the common stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of stock for which they subscribed.
Restriction on Sales Activities
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock in jurisdictions where such
participation is not prohibited. Other
employees of American Federal Savings Bank may participate in the offering in
ministerial capacities. Such other employees have been instructed not to solicit
offers to purchase common stock or provide advice regarding the purchase of
common stock. Questions of prospective purchasers will be directed to executive
officers of American Federal Savings Bank or registered representatives of Ryan,
Beck & Co. No officer, director or employee of American Federal Savings Bank
will be compensated in connection with the person's solicitations or other
participation in the offering by the payment of commissions or other
remuneration based either directly or indirectly on transactions in the common
stock.
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Restrictions on Repurchase of Shares
Generally, during the first six months following the reorganization,
Eagle may not repurchase its shares. During each of the second six months,
second and third years following the reorganization, Eagle may repurchase up to
five percent of the outstanding shares provided they are purchased in public
markets and not privately from individuals or other entities. Repurchases must
not cause us to become undercapitalized and at least 10 days prior notice of the
repurchase must be provided to the Office of Thrift Supervision. The Office of
Thrift Supervision may disapprove a repurchase program after it determines that:
o the repurchase program would adversely affect our financial
condition and capital position;
o the information submitted is not enough to base a conclusion as
to whether our financial condition and capital position would be
adversely affected; or
o a valid business purpose was not demonstrated.
In addition, SEC rules also govern the method, time, price, and number of shares
of common stock that may be repurchased by Eagle and affiliated purchasers. If,
in the future, the rules and regulations regarding the repurchase of stock are
liberalized, Eagle may utilize the rules and regulations then in effect.
Stock Pricing and the Number of Shares to be Offered
Feldman Financial, which is experienced in the valuation and appraisal
of business entities, including savings institutions, has been retained to
prepare an appraisal of the estimated pro forma market value of the common
stock. This independent valuation expresses our pro forma market value in terms
of an aggregate dollar amount. Feldman Financial will receive fees of $17,500
for its appraisal services, including preparing and issuing the independent
valuation and subsequent updates, and $5,000 for assistance in preparation of
our business plan, plus its reasonable out-of-pocket expenses incurred in
connection with the independent valuation and business plan. American Federal
Savings Bank has agreed to indemnify Feldman Financial against liabilities and
expenses arising out of or based on any misstatement or untrue statement of a
material fact contained in the information supplied by American Federal Savings
Bank to Feldman Financial. We will not indemnify Feldman Financial where Feldman
Financial is determined to have been negligent or failed to exercise due
diligence in the preparation of the independent valuation.
Feldman Financial has determined that as of January 7, 2000 the
estimated aggregate pro forma market value of our common stock was $11.05
million. Pursuant to regulations, this estimate results in an estimated
valuation range with a minimum of $9.39 million and a maximum of $12.71 million.
The board of directors reviewed and approved Feldman Financial's appraisal. The
board also reviewed the methodology and the assumptions
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used by Feldman Financial in preparing its appraisal. In particular, the
appraisal considered (i) American Federal's financial condition and results of
operations for the year ended June 30, 1999, and three months ended September
30, 1999, (ii) financial comparisons of American Federal Savings Bank in
relation to financial institutions of similar size and asset quality and (iii)
stock market conditions generally and in particular for financial institutions,
all of which are set forth in the appraisal. The number of shares, are subject
to change if the independent valuation changes at the conclusion of the
offering.
In accordance with regulations, the number of shares of Eagle common
stock to be outstanding after the reorganization must be based on the valuation.
The board of directors established a price per share of $8.00. Therefore, the
number of shares to be issued in the reorganization will be between 1,174,063
and 1,588,438, subject to a 15% increase to 1,826,073 shares The offering range
must also be based on the valuation. The board of directors has decided to offer
for sale 47% of Eagle's to-be outstanding shares. The remaining shares will be
owned by Eagle Financial MHC. The total number of shares of common stock that by
regulation will be sold to persons other than the mutual holding company in the
offering cannot exceed 49.99% of our issued and outstanding voting stock. We are
offering between 551,809 and 746,566 shares of stock, subject to a 15% increase
to 858,550 shares.
If the updated estimate of the pro forma market value of American
Federal Savings Bank just prior to the conclusion of the offering remains within
the estimated valuation range, there will be no change to the range of shares
issued to Eagle Financial MHC in the reorganization and sold to subscribers in
the offering. If, however, the updated valuation exceeds $14.61 million or is
less than $9.39 million, we may:
o terminate the offering, return all subscription funds promptly,
paying interest at the passbook rate and cancel all account
withdrawal authorizations;
o establish a new estimated valuation range and either:
o hold new subscription and community offerings; or
o provide subscribers the opportunity to change or cancel
their orders (a "resolicitation"), or
o take such other actions as permitted by the Office of Thrift
Supervision in order to complete the offering.
The independent valuation is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing the common
stock. In preparing the independent valuation, Feldman Financial has relied on
and assumed the accuracy and completeness of financial and statistical
information provided by American Federal. Feldman Financial did not
independently verify the financial statements and other information provided by
American Federal. Feldman Financial also did not value independently the assets
and
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<PAGE>
liabilities of American Federal. The independent valuation considers American
Federal Savings Bank only as an operating business. It should not be considered
as a indication of the value of American Federal Savings Bank if all of its
assets were sold or if American Federal Savings Bank were sold. Moreover,
because such independent valuation is based on estimates and projections, all of
which are subject to change from time to time, no assurance can be given that
persons purchasing the common stock will be able to sell shares of common stock
at a price equal to or greater than the $8.00 per share purchase price.
Plan of Distribution and Marketing Arrangements
The common stock will be offered in the offering principally by the
distribution of this prospectus. It is expected that a registered representative
employed by Ryan, Beck & Co., Inc. will be working at, and supervising the
operation of, the stock information center. Ryan, Beck & Co. will be responsible
for responding to questions regarding the reorganization and the offering.
American Federal Savings Bank and Eagle have entered into an agency
agreement with Ryan, Beck & Co. under which Ryan, Beck & Co. will provide
advisory assistance and assist, on a best-efforts basis, in the solicitation of
subscriptions for the common stock in the offering. Ryan, Beck & Co. is a
broker-dealer registered with the National Association of Securities Dealers,
Inc. In the offering, Ryan, Beck & Co. will assist in the design and
implementation of a marketing strategy for the offering. Ryan, Beck & Co. will
also provide such other general advice and assistance as may be requested to
promote the successful completion of the offering. Ryan, Beck & Co. has also
agreed to manage a group of broker-dealers if we conduct a best efforts
syndicated community offering.
Ryan, Beck & Co. will receive as compensation, an advisory and
marketing fee of $165,000. In the event that sufficient shares of stock are not
sold through the subscription offering or in the community offering, Ryan, Beck
& Co. will organize a syndicated community offering for which it will receive
additional compensation for any sales it makes. We will pay the broker-dealers,
including Ryan, Beck & Co. , a sales commission of 6% of the aggregate price of
shares sold by the broker-dealers. Ryan, Beck & Co. will also be reimbursed for
up to $25,000 of its legal fees and for out-of-pocket expenses, not to exceed
$25,000. American Federal Savings Bank has agreed to indemnify Ryan, Beck & Co.,
to the extent allowed by law, for reasonable costs and expenses in connection
with claims or liabilities, including liabilities under the Securities Act of
1933, as amended. See "Pro Forma Data" for further information regarding
expenses of the offering.
Restrictions on Transferability by Directors and Officers
Shares of the common stock purchased by directors or executive officers
of American Federal Savings Bank cannot be sold for a period of one year
following completion of the reorganization, except for a disposition of shares
after the death of an officer or director. Accordingly, stock certificates
issued to directors and officers will bear a legend restricting their sale. Any
shares
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<PAGE>
issued to directors and officers as a stock dividend, stock split, or otherwise
with respect to restricted stock are subject to the same restriction.
For a period of three years following the reorganization, no director
or executive officer of American Federal Savings Bank or their associates may
purchase our common stock except through a broker or dealer registered with the
SEC. This prohibition does not apply to negotiated transactions including more
than 1% of our common stock. It also does not apply to purchases made for tax
qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual officers or directors.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the reorganization and offering, no depositor
may transfer or enter into an agreement or understanding to transfer any
subscription rights or the legal or beneficial ownership of the shares of common
stock to be purchased by such person in the offering. Depositors who submit an
order form will be required to certify that their purchase of common stock is
solely for their own account and they have not entered into an agreement or
understanding regarding the sale or transfer of their shares. We intend to
pursue any and all legal and equitable remedies if we become aware of any such
agreement or understanding, and will not honor orders we reasonably believe to
involve such an agreement or understanding.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations is intended to assist you in understanding American Federal's
financial condition and results of operations. The information in this section
should also be read in conjunction with American Federal's financial statements
and notes to the financial statements beginning at page F-_______. Management's
discussion and analysis of financial condition and results of operations is
intended to assist you in understanding American Federal's financial condition
and results of operations. The information in this section should also be read
in conjunction with American Federal's financial statements and notes to the
financial statements beginning at page F-_______.
- --------------------------------------------------------------------------------
General
Eagle is a recently formed company. It has no operating history. The
following discussion relates only to the financial condition and results of
operations of American Federal. After the reorganization, Eagle will own all of
the stock of American Federal.
American Federal Savings Bank has operated as a community savings bank.
We raise money by offering FDIC-insured deposit products and lending this money
primarily for the purpose of home financing. As of September 30, 1999, 67.88% of
our total loans were residential mortgage loans with fixed rates and 3.68% were
residential mortgage loans with adjustable rates. Total first mortgage loans at
September 30, 1999, were $80.68 million or 80.08% of our loan portfolio. Our
other loan products include home equity loans, consumer and commercial loans.
These loans totaled $20.07 million or 19.92% of our total loan portfolio.
Our results of operations depend primarily on net interest income. Net
interest income is determined by the difference between rates of interest we
earn on our loans and investments and the rates we pay on interest-bearing
deposits and borrowings. This is our interest rate spread. Our net interest
income is also determined by the relative amounts of loans and investments and
interest-bearing deposits and borrowings. Our results of operations are also
affected by noninterest income. Noninterest income includes income from customer
deposit account service charges, loan servicing fee income and gains and losses
from the sale of loans. Noninterest expense is another factor in our results of
operations. It includes salary and employee benefits, federal deposit insurance
premiums, office occupancy costs and advertising and data processing. Our
results of operations also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates and
government policies and actions of regulatory authorities. All of these are
beyond our control.
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Note Concerning Forward-Looking Statements
This document contains forward-looking statements which are identified
by the use of words such as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential." Example of forward-looking statements
include, but are not limited to, estimates with respect to our financial
condition, results of operations and business. They are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to, general and local
economic conditions, changes in interest rates, deposit flows, demand for
mortgage or other loans, real estate values and competition; changes in
accounting principles, policies or guidelines; changes in legislation or
regulation; and other economic, competitive, governmental, regulatory and
technological factors affecting our operations, pricing, products and services.
You are cautioned not to place undue reliance on these forward-looking
statements which speak only as of their dates.
Management Strategy
American Federal Savings Bank was founded in 1922 and has operated
continuously in Helena since that time. Our primary management strategy has been
to offer a variety of savings deposits, including checking and NOW accounts as
well as residential loans, consumer loans and commercial loans, to generate
earnings and expand our customer base in the Montana counties in which we
operate. We believe we provide competitive rates and services to individuals and
businesses which we have served since 1922. We do this by:
o Emphasizing core deposits. Our core deposits, including IRA
certificates of deposit, were 68.93% of our total deposits, at
September 30, 1999. Core deposits are a stable source of funds,
and are less sensitive to withdrawal when rates fluctuate than
are certificates of deposit. Our employees are actively
encouraged through our sales culture to promote our core deposit
products. We include as core deposits, checking accounts, NOW
accounts, passbook and statement savings accounts, money market
accounts and IRA accounts funded by certificates of deposit.
o Improving customer service. We believe that successful banking in
our community begins with customer service. In that connection,
in 1997 we opened a new, larger headquarters building in Helena.
Our headquarters building is also our largest branch facility. It
has four drive-through banking lanes, and a large parking area.
We are committed to customer service in other ways as well,
including convenient operating hours, assuring the tenure and
continuity of our branch managers and senior staff, offering
automated voice response systems for customer inquiries and
developing and promoting new loan and deposit products to suit
our customers' needs and objectives. We have emphasized a sales
culture, and train our staff to make customers aware of our
products and services.
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<PAGE>
o Increasing noninterest income. We believe we have a relatively
high amount of noninterest income. Our noninterest income to
average assets ratio was an annualized .90% for the three months
ended September 30, 1999, and 1.23% for the year ended June 30,
1999. We have emphasized both core deposit growth and loan sales
growth as methods of achieving additional fee income.
o Maintaining asset quality. Our high asset quality is reflected in
our ratio of non-performing loans to total assets, which was .59%
at September 30, 1999, and .54% at June 30, 1999. Our ratio of
non-performing loans to total loans was .88% at September 30,
1999; and .83% at June 30, 1999. We have achieved these levels of
high asset quality through investment in high grade securities,
conservative underwriting and loan monitoring, local lending, the
experience of our senior lending officers and a strong awareness
of business and economic trends in our market area.
o Lending Diversification. We are committed to expanding our loan
products in addition to being a home mortgage lender. This
strategy began in the early 1980's and has gradually enabled us
to supplement our mortgage lending with consumer, commercial
business and commercial real estate loans.
Asset/Liability Management
Our assets and liabilities may be analyzed by examining the extent to
which they are interest rate sensitive and by evaluating the expected effects of
interest rate changes on our net portfolio value. The ability to maintain
consistent net interest income is largely dependent upon the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates.
Our lending activities have historically emphasized long-term fixed and
adjustable rate mortgage loans secured by one-to-four family residences. Our
deposits mature or are subject to repricing within a relatively short period of
time. The combination of long term fixed rate loans and shorter term repricing
of deposits has historically caused the income earned by us on our loans to
adjust more slowly to changes in interest rates than the interest we pay on our
deposits.
We typically sell a significant portion of our residential loan
originations to the secondary market and prefer to sell residential loans to
investors on a servicing retained basis. This allows us to increase our fee
income. It also allows us to provide a high degree of localized service to our
customers. To accomplish this, we became an approved Seller/Servicer for both
the Federal Home Loan Mortgage Corporation, or Freddie Mac and the Federal
National Mortgage Association, or Fannie Mae. A significant amount of our
conforming loan sales are to Freddie Mac. These loans are sold for cash with
servicing retained. To a much lesser extent, we occasionally sell loans
(primarily Federal Housing Administration, Veteran's Administration or Rural
Development insured or guaranteed loans) to other investors with servicing
released. All
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<PAGE>
loans are sold without recourse to us. We expect to continue our present
practice of selling most of our conforming loans to Freddie Mac for the
foreseeable future. We were servicing $112.23 million in loans for the benefit
of others at September 30, 1999.
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. The majority of our assets and liabilities are
sensitive to changes in interest rates. Therefore, our most significant form of
market risk is interest rate risk, or the effect on net interest income of
changes in interest rates. Our lending activities have historically emphasized
the origination of long-term, fixed rate loans secured by single-family
residences. The primary source of funds has been deposits with substantially
shorter maturities. While having deposits and borrowings that reprice more
frequently than loans and investments is generally beneficial to net interest
income during a period of declining interest rates, it is generally detrimental
during periods of rising interest rates.
The board of directors has established an asset/liability committee
which consists of senior officers and the Chairman of the Board. The committee
meets on an as needed basis, but at least quarterly, to review loan and deposit
pricing and production volumes, interest rate risk analysis, liquidity and
borrowing needs, and a variety of other asset and liability management topics.
To reduce the effect of interest rate changes on net interest income,
we have adopted various strategies to enable us to improve matching of asset
maturities to deposits and borrowings. The principal elements of these
strategies include seeking to originate and retain loans with adjustable rate
features or fixed rate loans with short maturities. We also sell 30 year fixed
rate mortgage loans in the secondary market to Fannie Mae or Freddie Mac or, on
occasion, other private investors. We also try to attract low or no cost
transaction accounts and lengthen the terms in which our liabilities mature when
we think it is beneficial from a cost standpoint. We do this through a concerted
emphasis on NOW accounts and noninterest checking account sales by our tellers.
When market conditions permit, we also extend maturities on certificates of
deposit, lengthen terms of Federal Home Loan Bank advances when appropriate and
originate and hold in our portfolio adjustable rate loans which have annual
interest rate adjustments. We also purchase securities with adjustable rates and
short-term maturities.
Quantitative Analysis. Exposure to interest rate risk is actively
monitored by management. Our objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. We use a variety of tools, including the
Office of Thrift Supervision Net Portfolio Value Model to monitor our exposure
to interest rate risk, which calculates changes in net portfolio value. The
Office of Thrift Supervision measures an institution's interest rate risk by the
changes in its Net Portfolio Value as a result of a hypothetical change in
market interest rates.
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The following table presents our Net Portfolio Value as of September
30, 1999. This table is calculated by the Office of Thrift Supervision based on
information provided by us.
Net Portfolio Value
-----------------------------------------------------
Change in Board
Interest Rates Estimated Increase (Decrease) Approved
(basis points)(1) Amount in Net Portfolio Value Limit(2)
- ----------------- ------ ------------------------------ --------
+300 bp $12,459 $(6,118) (33)% (50)%
+200 bp 14,668 (3,909) (21) (35)
+100 bp 16,781 (1,795) (10) (20)
0 bp 18,577 0 0 0
-100 bp 19,761 1,184 6 (10)
-200 bp 20,855 2,278 12 (15)
-300 bp 22,238 3,661 20 (20)
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
(2) Represents maximum change pursuant to policy set by board of directors.
Future interest rates or their effects on Net Portfolio Value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, loan prepayments, and deposit
run-offs, and should not be relied upon as indicative of actual results.
Shortcomings are inherent in such computations. Although some assets and
liabilities may have similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the market interest
rates. The interest rate on some assets and liabilities may fluctuate in advance
of changes in market interest rates, while rates on other types of assets and
liabilities may lag behind changes in market interest rates. Assets such as
adjustable rate mortgages, generally have features which restrict making
adjustments to a borrower's interest rate on a short-term basis and over the
life of the loan. After a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed in making
calculations set forth above. Additionally, an increased credit risk may result
if our borrowers are unable to meet their repayment obligations as interest
rates increase.
Interest Rate Risk Analysis. In addition to the asset/liability
committee, the board of directors reviews our asset and liability policies. The
board of directors reviews interest rate risk and interest rate trends
quarterly, as well as liquidity and capital ratio requirements. Management
administers the policies and determinations of the board of directors with
respect to our asset and liability goals and strategies. We expect that our
asset and liability policy and strategies will continue as described so long as
competitive and regulatory conditions in the financial institution industry and
market interest rates continue as they have in recent years.
Analysis of Net Interest Income
Our earnings have historically depended upon our net interest income,
which is the difference between interest income earned on loans and investments
and interest paid on deposits and any borrowed funds. It is the single largest
component of our operating income. Net interest income is affected by (i) the
difference between rates of interest earned on our loans and investments and
rates paid on our interest-bearing deposits and borrowings (the "interest rate
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spread") and (ii) the relative amounts of our loans and investments and
interest-bearing deposits and borrowings.
The following tables present an analysis of selected aspects of our
operations during the recent periods indicated. The first table presents the
average balances of and the interest and dividends earned or paid on each major
class of our loans and investments and interest-bearing deposits and borrowings.
Nonaccruing loans are included in balances for all periods. Average balances are
daily average balances. The yields and costs include fees, which are considered
adjustments to yields.
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<TABLE>
<CAPTION>
For the Three Months Ended September 30,
-----------------------------------------------------------------
At September 30, 1999 1999 1998
--------------------- ----------------------------- ------------------------------
Average Interest Average Interest
Yield/ Daily and Yield/ Daily and Yield/
Balance Rate Balance Dividends Rate Balance Dividends Rate
------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Federal Home Loan Bank Stock...... $ 1,325 7.25% $ 1,301 $ 24 7.38% $ 1,208 $ 23 7.62%
Loans receivable, net(1).......... 100,449 7.89 98,917 1,982 8.01 97,210 2,074 8.53
Investment securities............. 30,950 5.88 31,863 460 5.75 26,157 395 6.04
--------
Interest-bearing deposits with
banks............................ 550 5.53 3,239 42 5.19 6,437 90 5.59
-------- -------- ------ -------- -----
Total interest-earning assets.......... 133,274 7.41 135,320 2,508 7.41 131,012 2,582 7.85
Noninterest-earning assets............. 15,105 14,517 13,174
-------- -------- --------
Total assets........................... $148,379 $149,837 $144,186
======== ======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposit accounts:
Money market...................... $ 15,906 3.71 $ 15,294 $ 142 3.71 $ 11,448 $ 98 3.42
Passbooks......................... 21,030 3.00 21,264 161 3.03 20,156 153 3.04
Checking.......................... 21,990 1.50 21,827 75 1.37 21,449 81 1.51
Certificates of deposit........... 58,917 5.02 58,501 741 5.07 57,261 790 5.52
Advances from Federal Home Loan
Bank............................. 8,508 6.32 10,389 169 6.51 13,572 223 6.57
-------- -------- ------ -------- ------
Total interest-bearing liabilities..... 126,351 3.99 127,275 1,288 4.05 123,886 1,345 4.30
Noninterest-bearing liabilities........ 1,992 2,317 2,393
Noninterest checking................... 5,961 6,011 4,532
-------- --------- --------
Total liabilities...................... 134,304 135,603 130,811
Total equity........................... 14,075 14,234 13,375
-------- -------- --------
Total liabilities and equity........... $148,379 $149,837 $144,186
======== ======== ========
Net interest income.................... $1,220 $1,237
====== ======
Net interest rate spread(2)............ 3.42% 3.36% 3.55%
==== ==== ====
Net interest margin(3)................. 3.61% 3.78%
==== ====
Total interest-earning assets to total
interest-bearing liabilities........... 105.55% 106.32% 105.68%
====== ====== ======
</TABLE>
- -----------
(1) Includes loans available for sale and nonaccuring loans.
(2) Net interest rate spread represents the difference between the average
yield on interest-earnings loans and investments and the average rate on
interest-bearing deposits and borrowings.
(3) Net interest margin represents income before the provision for loan losses
divided by average interest-earning loans and investments.
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<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------------------------------------
1999 1998
---------------------------------- --------------------------------
(Dollars in thousands)
Average Interest Average Interest
Daily and Yield/ Daily and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Federal Home Loan Bank Stock.......... $ 1,243 $ 94 7.56% $ 1,151 $ 91 7.91%
Loans receivable, net(1).............. 97,392 8,049 8.26 99,884 8,495 8.50
Investment securities................. 25,362 1,498 5.91 23,967 1,457 6.08
Interest-bearing deposits with banks.. 7,661 381 4.97 4,026 225 5.59
-------- ------- -------- -------
Total interest-earning assets............ 131,658 10,022 7.61 129,028 10,268 7.96
=======
Noninterest-earning assets............... 13,472 13,150
-------- --------
Total assets............................. $145,130 $142,178
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposit accounts:
Money market........................ $ 12,441 $ 434 3.49 $ 11,423 $ 386 3.38
Passbook ........................... 20,393 614 3.01 20,027 603 3.01
Checking............................ 21,406 298 1.39 21,117 363 1.72
Certificates of deposit............. 56,926 3,009 5.29 56,521 3,153 5.58
--------
Advances from Federal Home Loan Bank 12,892 838 6.50 14,463 935 6.46
-------- ------- -------- ------- ------
Total interes-bearing liabilities........ 124,058 5,193 4.19 123,551 5,440 4.40
Other noninterest-bearing liabilities.... 2,380 2,360
Noninterest checking..................... 4,818 3,725
-------- --------
Total liabilities........................ 131,256 129,636
Total equity............................. 13,874 12,542
-------- --------
Total liabilities and equity............. $145,130 $142,178
======== ========
Net interest income ..................... $ 4,829 $ 4,828
======= =======
Net interest rate spread(2) ............. 3.42% 3.56%
====== ======
Net interest margin(3)................... 3.67% 3.74%
====== ======
Total interest-earning assets to total
interest-bearing liabilities........... 106.11% 104.41%
====== ======
</TABLE>
- ---------
(1) Includes loans available for sale and nonaccuring loans.
(2) Net interest rate spread represents the difference between the average
yield on interest-earnings loans and investments and the average rate on
interest-bearing deposits and borrowings.
(3) Net interest margin represents income before the provision for loan losses
divided by average interest-earning loans and investments.
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Rate/Volume Analysis
The following table sets forth information regarding changes in our
interest income and interest expense for the periods indicated. For each
category of our loans and investments and our interest-earning deposits and
borrowings, information is provided on changes attributable to change in volume
(change in volume multiplied by the old rate). The table also provides
information on change in rate (changes in rate multiplied by old volume). The
combined effects of changes in rate and volume have been allocated
proportionately to the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
For the Three For the
Months Ended September 30, Years Ended June 30,
Increase (Decrease) Increase (Decrease)
---------------------------- ------------------------
1999 vs. 1998 1999 vs. 1998
---------------------------- -------------------------
Due to Due to
------------------------- -------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net .......... $ 205 $(297) $(92) $(209) $(237) $(446)
Investment securities .......... 168 (103) 65 85 (44) 40
Interest-bearing deposits
with banks ................... (41) (7) (48) 183 (27) 156
Other earning assets ........... 5 (4) 1 7 (4) 3
----- ----- ---- ----- ----- -----
Total interest earning assets .... 337 (411) (74) 66 (312) (245)
----- ----- ---- ----- ----- -----
Interest-bearing liabilities:
Passbook, money market
and checking accounts ............ 34 12 46 41 (47) (5)
Certificates of deposit ........ 96 (145) (49) 23 (167) (144)
Borrowings(1) .................. (52) (2) (54) (97) 0 (97)
----- ----- ---- ----- ----- -----
Total interest-bearing liabilities 78 (135) (57) (33) (214) (246)
----- ----- ---- ----- ----- -----
Change in net interest income .... $ 259 $(276) $(17) $ 99 $ (98) $ 1
===== ===== ==== ===== ===== =====
</TABLE>
- ----------
(1) Includes advances from the Federal Home Loan Bank of Seattle.
Financial Condition
Total assets increased by $4.46 million, or 3.09%, from $144.43 million
at June 30, 1998, to $148.89 million at June 30, 1999. At September 30, 1999,
total assets were $148.38 million. Total liabilities increased by $3.43 million
or 2.61% from $131.57 million at June 30, 1998, to $135.00 million at June 30,
1999. At September 30, 1999, total liabilities were $134.30 million. The
consistency in asset size reflects the relatively moderate growth in the economy
in American Federal's market area.
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Comparison of Operating Results for the Three Months Ended September 30, 1999
and 1998
Net Income. The operations of American Federal Savings Bank are
impacted by a wide variety of economic and business factors. See "Business of
American Federal Savings Bank -- Current Operations." American Federal Savings
Bank had net income of $209,000 for the three months ended September 30, 1999,
compared to net income of $340,000 for the three months ended September 30,
1998. This decrease of 38.53% was due primarily to an increase in noninterest
expense from $1.14 million for the three months ended September 30, 1998, to
$1.21 million for the three months ended September 30, 1999 and a decrease in
noninterest income from $455,000 for the three months ended September 30, 1998,
to $330,000 for the three months ended September 30, 1999. The increase in
noninterest expense was the result of a $38,000 increase in salaries, an
increase in furniture and equipment depreciation of $17,000 and an increase of
$17,000 in consulting expenses. The increased salaries were primarily due to the
slowdown of mortgage loan originations which accelerated recognition of salary
related loan origination costs. The increased depreciation and consulting
expenses were due to the installation of a new software system used in
operations. The decrease in noninterest income was due primarily to the decrease
in net gain on sale of loans of $188,000 caused by the decline in loan sales.
Net Interest Income. Net interest income for the three months ended
September 30, 1999, and September 30, 1998, was nearly identical. Such income
was $1.22 million in 1999 versus $1.24 million in 1998. The ratio of average
interest earning assets to average interest bearing liabilities increased from
105.68% as of September 30, 1998, to 106.32% as of September 30, 1999.
Interest and Dividend Income. Total interest and dividend income was
$2.51 million for the three months ended September 30, 1999, compared to $2.58
million for the three months ended September 30, 1998, representing a small
decrease of $74,000 or 2.87%. This decrease was due to a decrease in average
yield on loans, partially offset by an increase in average loan and investment
securities volumes.
Interest Expense. Total interest expense, which consists primarily of
interest on savings deposits, decreased slightly from $1.34 million for the
three months ended September 30, 1998, to $1.29 million for the three months
ended September 30, 1999, a decrease of $57,000 or 4.23%. This decrease was
primarily the result of a decrease in average rates paid, slightly offset by
increased retail deposit volume.
Provision for Loan Losses. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by American Federal Savings Bank to provide for probable loan losses
based on prior loss experience, volume and type of lending conducted by American
Federal, available peer group information, and past due loans in the loan
portfolio. Our policies require the review of assets on a quarterly basis. We
classify loans as well as other assets if warranted. See "Business -- Lending
Activity." While we believe we use the best information available to make a
determination with respect to the
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allowance for loan losses, we recognize that future adjustments may be
necessary. We provided $15,000 for loan losses for the three months ended
September 30, 1999 and 1998. Identical amounts were provided primarily due to
the relatively consistent loss history in recent years. The amount was provided
primarily because of an increase in net loans receivable from September 30,
1998, to September 30, 1999 of $3.28 million. The amount of possible increase
was offset by the fact that the economy in our market has been stable, interest
rates had not risen materially and employment conditions appeared stable as
well. We continue to monitor our loan portfolio and will increase or decrease
the provision for loan losses as our portfolio size and composition changes or
we note an increase in non-performing loans or change in economic conditions
which may cause an increase in non-performing loans.
Noninterest Income. Total noninterest income decreased from $455,000
for the three months ended September 30, 1998 to $330,000, or 26.81%, for the
three months ended September 30, 1999. This decrease in noninterest income was
primarily attributable to a decrease in net gain on sale of loans from $188,000
for the three months ended September 30, 1998, to $88,000 for the three months
ended September 30, 1999, because of a decline in mortgage loan originations, a
reduction in loan sales due to decreased originations and a decision to retain
more loans with 15 year terms. Additionally, there was an increase in the net
loss on the sale of available for sale securities from a loss of $6,000 for the
three months ended September 30, 1998, to $30,000 for the three months ended
September 30, 1999 because of the sale of low yielding corporate debt
obligations. "Other" noninterest income decreased $13,600, or 14.27%, from
$95,300 for the three months ended September 30, 1998, to $81,700 for the three
months ended September 30, 1999 primarily because late charges assessed on loans
decreased $2,000 from $11,300 to $9,300, commission income decreased $2,000 from
$7,900 to $5,900 and servicing income on Small Business Administration loans
declined by $2,300 from $5,300 to $3,000.
Noninterest Expense. Noninterest expense increased from $1.14 million
for the three months ended September 30, 1998, to $1.21 million for the three
months ended September 30, 1999, an increase of $73,000 or 6.43%. This increase
was the result of a 6.29% increase in salaries and employee benefits from
$604,000 for the three months ended September 30, 1998, to $642,000 for the
three months ended September 30, 1999, and an increase in furniture and
equipment depreciation of $17,000, or 27.42% from $62,000 for the three months
ended September 30, 1998, to $79,000 for the three months ended September 30,
1999 because of the installation in October 1998 of a new Windows NT system and
an increase in consulting fees. We paid no consulting fees in the three months
ended September 30, 1998, as compared to $17,000 in the three months ended
September 30, 1999. The consulting fees in 1999 represented payments to a
consultant in connection with our installation of new computer software to
support the Windows NT system. Other noninterest expense decreased $12,200, or
6.71%, from $181,800 for the three months ended September 30, 1998 to $169,600
for the three months ended September 30, 1999. Office supplies expense decreased
$9,200 from $19,900 to $10,700. Real estate loan expenses decreased $5,500 from
$12,700 to $7,200. Dues and subscriptions expense decreased $2,300 from $9,900
to $7,600. Travel and entertainment expense increased $3,100 from $6,700 to
$9,800.
Income Taxes. Our income tax expense was $202,000 for the three months
ended September 30, 1998, compared to $120,000 for the three months ended
September 30, 1999. The effective tax rate was 37.25% for the three months ended
September 30, 1998, and was
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36.55% for the three months ended September 30, 1999. The decrease was
attributable to a decrease in net income which was $542,000 before the provision
for income taxes for the three months ended September 30, 1998, and $329,000 for
the three months ended September 30, 1999.
Comparison of Operating Results for the Years Ending June 30, 1998 and 1999
Net Income. American Federal Savings Bank had net income of $1.25
million for the year ended June 30, 1999, compared to net income of $1.24
million for the year ended June 30, 1998. Income before the provision for income
taxes decreased from $2.16 million for the year ended June 30, 1998, to $1.96
million for the year ended June 30, 1999, a decrease of $197,000, or 9.13%. This
decrease occurred primarily because noninterest expense increased from $4.26
million for the year ended June 30, 1998, to $4.61 million for the year ended
June 30, 1999, and noninterest income increased from $1.59 million to $1.80
million.
Net Interest Income. Net interest income was approximately $4.83
million for both of the years ended June 30, 1998 and 1999. The ratio of average
interest-earning loans and investments to average interest-bearing deposits and
borrowings increased from 104.41% to 106.11%.
Interest and Dividend Income. Total interest and dividend income was
$10.02 million for the year ended June 30, 1999, compared to $10.27 million for
the year ended June 30, 1998, representing a decrease of $245,000, or 2.39%.
Interest on loans decreased from $8.49 million for the year ended June 30, 1998,
to $8.05 million for the year ended June 30, 1999. This decrease of $446,000, or
5.25%, was due primarily to a decrease in the average yield on loans from 8.50%
for the year ended June 30, 1998, to 8.26% for the year ended June 30, 1999 as
well as a decline in the balance of loans receivable. This was somewhat offset
by interest earned from deposits held at other banks which increased from
$225,000 for the year ended June 30, 1998, to $381,000 for the year ended June
30, 1999. This increase reflected an increase in the average balances partially
offset by a decreased yield.
Interest Expense. Total interest expense decreased from $5.44 million
for the year ended June 30, 1998, to $5.19 million for the year ended June 30,
1999, a decrease of $246,000 or 4.53%. Interest on deposits decreased $150,000
or 3.31% from $4.50 million for the year ended June 30, 1998, to $4.36 million
for the year ended June 30, 1999. This decrease was due primarily to a decrease
in the average rates paid. Total interest expense also decreased as a result of
a decrease in borrowings from the Federal Home Loan Bank of Seattle. The
increase in our retail deposits enabled us to reduce the amount of advances we
borrowed from the Federal Home Loan Bank. Interest on borrowings from the
Federal Home Loan Bank of Seattle decreased from $935,000 for the year ended
June 30, 1998, to $838,000 for the year ended June 30, 1999.
Provision for Loan Losses. We provided $60,000 for loan losses for both
years ended June 30, 1998 and 1999, respectively. Over the same periods, our
loan loss experience has been consistent while the Montana economy has remained
stable. In establishing such provision, management considered the stability of
the loan portfolio and general economic conditions in our market area. In
monitoring our loan portfolio, we may increase or decrease the provision for the
loan losses as we consider necessary. Increases are based on our management's
review of such factors as
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employment rates, delinquency trends, loan growth and portfolio composition. In
its discussion on whether to modify the loan loss allowance, we noted that total
loans, as of June 30, 1999, grew by about $2 million. This growth was, however,
accompanied by relatively favorable conditions in other areas such as employment
rates and interest rates. We also noted that loans in higher risk areas such as
consumer lending increased by $783,000 and home equity loans by $1.76 million.
However, commercial lending and commercial real estate lending decreased by
$1.50 million as of June 30, 1999. Increases in higher risk lending will lead to
a change in the overall risk profile of the loan portfolio. Therefore,
management determined that the net growth in loans in high risk categories
warranted the $60,000 provision.
Noninterest Income. Total noninterest income increased from $1.65
million for the year ended June 30, 1998, to $1.80 million for the year ended
June 30, 1999, an increase of $156,000 or 9.48%. This change was the result of
an increase in gains on sales of loans from $630,000 for the year ended June 30,
1998, to $715,000 for the year ended June 30, 1999, a gain of $85,000 or 13.49%.
This increase was attributable to increased loan originations during the year
ended June 30, 1999, in a period where there was significant loan refinance
activity. Noninterest income was reduced by a slight decrease in the net gain on
sale of available securities from $5,000 for the year ended June 30, 1998, to a
loss of $6,000 for the year ended June 30, 1999. Loan servicing fees also
increased by $76,300 due to an increase in the amount of loans sales during the
period. "Other" noninterest income increased $11,600, or 3.27%, from $354,200
for the year ended June 30, 1998 to $365,800 for the year ended June 30, 1999.
Late charges assessed on loans increased $7,800 from $34,400 to $42,200. ATM and
debit card fee income increased $6,900 from $29,300 to $36,200. Credit card fee
income increased $5,400 from $9,300 to $14,700. Contract collection fees
decreased $9,800 from $29,500 to $19,700.
Noninterest Expense. Noninterest expense increased by $354,000 or 8.32%
from $4.26 million for the year ended June 30, 1998, to $4.61 million for the
year ended June 30, 1999. This increase was primarily due to a slight increase
in salaries and employee benefits from $2.37 million for the year ended June 30,
1998, to $2.42 million for the year ended June 30, 1999, an increase of $51,000
or 2.15%, as well as an increase in furniture and equipment depreciation from
$245,000 for the year ended June 30, 1998, to $289,000 for the year ended June
30, 1999, an increase of $44,000 or 17.96%. This increase was attributable to
installation of a new Windows NT system. In-house computer expense increased
from $133,000 for the year ended June 30, 1998 to $164,000 for the year ended
June 30, 1999, an increase of $31,000 or 23.67%. This increase, as well as an
increase in consulting fees from $2,000 for the year ended June 30, 1998, to
$40,000 for the year ended June 30, 1999, was primarily due to our decision to
install a new computer network designed to operate all of our computer systems
based on the Windows NT operating system. "Other" noninterest expenses also
increased from $574,000 for the year ended June 30, 1998, to $640,000 for the
year ended June 30, 1999. This increase was primarily the result of charitable
contributions which increased by $18,000, loan related expenses which increased
by $18,000, office supplies which increased by $13,000 and travel and
entertainment-related expenses which increased by $13,000.
Income tax expense. American Federal's income tax expense was $914,000
for the year ended June 30, 1998, as compared to $708,000 for the year ended
June 30, 1999. The effective tax rate for the year ended June 30, 1998, was
42.40% and was 36.10% for the year ended June 30, 1999. During the year ended
June 30, 1999, American Federal Savings Bank
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recognized a deferred tax expense of $72,000 for an increase in net deferred tax
liabilities due primarily to the recognition of an additional provision for
depreciation for federal tax purposes.
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined
by Office of Thrift Supervision regulations. This requirement, which varies from
time to time depending upon economic conditions and our deposit flows, is based
upon a percentage of our deposits and short-term borrowings. The required ratio
of liquidity is currently 5.0%. Our liquidity ratio average was 20.82%, 20.27%
and 18.06% at June 30, 1998, June 30, 1999, and September 30, 1999,
respectively. It is our belief that upon completion of the reorganization our
liquidity ratio will initially increase.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and deposits, funds
provided from operations and advances from the Federal Home Loan Bank of
Seattle. Scheduled repayments of loans and mortgage-backed securities and
maturities of investment securities are generally predictable. However, other
sources of funds, such as deposit flows and loan prepayments, can be greatly
influenced by the general level of interest rates, economic conditions and
competition. We use our liquidity resources principally to fund existing and
future loan commitments. We also use them to fund maturing certificates of
deposit, demand deposit withdrawals and to invest in other loans and
investments, maintain liquidity, and meet operating expenses.
Net cash provided by our operating activities which is primarily
comprised of cash transactions affecting net income for the three months ended
September 30, 1999, was $1.26 million. Net cash provided by our operating
activities for the year ended June 30, 1999, was $2.90 million and $1.06 million
for the year ended June 30, 1998. The increase was the result of a liquidation
in loans held for sale portfolio.
Net cash used in our investing activities which is primarily comprised
of cash transactions from our investment securities and mortgage-backed
securities portfolios and our loan portfolio for the three months ended
September 30, 1999, was $2.99 million. Net cash used in our investing activities
was $6.60 million for the year ended June 30, 1999, and $2.06 million for the
year ended June 30, 1998.
For the three months ended September 30, 1999, net cash used by our
financing activities which is primarily cash transactions from net increases in
deposits and net Federal Home Loan Bank advances was $1.08 million. Net cash
provided by our financing activities totaled $3.66 million for the year ended
June 30, 1999, and $5.46 million for the year ended June 30, 1998. This decrease
was the result of the payment of advances from the Federal Home Loan Bank of
Seattle.
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Liquidity may be adversely affected by unexpected deposit outflows,
higher interest rates paid by competitors, and similar matters. Management
monitors projected liquidity needs and determines the level desirable, based in
part on our commitments to make loans and management's assessment of our ability
to generate funds.
We are subject to federal regulations that impose minimum capital
requirements. For a discussion on such capital levels, see "Historical and Pro
Forma Capital Compliance" and "Regulation Regulatory Capital Requirements."
Financial Services Modernization Bill
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. Generally, the Act:
o repeals the historical restrictions and eliminates many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
o provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
o broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank system;
o modifies the laws governing the implementation of the Community
Reinvestment Act; and
o addresses a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial
institutions.
Thrift holding companies such as Eagle and mutual holding companies
such as Eagle Financial MHC will be permitted to engage in financial activities
in the same manner as bank holding companies with respect to insurance and
securities activities. In addition, in a change from prior law, thrift holding
companies can be owned, controlled or acquired only by companies engaged in
financially-related activities.
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We do not believe that the Act will have a material adverse effect on
our operations in the near-term. However, to the extent that it permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of larger financial institutions that can offer a wider variety of
financial services than we currently offer and that can aggressively compete in
the markets we currently serve.
Impact of Inflation and Changing Prices
Our financial statements and the accompanying notes presented elsewhere
in this prospectus, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of our operations.
Interest rates have a greater impact on our performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which, when originally issued, was required
to be adopted by American Federal Savings Bank as of July 1, 1999. However, in
June 1999, FASB issued Statement of Financial Accounting Standards No. 137 which
defers the effective date of Statement No. 133 by one year to July 1, 2000.
Statement of Financial Accounting Standards No. 133 establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities. Upon adoption of Statement of Financial Accounting Standards No.
133, all derivatives must be recognized at fair value as either assets or
liabilities in the statement of financial position. Changes in the fair value of
derivatives not designed as hedging instruments are to be recognized currently
in earnings or are to be recognized as a component of other comprehensive
income, depending on the intended use of the derivatives and the resulting
designations. Upon adoption, retroactive application of this statement to
financial statements of prior periods is not permitted. We are currently in the
process of evaluating the impact of Statement of Financial Accounting Standards
No. 133 on our consolidated financial position and results of operations.
In October 1998, the Financial Accounting Standards Board issued
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, an amendment of Statement of
Financial Accounting Standards No. 65." This statement amends Statement of
Financial Accounting Standards No. 65 to require that after the securitization
of mortgage loans held-for-sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other retained
interest based on its ability and interest to
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sell or hold these investments. Management does not expect this statement to
have a significant impact on our financial condition or results of operation.
BUSINESS OF THE MUTUAL HOLDING COMPANY
As part of the reorganization, American Federal Savings Bank will
organize Eagle Financial MHC as a federally chartered mutual holding company. As
long as they remain depositors, and, in some instances, borrowers, of American
Federal, persons who had liquidation rights with respect to American Federal
Savings Bank as of the date of the reorganization, will continue to have such
rights solely with respect to Eagle Financial MHC after the reorganization.
Voting rights in Eagle Financial MHC will be limited to members of Eagle
Financial MHC. At any point in time, members of Eagle Financial MHC consist of
persons who either have deposits in American Federal Savings Bank or a loan from
American Federal Savings Bank which was outstanding on April 18, 1991, and is
still outstanding.
Eagle Financial MHC's principal assets will be its shares of stock of
Eagle Bancorp received in the reorganization and its initial capitalization in
the reorganization. Immediately after consummation of the reorganization, it is
expected that Eagle Financial MHC will not engage in any business activity other
than its investment in a majority of the common stock of Eagle Bancorp and its
initial capitalization. However, Eagle Financial MHC may, at a later date,
engage in other business activities allowed by law or regulation. Eagle
Financial MHC will be a mutual holding corporation chartered under federal law
and regulated by the Office of Thrift Supervision. Eagle Financial MHC will be
subject to the limitations and restrictions on mutual holding companies required
by federal law.
BUSINESS OF EAGLE
After the reorganization Eagle Bancorp will own all of the stock of
American Federal. Eagle has not yet engaged in any business and will not
transact any material business before the reorganization. We will invest our
initial capital as discussed in the "How We Intend to Use the Proceeds of the
Offering" section. In the future, we may pursue other business activities,
including mergers and acquisitions, investment alternatives and diversification
of operations. There are, however, no current plans for such activities.
Initially, we will not maintain offices separate from those of American Federal
Savings Bank or employ any persons other than American Federal's officers. Our
officers will not be separately compensated for their services.
BUSINESS OF AMERICAN FEDERAL
American Federal Savings Bank was founded in 1922 as a Montana
chartered building and loan association and has conducted operations in Helena
since that time as a mutual savings bank. In 1975, we adopted a federal thrift
charter and in the period thereafter utilized less restrictive federal branching
laws to expand our branch structure. From 1976 to the present, seven new branch
facilities were opened and a new headquarters building in Helena was
constructed. We consolidated several of these facilities and currently have four
full
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service branches and one drive-up facility. We also have six automated teller
machines located in our market area and we participate in the CashCard ATM
network.
Since our founding in Helena in 1922, we have operated in the
southcentral portion of Montana. Since the advent of NOW accounts and low and no
cost checking or other transaction accounts, we have sought to operate in a
fashion similar to a commercial bank offering these kinds of deposits and
changing our emphasis on home mortgage lending by broadening and diversifying
the kind of loans we offer. As a result of these efforts, we provide full retail
banking services, including one- to four-family residential mortgage loans, home
equity loans, lines of credit, consumer loans and commercial loans for
businesses as well as certificates of deposit, checking accounts, NOW accounts
and savings accounts. We also originate commercial real estate loans, and offer
credit cards, debit cards and other services to individuals and businesses
within our market area. We also engage in extensive mortgage banking which means
that we originate and sell loans to Fannie Mae, Freddie Mac or private
investors. We have sought to introduce a sales culture at all our branches by
encouraging the cross selling of a wide variety of bank products and services to
our customers. As a result, at September 30, 1999, our core deposits consisting
of passbook and statement savings, checking and NOW accounts and IRA accounts
were $85.33 million or 68.93% of total deposits. We have, as a result, a
favorable ratio of transaction accounts and passbook accounts to certificates of
deposit. Because of our core deposit ratio, we believe that we operate in a
manner similar to that of a commercial bank. This is also evidenced by the
significant amount of consumer loans in our loan portfolio and the amount of our
fee income. Our expense ratios also more closely resemble the higher ratios of a
commercial bank as opposed to a thrift institution. At September 30, 1999, we
had total assets of $148.38 million, deposits of $123.80 million and equity of
$14.08 million.
We attract deposits from the general public and use these deposits
primarily to originate loans and to purchase investment and mortgage-backed and
other securities. The principal sources of funds for lending and investing
activities are deposits, Federal Home Loan Bank advances, the repayment, sale
and maturity of loans and sale and maturity of securities. The principal sources
of income are interest on loans and investments. The principal expense is
interest paid on deposits and Federal Home Loan Bank advances.
Market Area
From our headquarters in Helena, Montana, we operate four full service
offices, including our main office, and one drive-in facility. Our
headquarters/main office and our drive-in facility are located in Helena and
full service branches are located in each of Bozeman (opened 1980), Butte
(opened 1979) and Townsend (opened 1979), Montana.
Montana is one of the largest states in terms of land mass but ranks as
one of the least populated states. In 1997, it ranked 44th with a population of
880,000. Helena, where we are headquartered, is the county seat of Lewis and
Clark County which has a population of approximately 54,000 and is located
within 120 miles of four of Montana's other five largest cities: Missoula, Great
Falls, Bozeman and Butte. It is approximately midway between Yellowstone and
Glacier National Parks. Helena is also Montana's state capital. Its economy
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has shown slow growth, in terms of both employment and income. State government
and the numerous offices of the federal government comprise the largest
employment sector. Helena also has significant employment in the service
industries. Specifically, it has evolved into a central health care center with
employment in the medical and the supporting professions as well as the medical
insurance industry. The local economy is also dependent to a lesser extent upon
ranching and agriculture. These have been more cyclical in nature and remain
vulnerable to severe weather conditions, increased competition, both domestic
and international, as well as commodity prices.
Bozeman, where we have a branch, is approximately 95 miles southeast of
Helena. It is located in Gallatin County, which has a population of
approximately 63,000. Bozeman is home to Montana State University and has
achieved its recent growth in part due to the growth of the University as well
as the increased tourism for resort areas in and near Bozeman. Agriculture,
however, remains an important part of Bozeman's economy. Bozeman has also become
an attractive location for retirees, primarily from the West Coast, owing to its
many winter and summer recreational opportunities and the presence of the
University. Residential construction in Bozeman has increased more rapidly than
such construction in Helena and the other cities in which we operate.
Butte, Montana is approximately 64 miles southwest of Helena. We have
one branch in Butte. Butte and the surrounding Silverbow County have a
population of approximately 35,000. Butte's population has declined as a result
of the decline in the mining industry which had afforded many higher paying jobs
to residents of Butte and Silverbow County. Since mining's decrease in the
1980's, population losses have stabilized and new manufacturing jobs related to
production of materials for computer chips have been created.
Townsend is the smallest community in which we operate. We have one
branch in Townsend. It has a population of about 2,000. Many of its residents
commute to other Montana locations for work. Other employment in Townsend is
primarily in agriculture and services. Townsend is approximately 32 miles
southeast of Helena.
Competition
We face strong competition in our primary market area for the
attraction of retail deposits and the origination of loans. Until recently
Montana was a unit banking state. This means that the ability of Montana state
banks to create branches was either prohibited or significantly restricted. As a
result of unit banking, Montana has a significant number of independent
financial institutions serving a single community in a single location. While
the state's population is approximately 880,000 people, there were approximately
79 credit unions in Montana as well as five federally chartered thrift
institutions, and 89 commercial banks as of December 31, 1998. Our most direct
competition for depositors has historically come from locally owned and
out-of-state commercial banks, thrift institutions and credit unions operating
in our primary market area. The number of such competitor locations has
increased significantly in recent years. Our competition for loans also comes
from banks, thrifts and credit unions in addition to mortgage bankers and
brokers. Our principal market areas can be characterized as
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markets with moderately increasing incomes, low unemployment, increasing wealth
(particularly in the growing resort areas such as Bozeman), and moderate
population growth.
Lending Activities
General. American Federal Savings Bank primarily originates one- to
four-family residential real estate loans and, to a lesser extent commercial
real estate loans, real estate construction loans, home equity loans, consumer
loans and commercial loans. Commercial real estate loans include loans on
multi-family dwellings and loans on nonresidential property and loans on
developed and undeveloped land. Home equity loans include loans secured by the
borrower's primary residence. Typically, the property securing such loans is
subject to a prior lien. Consumer loans consist of loans secured by collateral
other than real estate, such as automobiles, recreational vehicles and boats,
personal loans and lines of credit and loans made on deposits held by American
Federal. Commercial loans consist of business loans and lines of credit on a
secured and unsecured basis.
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Loan Portfolio Composition. The following table analyzes the
composition of American Federal's loan portfolio by loan category at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
At September 30, 1999 1999 1998
----------------------- --------------------- ----------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage (1-4 family)(1).. $71,936 71.41% $71,120 72.64% $69,724 72.68%
Commercial real estate................ 7,529 7.47 6,811 6.96 7,555 7.87
Real estate construction............. 1,210 1.20 654 0.67 1,132 1.18
------- ------ ------- ------ ------- -----
Total first mortgage loans......... 80,675 80.08 78,585 80.27 78,411 81.73
------- ------ ------- ------ ------- -----
Other loans:
Home equity........................... 11,823 11.74 11,867 12.12 10,103 10.53
Consumer.............................. 6,335 6.29 5,332 5.45 4,549 4.74
Commercial............................ 1,909 1.89 2,120 2.16 2,877 3.00
------- ------ ------- ------ ------- ------
Total other loans................... 20,067 19.92 19,319 19.73 17,529 18.27
------- ------ ------- ------- ------
Total loans............................. 100,742 100.00% 97,904 100.00% 95,940 100.00%
------- ====== ------- ====== ------- ======
Less:
Deferred loan fees.................... 130 131 213
Allowance for loan losses............. 748 737 678
------- ------- -------
Total loans, net...................... $99,864 $97,036 $95,049
======= ======= =======
</TABLE>
- ----------
(1) Excludes loans held for sale.
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Fee Income. American Federal Savings Bank receives lending related fee
income from a variety of sources. Its principal source of this income is from
the origination and subsequent servicing of sold mortgage loans. Fees generated
from mortgage loan servicing, which generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing for loans held by others, were $74,000 for the three
months ended September 30, 1999, and $264,000 and $190,000 for the years ended
June 30, 1999 and 1998, respectively. Other loan related fee income for contract
collections, late charges, credit life commissions and credit card fees were
$19,000 for the three months ended September 30, 1999, and were $94,000 and
$93,000 for the years ended June 30, 1999 and 1998, respectively.
Loan Maturity Schedule. The following table sets forth the estimated
maturity of American Federal's loan portfolio at September 30, 1999. Scheduled
principal repayments of loans do not necessarily reflect the actual life of such
assets. The average life of a loan is typically substantially less than its
contractual terms because of prepayments. In addition, due on sale clauses on
loans generally give American Federal Savings Bank the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property, subject to the mortgage, and the loan is not repaid.
The average life of a mortgage loan tends to increase, however, when the current
mortgage loan market rates are substantially higher than the rates of existing
mortgage loans. Conversely, the average life of a loan decreases when rates on
existing mortgage loans are substantially higher than current mortgage loan
market rates. All mortgage loans are shown to be maturing based on the date of
the last payment required by the loan agreement, except as noted. Loans having
no stated maturity, those without a scheduled payment, demand loans and
delinquent loans, are shown as due within six months.
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<TABLE>
<CAPTION>
More than More than 2
Within 6 6 to 12 1 year to years to Over 5 years
Months Months 2 years 5 years years Total
------ ------ ------- ------- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage
(1-4 family)(1).................. $ 435 $ 56 $ 228 $ 2,328 $69,474 $ 72,521
Commercial real estate .......... 249 308 137 409 6,426 7,529
Real estate construction.......... 1,060 150 0 0 0 1,210
Home equity....................... 93 180 309 4,398 6,843 11,823
Consumer.......................... 494 213 671 3,338 1,619 6,335
Commercial ....................... 230 320 249 458 652 1,909
------ ------ ------ ------- ------- --------
Total Loans(1).............. $2,561 $1,227 $1,594 $10,931 $85,014 $101,327
====== ====== ====== ======= ======= ========
</TABLE>
(1) Includes loans held for sale.
The following table sets forth the dollar amount of all loans, at
September 30, 1999, due after September 30, 2000, which have pre-determined
interest rates and which have floating or adjustable interest rates:
Fixed Adjustable Total
----- ---------- -----
(Dollars in thousands)
Residential mortgage (1-4 family) ....... $68,307 $ 3,723 $72,030
Commercial real estate .................. 6,393 579 6,972
Real estate construction ................ 0 0 0
Home equity ............................. 9,761 1,789 11,550
Consumer ................................ 5,381 247 5,628
Commercial .............................. 1,030 329 1,359
------- ------- -------
Total ................................... $90,872 $ 6,667 $97,539
======= ======= =======
Percent of total ........................ 93.16% 6.84% 100.0%
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The following table sets forth information with respect to our loan
originations, purchases and sales activity for the periods indicated.
For the Three Months For the Years
Ended September 30, Ended June 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
Net loans receivable at
beginning of period: ........ $ 98,103 $98,100 $98,100 $97,926
Loans originated:
Residential mortgage
(1-4 family) ............... 10,208 14,757 71,150 59,028
Commercial real estate ...... 863 538 1,645 2,034
Real estate construction .... 1,762 2,098 3,643 5,015
Home equity ................. 2,087 2,562 9,670 5,667
Consumer .................... 1,740 2,287 3,857 5,917
Commercial loans ............ 379 391 1,028 2,141
-------- ------- ------- -------
Total loans originated... 17,039 22,633 90,993 79,802
-------- ------- ------- -------
Loans sold:
Whole loans ................. 5,185 12,891 48,243 37,960
Participations .............. 0 0 0 729
-------- ------- ------- -------
Total loans sold ........ 5,185 12,891 48,243 38,689
-------- ------- ------- -------
Principal repayments .......... 9,497 10,652 42,689 40,945
Allowance for losses increase.. (11) (16) (58) 6
Net loan increase (decrease)... 2,346 (926) 3 174
-------- ------- ------- -------
Net loans receivable
at end of period ............. $100,449 $97,174 $98,103 $98,100
======== ======= ======= =======
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Residential Lending. American Federal's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in American Federal's market area. Approximately
71.41% of American Federal's loans as of September 30, 1999, were comprised of
such loans. American Federal Savings Bank generally originates one- to
four-family residential mortgage loans in amounts up to 80% of the lesser of the
appraised value or the selling price of the mortgaged property without requiring
private mortgage insurance. American Federal Savings Bank will originate a
mortgage loan in an amount up to 97% of the lesser of the appraised value or
selling price of a mortgaged property; however, private mortgage insurance is
required on the amount financed in excess of 80%. A mortgage loan originated by
American Federal, whether fixed rate or adjustable rate, can have a term of up
to 30 years. American Federal Savings Bank originates fixed rate loans with
terms of 8, 10, 12, 15 and 30 years. All 30 year fixed rate loans are sold in
the secondary market. American Federal Savings Bank holds substantially all of
its adjustable rate and its 8, 10 and 12 year fixed rate loans in portfolio; its
fixed rate 15 year loans are held in portfolio or sold in the secondary market
depending on market conditions. The volume of loan sales is dependent on the
volume, type and term of loan originations.
Adjustable rate loans limit the periodic interest rate adjustment and
the minimum and maximum rates that may be charged over the term of the loan. The
majority of these loans are retained in American Federal's portfolio.
The majority of American Federal's one- to four-family residential
loans (both fixed rate and adjustable rate) are underwritten in accordance with
Freddie Mac guidelines, regardless of whether they will be sold to Freddie Mae
or other investors. However, American Federal Savings Bank also originates both
fixed and adjustable residential loans that do not conform to Freddie Mac
guidelines. Such loans are usually retained in portfolio. Substantially all of
American Federal's residential mortgages include "due on sale" clauses. These
clauses give American Federal Savings Bank the right to declare a loan
immediately payable if the borrower sells or otherwise transfers an interest in
the property to a third party. American Federal Savings Bank also originates FHA
insured, VA guaranteed and Rural Development guaranteed loans in amounts up to
100% of the appraisal value or selling price of the mortgaged property,
whichever is less.
American Federal Savings Bank obtains a significant portion of its
noninterest income from servicing loans sold. American Federal Savings Bank
offers most of the fixed rate loans it originates for sale in the secondary
market on a servicing retained basis. This means that we process the borrower's
payments and send them to the purchaser. The retention of servicing enables
American Federal Savings Bank to increase fee income and maintain a relationship
with the borrower. Servicing income was $74,000 for the three months ending
September 30, 1999, and was $264,000 for the year ended June 30, 1999. At
September 30, 1999, American Federal Savings Bank had $112.23 million in loans
sold with servicing retained. We believe that by retaining servicing, we are
better able to serve our local customers. From time to time, we will sell some
loans to investors other than Freddie Mac, primarily large banks or mortgage
banking firms, on a servicing released basis. This means that the purchasers of
these loans handle loan processing and loan payments by the borrowers on the
purchased loans. All loans are sold without recourse. We believe we will
continue the current practice of selling conforming loans
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<PAGE>
to Freddie Mac for the immediate future. American Federal Savings Bank does not
ordinarily purchase home mortgage loans from other financial institutions.
Property appraisals on real estate securing American Federal's
single-family residential loans are made by state certified and licensed
independent appraisers approved annually by the board of directors. Appraisals
are performed in accordance with applicable regulations and policies. American
Federal Savings Bank generally obtains title insurance policies on all first
mortgage real estate loans originated. On occasion, refinancings of mortgage
loans are approved using title reports instead of title insurance. Title reports
are also allowed on home equity loans. Borrowers generally remit funds with each
monthly payment of principal and interest, to a loan escrow account from which
American Federal Savings Bank makes disbursements for such items as real estate
taxes and hazard and mortgage insurance premiums as they become due.
Home Equity Loans. American Federal Savings Bank also originates home
equity loans. These loans are secured by the borrowers' primary real estate, but
are typically subject to a prior lien. At September 30, 1999, $11.82 million or
11.74% of our total loans, were home equity loans. Borrowers may use the
proceeds from American Federal's home equity loans for many purposes, including
home improvement, debt consolidation, or other purchasing needs. American
Federal's home equity loans are generally fixed rate, fixed payment loans and
typically have terms of no longer than eight years.
Although home equity loans are secured by real estate, they carry a
greater risk than first lien residential mortgages because of the existence of a
prior lien on the property securing the loan, as well as the flexibility the
borrower has with respect to the loan proceeds. American Federal Savings Bank
attempts to minimize this risk by maintaining conservative underwriting policies
on such loans by. We make home equity loans for up to only 85% of appraised
value of the underlying real estate collateral, less the amount of any existing
prior liens on the property securing the loan. Even for home equity loans
secured by real estate, the risk to American Federal Savings Bank is greater
than that inherent in the residential mortgage loan portfolio in that the
ultimate collection of amounts due may depend on whether any value remains after
collection by a holder with a higher priority than American Federal.
Commercial Real Estate. American Federal Savings Bank originates
non-residential commercial real estate mortgage loans, including both developed
and undeveloped land loans, and loans on multi-family dwellings. Commercial real
estate loans make up 7.47% of American Federal's total loan portfolio, or $7.53
million at September 30, 1999. The majority of these loans are non-residential
commercial real estate loans. American Federal's commercial real estate mortgage
loans are primarily permanent loans secured by improved property such as office
buildings, retail stores, commercial warehouses and apartment buildings. The
terms and conditions of each loan are tailored to the needs of the borrower and
based on the financial strength of the project and any guarantors. Generally,
commercial real estate loans originated by American Federal Savings Bank will
not exceed 70% of the appraised value or the selling price of the property,
whichever is less. The average loan size is approximately $106,000 and is
typically made with fixed rates of interest with five to 15 year maturities.
Upon maturity, the loan is repaid or the terms and conditions are renegotiated.
Generally, all originated commercial real estate loans are within American
Federal's market area and all are within the state of
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Montana. American Federal's largest commercial single real estate loan had a
balance of approximately $455,000 on September 30, 1999, and was secured by a
commercial office building. See also "-- Loans to One Borrower."
Commercial real estate, multi-family and land loans generally have
significantly greater risk than those that involve 1-4 family residential
mortgage lending. The repayment of these loans typically depends on the
successful operations and income stream of the commercial real estate and the
borrower. Such risks can be significantly affected by economic conditions. In
addition, commercial real estate lending generally requires substantially
greater oversight efforts compared to residential real estate lending.
Real Estate Construction Lending. American Federal Savings Bank also
lends funds for the construction of one- to four-family homes. Real estate
construction loans are made both to individual homeowners for the construction
of their primary residence and to a lesser extent, to local builders for the
construction of pre-sold houses or houses that are, being built for speculative
purposes. Real estate construction loans accounted for $1.21 million or 1.20% of
American Federal's loan portfolio at September 30, 1999.
Real estate construction lending is generally considered to involve a
higher degree of credit risk than long term financing of residential properties.
American Federal's risk of loss on a real estate construction loan depends
largely on the accuracy of the initial estimate of the property's value at
completion of construction and the estimated cost of construction. If the
estimate of construction cost and the marketability of the property after the
project is completed prove to be inaccurate, we may be compelled to advance
additional funds to complete the construction. Furthermore, if the final value
of the completed property is less than the estimated amount, the value of the
property might not be sufficient to serve as collateral for the loan.
American Federal Savings Bank limits its exposure for real estate
construction loans made to local builders through periodic credit analysis on
the individual builder and a series of inspections throughout the construction
phase. In addition, American Federal Savings Bank limits the amount and number
of loans made to an individual builder for the construction of pre-sold and
speculative houses based on the financial strength of the builder.
Consumer Loans. As part of its strategy to invest in higher yielding
shorter term loans, American Federal Savings Bank has made significant efforts
to grow its consumer lending portfolio. This portfolio includes personal loans
secured by collateral other than real estate, personal loans and lines of
credit, and loans secured by deposits held by American Federal. As of September
30, 1999, consumer loans totaled $6.34 million or 6.29% of American Federal's
total loan portfolio. These loans consist primarily of auto loans, boat loans,
personal loans and credit lines and deposit account loans. Consumer loans are
originated in American Federal's market area and generally have maturities of up
to 10 years. For loans secured by savings accounts, American Federal Savings
Bank will lend up to 90% of the account balance on single payment loans and up
to 100% for monthly payment loans.
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<PAGE>
Consumer loans have a shorter term and generally provide higher
interest rates than residential loans. Consumer loans can be helpful in
improving the spread between average loan yield and cost of funds and at the
same time improve the matching of the maturities of rate sensitive assets and
liabilities. Increasing its consumer loans has been a major part of American
Federal's strategy of operating more like a commercial bank than a traditional
savings bank.
Consumer loans may entail greater risks than one- to four-family
residential mortgage loans, particularly consumer loans secured by rapidly
depreciable assets such as automobiles or loans that are unsecured. In such
cases, any repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections depend on the borrower's continuing financial
stability, and therefore are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Finally, the application of various
federal laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans after a default. American
Federal Savings Bank limits its consumer loans on new vehicles to 85% of the
purchase price and to 80% of the retail value on used vehicles.
The underwriting standards employed by American Federal Savings Bank
for consumer loans include a determination of the applicant's credit history and
an assessment of the applicant's ability to meet existing obligations and
payments on the proposed loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment, and additionally from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration; however, the
underwriting process also includes a comparison of the value of the collateral
in relation to the proposed loan amount.
Commercial Loans. Commercial loans amounted to $1.91 million, or 1.89%
of American Federal's total loan portfolio at September 30, 1999. American
Federal's commercial loans are traditional business loans and are not secured by
real estate. Such loans may be structured as unsecured lines of credit or may be
secured by inventory, accounts receivable or other business assets. While the
commercial loan portfolio amounts to only 1.89% of the total portfolio at
September 30, 1999, American Federal Savings Bank intends to increase such
lending by focusing on market segments which it has not previously emphasized,
such as business loans to doctors, lawyers, architects and other professionals
as well as to small businesses within its market area. Our management believes
that this strategy provides opportunities for growth, without significant
additional cost outlays for staff and infrastructure.
Commercial loans of this nature usually involve greater risk than 1-4
family residential mortgage loans. The collateral we receive is typically
related directly to the performance of the borrower's business which means that
repayment of commercial loans is dependent on the successful operations and
income stream of the borrower's business. Such risks can be significantly
affected by economic conditions. In addition, commercial lending generally
requires substantially greater oversight efforts compared to residential real
estate lending.
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Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. As of September 30, 1999, our largest aggregation of loans to one
borrower was $788,000, consisting of two loans secured primarily by commercial
office buildings. This was well below our federal legal lending limit to one
borrower of approximately $2.11 million at such date. At September 30, 1999,
these loans were current. The increase in the capital of American Federal
Savings Bank from this offering will increase its legal lending limit.
Loan Solicitation and Processing. Our customary sources of mortgage
loan applications include repeat customers, walk-ins, and referrals from home
builders and real estate brokers. We also advertise in local newspapers and on
local television. Our branch managers and loan officers located at our
headquarters and in branches, have authority to approve loans when presented
with a completed application. Other loans must be approved at our main offices
as disclosed herein. No loan consultants or loan brokers are currently used by
us for either residential or commercial lending activities.
After receiving a loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. When
required by our policies, an appraisal of the real estate intended to secure the
proposed loan is undertaken by an independent fee appraiser. In connection with
the loan approval process, our staff analyze the loan applications and the
property involved. Officers and branch managers are granted lending authority
based on the kind of loan types where they possess expertise and their level of
experience. We have established a series of loan committees to approve any loans
which may exceed the lending authority of particular officers or branch
managers. A quorum of the board of directors is required for approval of any
loan in excess of $500,000.
Loan applicants are promptly notified of the decision by a letter
setting forth the terms and conditions of the decision. If approved, these terms
and conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged , tax escrow and the
notice of requirement of insurance coverage to be maintained. We generally
require title insurance on first mortgage loans and fire and casualty insurance
on all properties securing loans, which insurance must be maintained during the
entire term of the loan.
Loan Commitments. We generally provide commitments to fund fixed and
adjustable-rate single-family mortgage loans for periods of 60 days at a
specified term and interest rate. The total amount of our commitments to extend
credit as of September 30, 1999 was approximately $7.5 million.
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Non-performing Loans and Problem Assets
Collection Procedures. Generally, our collection procedures provide
that when a loan is 15 or more days delinquent, the borrower is notified with a
past due notice. If the loan becomes 30 days delinquent, the borrower is sent a
written delinquent notice requiring payment. If the delinquency continues,
subsequent efforts are made to contact the delinquent borrower, including face
to face meetings and counseling to resolve the delinquency. All collection
actions are undertaken with the objective of compliance with the Fair Debt
Collection Act. In some instances, we may modify the loan or grant a limited
suspension on loan payments to enable the borrower to reorganize his financial
affairs and attempt to work with the borrower to establish a repayment schedule
to cure the delinquency.
For mortgage loans and home equity loans, if the borrower is unable to
cure the delinquency or reach a payment agreement, we will institute foreclosure
actions. If a foreclosure action is taken and the loan is not reinstated, paid
in full or refinanced, the property is sold at judicial sale at which we may be
the buyer if there are no adequate offers to satisfy the debt. Any property
acquired as the result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until such time as it is sold or otherwise
disposed of. When real estate owned is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value less
estimated selling costs. The initial recordation of any loss is charged to the
allowance for loan losses. As of September 30, 1999, American Federal Savings
Bank had no real estate owned.
Loans are reviewed on a quarterly basis and are placed on non-accrual
status when they are more than 90 days delinquent. Loans may be placed on
non-accrual status at any time if, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At September 30, 1999, we had $878,000 of loans that
were non-performing and held on non-accrual status.
Delinquent Loans. The following table provides information regarding
American Federal's loans delinquent 30 to 89 days at September 30, 1999:
Percentage Of Total
Number Amount Delinquent Loans
------ ------ ----------------
Loan Type:
Mortgage (1-4 family) .......... 2 $102,306 27.26%
Consumer ....................... 15 265,394 70.70
Commercial ..................... 1 7,654 2.04
-- -------- ------
Total .......................... 18 $375,354 100.00%
== ======== ======
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Non-Performing Assets. The following table sets forth information
regarding American Federal's non-performing assets as of the dates indicated.
American Federal Savings Bank does not have any troubled debt restructurings
within the meaning of the Statement of Financial Accounting Standards No. 114.
At June 30,
At September 30, ---------------
1999 1999 1998
---- ---- ----
(Dollars in thousands)
Non-accrual loans .............................. $878 $805 $263
Accruing loans delinquent 90 days or more ...... 0 0 4
Real estate owned .............................. 0 0 143
---- ---- ----
Total .......................................... $878 $805 $410
==== ==== ====
Total non-performing loans as a
percentage of total loan portfolio ............. 0.88% 0.83% 0.28%
Percentage of total assets ..................... 0.59% 0.54% 0.18%
The increase in non-accrual loans during the year ended June 30, 1999,
was attributable primarily to $543,000 in residential loans which were placed in
non-accrual status. During the year ended June 30, 1999, American Federal
Savings Bank did not foreclose on any properties.
During the year ended June 30, 1999, approximately $10,538 of interest
would have been recorded on loans accounted for on a non-accrual basis if such
loans had been current according to the original loan agreements for the entire
period. These amounts were not included in American Federal's interest income
for the respective periods. The amount of interest income on loans accounted for
on a non-accrual basis that was excluded from income was insignificant during
the year ended June 30, 1998.
Classified Assets. Management, in compliance with regulatory
guidelines, conducts an internal loan review program, whereby loans are placed
or classified in categories depending upon the level of risk of non-payment or
loss. These categories are special mention, substandard, doubtful or loss. When
a loan is classified as substandard or doubtful, management is required to
establish an allowance for loan losses in an amount that is deemed prudent. When
management classifies a loan as a loss asset, a reserve equal to 100% of the
loan balance is required to be established or the loan is required to be
charged-off. The allowance for loan losses is composed of an allowance for both
inherent risk associated with lending activities and particular problem assets.
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full, highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets of American Federal
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Savings Bank without the establishment of a loss reserve is not warranted.
Assets which do not currently expose the institution to a sufficient degree of
risk to warrant classification in one of the aforementioned categories but
possess credit deficiencies or potential weaknesses are required to be
designated special mention by management. In addition, each loan that exceeds
$200,000 and each group of loans to one borrower that exceeds $200,000 is
monitored more closely.
Management's evaluation of the classification of assets and the
adequacy of the allowance for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process. The
following table reflects our classified assets.
At June 30,
At September 30, -----------------
1999 1999 1998
---- ---- ----
(In thousands)
Residential mortgages (1-4 family:
Special mention ......................... $ 318 $ 319 $ 499
Substandard ............................. 869 903 862
Doubtful ................................ 0 0 0
Loss .................................... 0 0 13
Home equity:
Special mention ......................... 0 0 0
Substandard ............................. 229 201 171
Doubtful ................................ 0 0 0
Loss .................................... 2 2 3
Consumer:
Special mention ......................... 0 0 0
Substandard ............................. 48 21 18
Doubtful ................................ 0 0 0
Loss .................................... 22 24 30
Commercial:
Special mention ......................... 0 0 75
Substandard ............................. 161 168 116
Doubtful ................................ 0 0 5
Loss .................................... 54 56 54
Real estate owned:
Special mention ......................... 0 0 0
Substandard ............................. 0 0 143
Doubtful ................................ 0 0 0
Loss .................................... 0 0 30
------ ------ ------
Total classified loans and real
estate owned ............................... $1,703 $1,694 $2,029
====== ====== ======
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Allowance for Loan Losses and Real Estate Owned. American Federal
Savings Bank segregates the loan portfolio for loan losses into the following
broad categories: residential mortgages (1-4 family), commercial real estate,
real estate construction, commercial loans, home equity loans and consumer
loans. American Federal Savings Bank provides for a general allowance for losses
inherent in the portfolio by the above categories, which consists of two
components. General loss percentages are calculated based on historical analyses
and other factors. A supplemental portion of the allowance is calculated for
inherent losses which probably exist as of the evaluation date even though they
might not have been identified by the more objective processes used. This is due
to the risk of error and/or inherent imprecision in the process. This portion of
the allowance is particularly subjective and requires judgments based on
qualitative factors which do not lend themselves to exact mathematical
calculations such as:
o trends in delinquencies and non-accruals;
o trends in volume, terms and portfolio mix;
o new credit products;
o changes in lending policies and procedures;
o changes in the outlook for the local, regional and national economy;
and
o peer group comparisons.
At least quarterly, American Federal's management evaluates the need to
establish reserves against losses on loans and other assets based on estimated
losses on specific loans and on any real estate owned when a finding is made
that a loss is estimable and probable. Such evaluation includes a review of all
loans for which full collectibility may not be reasonably assured and considers,
among other matters:
o the estimated market value of the underlying collateral of problem
loans;
o prior loss experience; economic conditions; and
o overall portfolio quality.
Provisions for losses are charged against earnings in the period they
are established. We had $748,000 in allowances for loan losses at September 30,
1999.
While we believe we have established our existing allowance for loan
losses in accordance with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing our loan portfolio, will not request
that we significantly increase our allowance for loan losses, or that general
economic conditions, a deteriorating real estate market, or other factors will
not cause us to significantly increase our allowance for loan losses, therefore
negatively affecting our financial condition and earnings.
In making loans, we recognize that credit losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan and,
in the case of a secured loan, the quality of the security for the loan.
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It is our policy to review our loan portfolio, in accordance with
regulatory classification procedures, on at least a quarterly basis.
Additionally, we maintain a program of reviewing loan applications prior to
making the loan and immediately after loans are made in an effort to maintain
loan quality.
The following table sets forth information with respect to our
allowance for loan losses at the dates indicated:
For Three Months Ended For Years Ended
September 30, June 30,
---------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Balance at beginning
of period ............................. $ 737 $ 678 $ 678 $ 684
Loans charged-off ...................... (4) (5) (18) (8)
Recoveries ............................. 0 16 17 15
----- ----- ----- -----
Net loans charged-off .................. (4) 11 (1) (66)
----- ----- ----- -----
Provision for possible
loan losses ........................... 15 15 60 60
----- ----- ----- -----
Balance at end of period ............... $ 748 $ 704 $ 737 $ 678
===== ===== ===== =====
Allowance for loan
losses to total loans ................. 0.75% 0.74% 0.76% 0.71%
Allowance for loan losses to
total non-performing loans ............. 85.19% 247.02% 91.55% 253.93%
Net charge-offs to average loans
outstanding during the period ........ (0.00)% 0.01% (0.00)% (0.07)%
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The following table presents our allocation of the allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the periods indicated.
<TABLE>
<CAPTION>
At September 30, At June 30,
--------------------------------- ------------------------------------------------------------------
1999 1999 1998
---------------------------------- -------------------------------- --------------------------------
Percentage of Percentage of Percentage of
Allowance to Loans in Each Allowance to Loans in Each Allowance to Loans in Each
Total Category to Total Category to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Mortgage Loans :
Residential mortgage (1-4
family) ................... $157 20.99% 71.41% $161 21.84% 72.64% $161 23.75% 72.68%
Commercial real estate ...... 218 29.15 7.47 206 27.95 6.96 195 28.76 7.87
Real estate construction .... 1 0.13 1.20 1 0.14 0.67 2 0.30 1.18
---- ------ ------ ---- ------ ------ ---- ------ ------
Total mortgage loans ..... 376 50.27 80.08 368 49.93 80.27 358 52.81 81.73
---- ------ ------ ---- ------ ------ ---- ------ ------
Other loans:
Home equity ................. 171 22.86 11.74 174 23.61 12.12 131 19.32 10.53
Consumer .................... 103 13.77 6.29 92 12.48 5.45 78 11.50 4.74
Commercial .................. 98 13.10 1.89 103 13.98 2.16 111 16.37 3.00
---- ------ ------ ---- ------ ------ ---- ------ ------
Total other loans ........ 372 49.73 19.92 369 50.07 19.73 320 47.19 18.27
---- ------ ------ ---- ------ ------ ---- ------ ------
Total .................... $748 100.00% 100.00% $737 100.00% 100.00% $678 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== ======
</TABLE>
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Investment Activities
General. Federally chartered savings banks such as American Federal
Savings Bank have the authority to invest in various types of investment
securities, including United States Treasury obligations, securities of various
Federal agencies (including securities collateralized by mortgages),
certificates of deposits of insured banks and savings institutions, municipal
securities, corporate debt securities and loans to other banking institutions.
American Federal Savings Bank maintains liquid assets which may be
invested in specified short-term securities and other investments. See
"Regulation - Regulation of American Federal Savings Bank - Federal Home Loan
Bank System" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources." Liquidity levels
may be increased or decreased depending on the yields on investment
alternatives. They may also be increased based on management's judgment as to
the attractiveness of the yields then available in relation to other
opportunities. Liquidity levels can also change based on management's
expectation of future yield levels, as well as management's projections as to
the short-term demand for funds to be used in American Federal's loan
origination and other activities. American Federal Savings Bank maintains an
investment securities portfolio and a mortgage- backed securities portfolio as
part of its investment portfolio.
Investment Policies. The investment policy of American Federal, which
is established by the board of directors, is designed to foster earnings and
liquidity within prudent interest rate risk guidelines, while complementing
American Federal's lending activities. The policy provides for available for
sale, held to maturity and trading classifications. However, American Federal
Savings Bank does not hold any securities for purposes of trading and does not
anticipate doing so in the future. The policy permits investments in high credit
quality instruments with diversified cash flows while permitting us to maximize
total return within the guidelines set forth in our interest rate risk and
liquidity management policy. Permitted investments include but are not limited
to U. S. government obligations, government agency or government-sponsored
agency obligations, state, county and municipal obligations, and mortgage-backed
securities. Collateralized mortgage obligations guaranteed by government or
government-sponsored agencies, investment grade corporate debt securities, and
commercial paper are also included. We also invest in Federal Home Loan Bank
overnight deposits and federal funds, but these instruments are not considered
part of the investment portfolio.
Our investment policy also includes several specific guidelines and
restrictions to insure adherence with safe and sound activities. The policy
prohibits investments in high risk mortgage derivative products (as defined
within the policy) without prior approval from the board of directors.
Management must demonstrate the business advantage of such investments. In
addition, the policy limits the maximum amount of the investment in a specific
investment category. We do not participate in hedging programs, interest rate
swaps, or other activities involving the use of off-balance sheet derivative
financial instruments. Further,
American Federal Savings Bank does not invest in securities which are not rated
investment grade.
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The Board through its asset liability committee has charged the Chief
Financial Officer to implement the investment policy. All transactions are
reported to the board of directors monthly, as well as the current composition
of the portfolio, including market values and unrealized gains and losses.
Investment Securities. We maintain a portfolio of investment
securities, classified as either available for sale or held to maturity to
enhance total return on investments. At September 30, 1999, our investment
securities were U.S. government and agency obligations, Small Business
Administration pools, municipal securities, mortgage-backed securities and
corporate obligations, all with varying characteristics as to rate, maturity and
call provisions. Investment securities held to maturity represented 47.18% of
American Federal's total investment portfolio.
Corporate Debt. We invest in corporate securities. Corporate bonds may
offer a higher yield than a U.S. Treasury security of comparable duration. These
debt instruments also may have a higher risk of default due to adverse change in
the creditworthiness of the issuer. Our policy limits investments in corporate
bonds to securities rated investment grade or better.
Mortgage-backed Securities and Small Business Administration Loan
Pools. We invest in mortgage-backed securities to provide earnings, liquidity,
cash flows, and diversification to our overall balance sheet. These
mortgage-backed securities are classified as either available for sale or held
to maturity. These securities are participation certificates issued and
guaranteed by the Government National Mortgage Association, Freddie Mac and
Fannie Mae and secured by interests in pools of mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although we focus investments on
mortgage-backed securities secured by single-family mortgages. Expected
maturities will differ from the maturities actually set forth in the loans in
the pools due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages.
American Federal Savings Bank also invests in securities secured by
pools of Small Business Administration loans. The securities are created and
serviced by various issuers and consist of pools of the guaranteed portions of
Small Business Administration business loans which are consolidated by the
issuers and which are guaranteed by the Small Business Administration as to
payment of principal and interest. There is an active secondary market for such
securities and American Federal Savings Bank believes that its investments in
such pools are liquid investments.
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Collateralized Mortgage Obligations. We also invest in collateralized
mortgage obligations, issued or sponsored by Fannie Mae and Freddie Mac.
Collateralized mortgage obligations are a type of debt security that aggregates
pools of mortgages and mortgage-backed securities and creates different classes
of securities with varying maturities and amortization schedules as well as a
residual interest with each class having different risk characteristics. The
cash flows from the underlying collateral are usually divided into "tranches" or
classes which have descending priorities with respect to the distribution of
principal and interest repayment of the underlying mortgages and mortgage-backed
securities as opposed to pass through mortgage-backed securities where cash
flows are distributed pro rata to all security holders. Unlike mortgage-backed
securities from which cash flow is received and prepayment risk is shared pro
rata by all securities holders, cash flows from the mortgages and
mortgage-backed securities underlying collateralized mortgage obligations are
paid in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche may carry
prepayment risk which may be different from that of the underlying collateral
and other tranches. Investing in collateralized mortgage obligations allows us
to protect ourselves to a degree from reinvestment risk resulting from
unexpected prepayment activity associated with conventional mortgage-backed
securities. Management believes these securities represent attractive
alternatives relative to other investments due to the wide variety of maturity,
repayment and interest rate options available. At September 30, 1999, 1.38% of
our investment portfolio consisted of collateralized mortgage obligations.
Other Securities. Equity securities owned consist of a $1.32 million
investment in Federal Home Loan Bank of Seattle common stock as of September 30,
1999. As a member of the Federal Home Loan Bank of Seattle, ownership of Federal
Home Loan Bank of Seattle common shares is required. The remaining securities
and deposits provide diversification and complement our overall investment
strategy.
The following table sets forth the carrying value of American Federal's
investment and mortgage-backed securities portfolio at the dates indicated.
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<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------
At September 30, 1999 1999 1998
--------------------- ---------------------- -----------------------
Book Percentage Book Percentage Book Percentage
Value of Total Value of Total Value of Total
----- -------- ----- -------- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale,
at fair value:
U.S. Government and agency obligations ... $ 4,385 13.36% $ 3,536 9.67% $ 6,365 19.37%
Corporate obligations ................... 4,505 13.72 5,543 15.16 3,595 10.95
Municipal obligations .................... 3,026 9.22 3,118 8.53 0 0
Collateralized mortgage obligations ...... 453 1.38 570 1.56 1,656 5.04
Mortgage-backed securities ............... 3,980 12.12 3,823 10.45 2,246 6.84
MBS-mutual fund .......................... 0 0 0 0 2,018 6.14
------- ------ ------ ------ ------ ------
Total securities available-for-sale ...... 6,349 49.80 16,590 45.37 15,880 48.34
------- ------ ------- ------ ------- ------
Securities held to maturity, at book value:
U.S. Government and Agency obligations.... 6,700 20.41 6,700 18.32 6,417 19.53
Mortgage-backed securities ............... 6,838 20.83 6,843 18.72 4,163 12.67
Municipal obligations .................... 1,063 3.24 955 2.61 786 2.39
------- ------ ------ ------ ------ ------
Total securities held-to-maturity...... 14,601 44.48 14,498 39.65 11,366 34.59
------- ------ ------ ------ ------ ------
Total securities ......................... 30,950 94.28 31,088 85.02 27,246 82.93
Interest-bearing deposits ................ 550 1.68 4,175 11.42 4,400 13.40
Federal Home Loan Bank
capital stock, at cost ................. 1,325 4.04 1,301 3.56 1,207 3.67
------- ------ ------ ------ ------ ------
Total .................................... $32,825 100.00% $36,564 100.00% $32,853 100.00%
======= ====== ====== ====== ====== ======
</TABLE>
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<PAGE>
The following table sets forth information regarding the carrying
values, weighted average yields and maturities of American Federal's investment
and mortgage-backed securities portfolio at September 30, 1999.
<TABLE>
<CAPTION>
At September 30, 1999
---------------------------------------------------------------------------------------------
One Year or Less One to Five Years More than Five Years Total Investment Securities
-------------------- ------------------- -------------------- ------------------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Approximate Weighted
Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and Agency
obligations...................... $0 0% $1,487 6.32% $2,898 5.99% $4,385 $ 4,385 6.10%
Corporate obligations.............. 428 5.85 4,077 6.22 0 0 4,505 4,505 6.18
Municipal obligations.............. 0 0 0 0 3,026 6.24 3,026 3,026 6.24
Collateralized mortgage obligations 0 0 0 0 453 6.20 453 453 6.20
Mortgage-backed securities......... 0 0 0 0 3,980 6.33 3,980 3,980 6.33
------ ------ ------ ------ ------
Total securities available for sale 428 5.85 5,564 6.24 10,357 6.20 16,349 16,349 6.21
------ ------ ------ ------ ------
Securities held to maturity:
U.S. Government and agency
obligations....................... 4,302 5.49 2,398 6.12 0 0 6,700 6,696 5.72
Mortgage-backed securities......... 0 0 1,854 6.43 4,984 6.09 6,838 6,774 6.18
Municipal obligations.............. 227 6.16 726 5.89 110 6.34 1,063 1,044 5.95
------ ------ ------ ------ ------
Total securities held to maturity.. 4,529 5.53 4,978 6.20 5,094 6.10 14,601 14,514 5.82
------ ------ ------ ------ ------
Total securities................... 4,957 5.55 10,542 6.22 15,451 6.17 30,950 30,863 6.09
------ ------ ------ ------ ------
Interest-bearing deposits.......... 550 5.53 0 0 0 0 550 550 5.53
Federal Home Loan Bank
capital stock.................... 0 0 0 0 1,325 7.25 1,325 1,325 7.25
------ ------- ------- ------- -------
Total.............................. $5,507 5.55% $10,542 6.22% $16,776 6.25% $32,825 $32,738 6.13%
====== ======= ======= ======= =======
</TABLE>
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<PAGE>
Sources of Funds
General. Deposits are the major source of our funds for lending and
other investment purposes. Borrowings (principally from the Federal Home Loan
Bank) are also used to compensate for reductions in the availability of funds
from other sources. In addition to deposits and borrowings, we derive funds from
loan and mortgage-backed securities principal repayments, and proceeds from the
maturity, call and sale of mortgage-backed securities and investment securities
and from the sale of loans. Loan and mortgage-backed securities payments are a
relatively stable source of funds, while deposit inflows are significantly
influenced by general interest rates and money market conditions.
Deposits. We offer a variety of deposit accounts. Deposit account terms
vary, primarily as to the required minimum balance amount, the amount of time
that the funds must remain on deposit and the applicable interest rate.
Our current deposit products include certificates of deposit accounts
ranging in terms from 90 days to five years as well as checking, savings and
money market accounts. Individual retirement accounts (IRAs) are included in
certificates of deposit.
Deposits are obtained primarily from residents of Helena, Bozeman,
Butte and Townsend. We believe we are able to attract deposit accounts by
offering outstanding service, competitive interest rates, and convenient
locations and service hours. We use traditional methods of advertising to
attract new customers and deposits, including radio, television, print media
advertising and sales training and incentive programs for employees. We do not
utilize the services of deposit brokers and management believes that an
insignificant number of deposit accounts are held by non-residents of Montana.
We pay interest on deposits which are competitive in our market.
Interest rates on deposits are set weekly by senior management, based on a
number of factors, including:
o projected cash flow;
o a current survey of a selected group of competitors' rates for similar
products;
o external data which may influence interest rates; investment
opportunities and loan demand; and
o scheduled certificate maturities and loan and investment repayments.
Core deposits are deposits which are more stable and somewhat less
sensitive to rate changes. They also represent a lower cost source of funds than
rate sensitive, more volatile accounts such as certificates of deposit. We
believe that our core deposits are our checking, as well as NOW accounts,
passbook and statement savings accounts, money market accounts and IRA accounts.
Based on our historical experience, we include IRA accounts funded by
certificates of deposit as core deposits because they exhibit the principal
features of core deposits in that they are stable and generally are not rate
sensitive. Core deposits amounted to $85.33 million or 68.93% of American
Federal's deposits at September 30, 1999 ($64.89 million or 52.41% if IRA
certificates of deposit are excluded). The presence of a high percentage of
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<PAGE>
core deposits and, in particular, transaction accounts, is part of our strategy
to restructure our liabilities to more closely resemble the lower cost
liabilities of a commercial bank. However, a significant portion of our deposits
remain in certificate of deposit form. These certificates of deposit, should
they mature and be renewed at higher rates, will result in an increase in our
cost of funds.
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<PAGE>
The following table sets forth American Federal's distribution of
deposit accounts at the dates indicated and the weighted average interest rate
on each category of deposit represented:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
At September 30, 1999 1999 1998
----------------------------- -------------------------- ------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Amount of Total Rate Amount of Total Rate Amount of Total Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest checking....... $ 5,961 4.82% 0.00% $ 5,223 4.32% 0.00% $ 4,376 3.81% 0.00%
Passbook savings........... 21,030 16.99 3.00 21,430 17.74 3.00 20,174 17.59 3.00
NOW account/Interest-
bearing checking.......... 21,990 17.76 1.50 21,467 17.77 1.50 21,287 18.55 2.00
Money market accounts...... 15,906 12.85 3.71 14,446 11.96 3.61 11,659 10.16 3.43
-------- ------ -------- ------ -------- ------
Total...................... 64,887 52.41 2.39 62,566 51.78 2.38 57,496 50.11 2.49
-------- ------ -------- ------ -------- ------
Certificates of deposit
accounts:
IRA certificates........ 20,450 16.52 5.03 20,204 16.73 5.03 20,510 17.87 5.35
Step-rate certificates . 5,157 4.17 5.12 5,358 4.43 5.04 7,606 6.63 5.68
Other certificates...... 33,310 26.90 4.99 32,694 27.06 5.03 29,117 25.39 5.51
-------- ------ ------ -------- ------
Total certificates of
deposit accounts.......... 58,917 47.59 5.04 58,256 48.22 5.04 57,233 49.89 5.47
-------- ------ -------- ------ -------- ------
Total................. $123,804 100.00% 3.63% $120,822 100.00% 3.64% $114,729 100.00% 3.93%
======== ====== ======== ====== ======== ======
</TABLE>
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<PAGE>
The following table sets forth the amounts and maturities of our
certificates of deposit as of September 30, 1999, for the maturity dates
indicated:
Certificate Of Deposit Maturity
---------------------------------------------------------------------
(In thousands)
After
September 30, September 30, September 30, September 30,
2000 2001 2002 2002 Total
------ ------ ------ ------ ------
4.01-6%..... $40,345 $10,563 $4,660 $868 $56,436
6.01-8%..... 1,663 459 359 0 2,481
------- -------- ------ ----- -------
Total....... $42,008 $11,022 $5,019 $868 $58,917
======= ======= ====== ==== =======
The following table shows the amount of certificates of deposit of
$100,000 or more by time remaining until maturity as of September 30, 1999:
Maturity Period Amount
--------------- ------
(In thousands)
3 months or less.......................... $1,660
Over 3 to 6 months........................ 1,713
Over 6 to 12 months....................... 1,432
Over 12 months............................ 2,045
-----
Total........................... $6,850
======
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<PAGE>
The following table sets forth the net changes in deposit accounts for
the periods indicated:
Year Ended June 30,
------------------------
Three Months Ended
September 30, 1999 1999 1998
------------------ ---- ----
(Dollars in thousands)
Opening balance ................ $120,822 $114,729 $110,288
Deposits/Withdrawals, Net ......... 1,907 1,914 117
Interest credited ................. 1,075 4,179 4,324
-------- -------- --------
Ending balance .................... $123,804 $120,822 $114,729
======== ======== ========
Net increase ...................... $ 2,982 $ 6,093 $ 4,441
Percent increase .................. 2.47% 5.31% 4.03%
Weighted average cost of
deposits during the period ...... 3.64% 3.76% 3.99%
Weighted average cost
of deposits at end of period ... 3.63% 3.64% 3.93%
Our depositors are primarily residents of the state of Montana and only
3% of its deposits ($3.7 million) as of September 30, 1999, were from
out-of-state residents. We believe that many of these deposits are owned by
retirees who reside elsewhere but spend portions of the year in Montana. As a
result, these deposits, although owned by persons whose principal residence is
elsewhere, are less likely to be withdrawn. We have no brokered deposits.
Borrowings. Deposits are the primary source of funds for our lending
and investment activities and for general business purposes. However, as the
need arises or in order to take advantage of funding opportunities, we also
borrow funds in the form of advances from the Federal Home Loan Bank to
supplement our supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the Federal Home Loan Bank are typically secured by
our stock in the Federal Home Loan Bank and a portion of our residential
mortgage loans. They may be secured by other assets (principally securities
which are obligations of or guaranteed by the U.S. Government). Typically, we
fund loan demand and investment opportunities out of current loan and
mortgage-backed securities repayments, investment maturities and new deposits.
However, we recently utilized Federal Home Loan Bank advances to supplement
these sources and as a match against assets in order to better manage interest
rate risk.
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<PAGE>
The following table sets forth information concerning our borrowing
from the Federal Home Loan Bank of Seattle at the end of, and during, the
periods indicated:
At or For
the Three Months At or For the
Ended September 30, Year Ended June 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Advances from Federal Home Loan Bank:
Average balance .................. $10,389 $13,572 $12,892 $14,463
Maximum balance at any
month-end ....................... 12,552 14,819 14,819 15,019
Balance at period end ............ 8,508 12,774 12,574 14,841
Weighted average interest rate
during the period ............... 6.51% 6.51% 6.50% 6.46%
Weighted average interest rate
at period end ................... 6.32 6.48 6.48 6.43
Subsidiary Activity
We are permitted to invest its assets in the capital stock of, or
originate secured or unsecured loans to, subsidiary corporations. We do not have
any subsidiaries.
Personnel
As of September 30, 1999, we had 69 full-time employees and 4 part-time
employees. The employees are not represented by a collective bargaining unit. We
believe our relationship with our employees to be good.
Competition
We face strong competition in attraction of deposits, which are our
primary source of funds for lending, and in the origination of real estate,
commercial and consumer loans. Our competition for deposits and loans
historically has come from local and regional commercial banks and credit unions
located in our market area. We also compete with mortgage banking companies for
real estate loans, and commercial banks and savings institutions for consumer
loans. Mutual fund accounts, short-term money funds and corporate and government
securities also represent significant sources of competition for investor funds.
Our primary market area is Lewis and Clark, Gallatin, Silverbow, Broadwater and
Jefferson counties in Montana.
We compete for loans by charging competitive interest rates and loan
fees, and emphasizing outstanding service for its customers. We offer consumer
banking services such as checking, passbook and statement savings accounts,
money market accounts and certificates of deposit, including IRA accounts,
overdraft protection, and consumer, commercial and mortgage loans. American
Federal Savings Bank also provides drive-up facilities and offers a debit card
program and ATMs. The emphasis on outstanding services differentiates American
Federal Savings Bank in its competition for deposits, although American Federal
Savings Bank also
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<PAGE>
offers competitive market rates. American Federal Savings Bank is the second
largest locally based financial institution in terms of deposit share in its
primary market area of Helena and offers an array of retail products and
considers itself a full service community bank.
Properties and Equipment
American Federal's executive office is located at 1400 Prospect Avenue
in Helena, Montana. American Federal Savings Bank conducts its business through
five offices, which are located in Helena, Bozeman, Butte, and Townsend,
Montana. All of its offices are owned. Its principal banking office in Helena
also serves as its executive headquarters and operations center. It houses over
50% of American Federal Savings Bank's full-time employees. The following table
sets forth the location of each of American Federal's offices, the year the
office was opened, and the net book value including land, buildings, computer
software and its related equipment and furniture. The square footage at each
location is also shown.
Net Book Value
At September 30, Square
Location Address Opened 1999 Footage
- -------- ------- ------ ---- -------
Helena Main 1400 Prospect Ave. 1997 $4,496,078 32,304
Office Helena, MT 59601
Helena Downtown 28 Neill Ave. 1987 $ 389,943 1,391
Drive-up Helena, MT 59601
Butte Office 3401 Harrison 1979 $ 684,212 3,890
Butte, MT 59701
Bozeman Office 606 North Seventh 1980 $ 622,366 5,886
Bozeman, MT 59715
Townsend Office 416 Broadway 1979 $ 41,729 1,973
Townsend, MT 59644
As of September 30, 1999, the net book value of land, buildings,
furniture, and equipment owned by American Federal, less accumulated
depreciation, totaled $7.2 million.
Legal Proceedings
American Federal, from time to time, is a party to routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which American Federal Savings Bank
holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of American Federal.
There were no lawsuits pending or known to be contemplated against American
Federal Savings Bank at September 30, 1999.
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<PAGE>
REGULATION
Set forth below is a brief description of laws which relate to the
regulation of American Federal, Eagle and Eagle Financial MHC. The description
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of Eagle Financial MHC
Upon completion of the reorganization and stock issuance, Eagle
Financial MHC, will become a federal mutual holding company within the meaning
of Section 10(o) of the Home Owners Loan Act. As such, Eagle Financial MHC will
be required to register with and be subject to Office of Thrift Supervision
examination and supervision as well as reporting requirements. In addition, the
Office of Thrift Supervision has enforcement authority over Eagle Financial MHC
and its non-savings institution subsidiaries, if any. Among other things, this
authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a serious risk to the financial safety,
soundness or stability of a subsidiary savings bank.
A mutual holding company is permitted to, among other things:
o invest in the stock of a savings institution;
o acquire a mutual institution through the merger of such o
institution into a savings institution subsidiary of such mutual
holding company or an interim savings institution of such mutual
holding company;
o merge with or acquire another mutual holding company, one of
whose subsidiaries is a savings institution;
o acquire non-controlling amounts of the stock of savings
institutions and savings institution holding companies, subject
to various restrictions;
o invest in a corporation the capital stock of which is available
for purchase by a savings institution under Federal law or under
the law of any state where the subsidiary savings institution or
institutions have their home offices;
o furnish or perform management services for a savings institution
subsidiary of such company;
o hold, manage or liquidate assets owned or acquired from a savings
institution subsidiary of such company;
o hold or manage properties used or occupied by a savings
institution subsidiary of such company; and
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<PAGE>
o act as a trustee under deed or trust.
As a result of the Gramm-Leach-Bliley Financial Modernization Act of
1999, the activities of a newly formed mutual holding company and a unitary
savings and loan holding company is restricted to those of a financial nature
permitting securities and insurance activities as well as affiliations with
financial companies such as insurance and securities firms.
Regulation of American Federal
General. As a federally chartered, Savings Association Insurance
Fund insured savings bank, American Federal Savings Bank is subject to extensive
regulation by the Office of Thrift Supervision and the FDIC. Lending activities
and other investments must comply with federal statutory and regulatory
requirements. American Federal Savings Bank is also subject to reserve
requirements of the Federal Reserve System. Federal regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the Savings Association
Insurance Fund of the FDIC and depositors. This regulatory structure gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies
regarding to the classification of assets and the establishment of adequate loan
loss reserves.
The Office of Thrift Supervision regularly examines American Federal
Savings Bank and prepares a report on its examination findings to American
Federal's board of directors. American Federal's relationship with its
depositors and borrowers is also regulated by federal law, especially in such
matters as the ownership of savings accounts and the form and content of
American Federal's mortgage documents.
American Federal Savings Bank must file reports with the Office of
Thrift Supervision and the FDIC concerning its activities and financial
condition, and must obtain regulatory approvals prior to entering into
transactions such as mergers with or acquisitions of other financial
institutions. Any change in such regulations, whether by the Office of Thrift
Supervision, the FDIC or the United States Congress, could have a material
adverse impact on Eagle and American Federal, and their operations.
Insurance of Deposit Accounts. The deposit accounts held by American
Federal Savings Bank are insured by the Savings Association Insurance Fund to a
maximum of $100,000 as permitted by law. Insurance on deposits may be terminated
by the FDIC if it finds an 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
FDIC or the institution's primary regulator.
As a member of the Savings Association Insurance Fund, American Federal
Savings Bank paid an insurance premium to the FDIC equal to a minimum of 0.23%
of its total deposits during 1996 and prior years. The FDIC also maintains
another insurance fund, the Bank Insurance Fund, which primarily insures
commercial bank deposits. In 1999, the annual insurance
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premium for institutions in the lowest risk category, which included most Bank
Insurance Fund members, was $2,000, regardless of size. The nominal deposit
insurance premium for Bank Insurance Fund members placed Savings Association
Insurance Fund members at a competitive disadvantage to Bank Insurance Fund
members.
Effective September 30, 1996, a federal law was enacted which mandated
a one-time special assessment on Savings Association Insurance Fund members such
as American Federal Savings Bank of approximately 0.657% of deposits held on
March 31, 1995. The law had the effect of eliminating the deposit insurance
premium differential. Specifically, beginning January 1, 1997, the deposit
insurance assessment for most Savings Association Insurance Fund members was
reduced to 0.064% of deposits on an annual basis through the end of 1999. During
this same period, Bank Insurance Fund members will be assessed approximately
0.013% of deposits. It is expected that these continuing assessments for both
Savings Bank Insurance Fund and Bank Insurance Fund members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance paid by
American Federal Savings Bank declined from 0.23% of total deposits to .064% of
the total deposits, a reduction of approximately 70%.
Regulatory Capital Requirements. Office of Thrift Supervision capital
regulations require savings institutions to meet three capital standards. The
standards are tangible capital equal to 1.5% of adjusted total assets, core
capital equal to at least 3% of total adjusted assets, and risk-based capital
equal to 8% of total risk- weighted assets. American Federal's capital ratios
are set forth under "Historical And Pro Forma Capital Compliance."
Tangible capital is defined as core capital less all intangible assets,
less mortgage servicing rights and less investments. Core capital is defined as
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries,
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, mortgage
servicing rights and investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital is comprised of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, and the portion of the
allowance for loan losses not designated for specific loan losses. The portion
of the allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the Office of Thrift Supervision, which
range from 0% for cash to 100% for delinquent loans, property acquired through
foreclosure, commercial loans, and other assets.
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Office of Thrift Supervision rules require a deduction from capital for
institutions which have unacceptable levels of interest rate risk. The Office of
Thrift Supervision calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the Office of Thrift Supervision. The amount of the interest rate
risk component, if any, is deducted from an institution's total capital in order
to determine if it meets its risk-based capital requirement. Federal savings
institutions with less than $300 million in assets and a risk- based capital
ratio above 12% are exempt from filing the interest rate risk schedule. However,
the Office of Thrift Supervision may require any exempt institution to file such
schedule on a quarterly basis and may be subject to an additional capital
requirement based on its level of interest rate risk as compared to its peers.
Dividend and Other Capital Distribution Limitations. The Office of
Thrift Supervision imposes various restrictions or requirements on the ability
of savings institutions to make capital distributions, including dividend
payments.
Office of Thrift Supervision regulations impose limitations on all
capital distributions by savings institutions, such as cash dividends, payments
to repurchase or otherwise acquire its shares, payments to stockholders of
another institution in a cash-out merger, and other distributions charged
against capital. The rule establishes three tiers of institutions based
primarily on an institution's capital level. An institution that exceeds all
capital requirements before and after a proposed capital distribution and has
not been advised by the Office of Thrift Supervision that it is in need of more
than the normal supervision has the greatest amount of flexibility for
determining dividends. Such institutions can, after prior notice but without the
approval of the Office of Thrift Supervision, make capital distributions during
a calendar year. These distributions can be equal to the greater of 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its excess capital divided by its fully phased-in capital requirements
at the beginning of the calendar year. At the institution's discretion,
dividends can also be 75% of its net income over the most recent four-quarter
period. Any additional capital distributions require prior regulatory notice. As
of September 30, 1999, American Federal Savings Bank had this level of
flexibility with respect to dividends.
If American Federal's capital falls below its fully phased-in
requirement or if the Office of Thrift Supervision notified it that it was in
need of more than normal supervision, American Federal Savings Bank would have
less flexibility. Its ability to make capital distributions could be restricted.
Institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four-quarter period. Institutions that do not
meet current minimum capital requirements and propose to make any capital
distribution, and institutions not in the highest category for capital purposes
that propose to make a capital distribution in excess of safe harbor levels,
must obtain Office of Thrift Supervision approval prior to making such
distribution. In addition, the Office of Thrift Supervision could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the Office of Thrift Supervision determines that
such distribution would constitute an unsafe or unsound practice.
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A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings institution would
not meet any one of its minimum regulatory capital requirements. Further, a
federal savings institution cannot distribute regulatory capital that is needed
for its liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender test or they become subject to operating restrictions.
Until recently, the chief restriction was the elimination of borrowing rights
from the Federal Home Loan Bank. However, with passage of the Gramm-Leach-Bliley
Financial Modernization Act of 1999 by Congress, the failure to maintain
qualified thrift lender status will not affect borrowing rights with the Federal
Home Loan Bank. Notwithstanding these changes, American Federal Savings Bank
anticipates that it will maintain an appropriate level of investments consisting
primarily of residential mortgages, mortgage-backed securities and other
mortgage-related investment, and otherwise qualify as a qualified thrift lender.
The required percentage of these mortgage-related investments is 65% of
portfolio assets. Portfolio assets are all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets. Compliance with the qualified thrift lender test
is determined on a monthly basis in nine out of every twelve months.
Transactions With Affiliates. Generally, federal banking law requires
that transactions between a savings institution or its subsidiaries and its
affiliates must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, some transactions can
be restricted to an aggregate percentage of the savings institution's capital.
Collateral in specified amounts must usually be provided by affiliates in order
to receive loans from the savings institution. In addition, a savings
institution may not extend credit to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate that is not a subsidiary. The Office of Thrift Supervision has the
discretion to treat subsidiaries of savings institution as affiliates on a
case-by-case basis.
Liquidity Requirements. All federal savings institutions are required
to maintain an average daily balance of liquid assets equal to a percentage of
the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. Depending on economic conditions and
savings flows of all savings institutions, the Office of Thrift Supervision can
vary the liquidity requirement from time to time between 4% and 10%. Monetary
penalties may be imposed on institutions for liquidity requirement violations.
Federal Home Loan Bank System. We are a member of the Federal Home Loan
Bank of Seattle, which is one of 12 regional Federal Home Loan Banks. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
financial institutions and proceeds derived from the sale of consolidated
obligations of the Federal Home Loan Bank System. It makes loans to members
pursuant to policies and procedures established by the board of directors of the
Federal Home Loan Bank.
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As a member, we are required to purchase and maintain stock in the
Federal Home Loan Bank of Seattle in an amount equal to at least 1% of our
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, or 5% of our outstanding advances,
whichever is larger. We are in compliance with this requirement. The Federal
Home Loan Bank imposes various limitations on advances such as limiting the
amount of real estate related collateral to 30% of a member's capital and
limiting total advances to a member. As a federal savings bank, we were
mandatory members of the Federal Home Loan Bank of Seattle. Under the recently
enacted Gramm-Leach-Bliley Financial Modernization Act of 1999, we are now
voluntary members of the Federal Home Loan Bank of Seattle. We could withdraw or
significantly reduce our required stock ownership in the Federal Home Loan Bank
of Seattle.
In the past, the Federal Home Loan Banks provided funds for programs to
resolve the problems created by troubled savings institutions and also
contribute to affordable housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have adversely affected
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain noninterest bearing reserves at specified
levels against their checking, NOW, and Super NOW checking accounts and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve System may be used to satisfy the
Office of Thrift Supervision liquidity requirements.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
Regulation of Eagle Bancorp
General. After the reorganization, Eagle Bancorp, as a federal stock
corporation in a mutual holding company structure, will be deemed a federal
mutual holding company within the meaning of Section 10(o) of the Home Owners
Loan act ("HOLA"). Eagle will be required to register and file reports with the
Office of Thrift Supervision and will be subject to regulation and examination
by the Office of Thrift Supervision. In addition, the Office of Thrift
Supervision will have enforcement authority over Eagle and any nonsavings
institution subsidiary. The Office of Thrift Supervision can restrict or
prohibit activities that it determines to be a serious risk to us. This
regulation is intended primarily for the protection of our depositors and not
for the benefit of you, as stockholders of Eagle.
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TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations. Prior to changes
to the Internal Revenue Code in 1996, thrift institutions enjoyed a tax
advantage over banks with respect to determining additions to its bad debt
reserves. All thrift institutions, prior to 1996, were generally allowed a
deduction for additions to a reserve for bad debts. In contrast, only "small
banks" (the average adjusted bases of all assets of such institution equals $500
million or less) were allowed a similar deduction for additions to their bad
debt reserves. In addition, while small banks were only allowed to use the
experience method in determining their annual addition to a bad debt reserve,
all thrift institutions generally enjoyed a choice between the percentage of
taxable income method and the experience method, for determining the annual
addition to their bad debt reserve. This choice of methods provided a distinct
advantage to thrift institutions that continually experienced little or no
losses from bad debts, over small banks in a similar situation. The reason is
that thrift institutions in comparison to small banks were generally allowed a
greater tax deduction by using the percentage of taxable income method (rather
than the experience method) to determine their deductible addition to their bad
debt reserves.
The Internal Revenue Code was revised in August 1996 to equalize the
taxation of thrift institutions and banks, effective for taxable years beginning
after 1995. All thrift institutions are now subject to the same provisions as
banks with respect to deductions for bad debt. Now only thrift institutions that
are treated as small banks under the Internal Revenue Code may continue to
account for bad debts under the reserve method; however such institutions may
only use the experience method for determining additions to their bad debt
reserve. Thrift institutions that are not treated as small banks may no longer
use the reserve method to account for their bad debts but must now use the
specific charge-off method.
The revisions to the Internal Revenue Code in 1996 also provided that
all thrift institutions must generally recapture any "applicable excess
reserves" into their taxable income, over a six year period beginning in 1996;
however, such recapture may be delayed up to two years if a thrift institution
meets a residential-lending test. Generally, a thrift institution's applicable
excess reserves equals the excess of the balance of its bad debt reserves as of
the close of its taxable year beginning before January 1, 1996, over the balance
of such reserves as of the close of its last taxable year beginning before
January 1, 1988. These are known as pre-1988 reserves. American Federal Savings
Bank will be required to recapture $350,000 of applicable excess reserve as of
September 30, 1999.
In addition, all thrift institutions must continue to keep track of
their pre-1988 reserves because this amount remains subject to recapture in the
future under the Internal Revenue Code. A thrift institution such as American
Federal, would generally be required to recapture into its taxable income its
pre-1988 reserves in the case of excess distributions to, and redemptions of
American Federal's stock and in the case of a reduction in American Federal's
outstanding loans when comparing loans currently outstanding to loans
outstanding at the end of the base year. For taxable years after 1995, American
Federal Savings Bank will continue to account for its bad
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debts under the reserve method. The balance of American Federal's pre-1988
reserves equaled $915,000.
Eagle may exclude from its income 100% of dividends received from
American Federal Savings Bank as a member of the same affiliated group of
corporations. A 70% dividends received deduction generally applies with respect
to dividends received from corporations that are not members of such affiliated
group.
American Federal's federal income tax returns for the last five tax
years have not been audited by the IRS.
State Taxation
American Federal Savings Bank files Montana tax returns. For Montana
tax purposes, savings institutions are presently taxed at a rate equal to 6.75%
of taxable income which is calculated based on federal taxable income, subject
to certain adjustments (including the addition of interest income on state and
municipal obligations).
American Federal's state tax returns have not been audited for the past
five years by the state of Montana.
MANAGEMENT
Directors and Executive Officers
The board of directors of American Federal Savings Bank currently
consists of seven individuals. After the reorganization, the Boards of Directors
of American Federal, Eagle and Eagle Financial MHC will initially be identical.
The boards of directors will appoint executive officers to manage the day to day
affairs of the respective corporations. We currently expect the individuals who
currently serve as executive officers of American Federal Savings Bank to
continue to serve in such positions, and as executive officers of Eagle and
Eagle Financial MHC, after the reorganization. Each member of our board of
directors serves for a term of three years, with approximately one-third of the
directors elected each year. Our proposed charter and bylaws also require that
directors be divided into three classes, as nearly equal in number as possible.
Our officers are elected annually by our board and serve at the board's
discretion. These provisions also apply to American Federal Savings Bank and
Eagle Financial MHC, which will have the same directors and executive officers
that we have.
The following table sets forth information with respect to the
directors and executive officers, all of whom will continue to serve in the same
capacities after the reorganization.
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<TABLE>
<CAPTION>
Age At Director Term
Name September 30, 1999 Since Position Expires(1)
---- ------------------ ----- -------- ----------
<S> <C> <C> <C> <C>
Robert L. Pennington 67 1973 Chairman of the Board 2001
Larry A. Dreyer 54 1990 President, Director 2002
Don O. Campbell 65 1994 Director 2001
Teresa Hartzog 69 1993 Director 2002
Charles G. Jacoby 67 1979 Vice Chairman 2001
James A. Maierle 52 1997 Director 2000
Thomas J. McCarvel 50 1998 Director 2000
</TABLE>
- -------------
(1) The terms for directors of Eagle Bancorp and Eagle Financial MHC will be
the same as those of American Federal.
Other Executive Officers
Age At
Name September 30, 1999 Position
---- ------------------ --------
Peter J. Johnson 42 Senior Vice President, Treasurer
Michael C. Mundt 45 Senior Vice President, Lending
Joanne Y. Sanderson 56 Senior Vice President, Operations
There are no arrangements or understandings between American Federal
Savings Bank and any other person pursuant to which any director was elected or
any officer appointed.
The principal business experience for the past five years of each of
the directors and executive officers is as follows:
Robert L. Pennington is the Chairman of American Federal. He was
previously the President and Chief Executive Officer of American Federal Savings
Bank from 1974 through 1995, when he retired. He has served as Chairman since
1993.
Teresa Hartzog is retired. She was formerly employed by the Leaphart
law firm where she served as office manager and a legal secretary.
Don O. Campbell was a certified public accountant and previously served
as Vice President and Controller of Capri, Inc., an investment management
company located in Helena.
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Charles G. Jacoby is retired. He formerly owned a retail clothing
establishment in Helena. He serves as Vice Chairman of the Board.
James A. Maierle currently serves as President of Morrison-Maierle,
Inc., a civil engineering corporation, headquartered in Helena.
Thomas J. McCarvel currently serves as a Vice President of Carroll
College in Helena. He was previously the Chief Operating Officer of Anderson
ZurMuehlen & Co., P.C., a public accounting firm in Helena, and one of American
Federal Savings Bank's auditors.
Larry A. Dreyer is currently President (since 1993) and Chief Executive
Officer (since 1995) of American Federal. He joined American Federal Savings
Bank in 1973, serving as its Controller. He is a board member of the Lewis and
Clark County United Way, a member and past president of the Downtown Helena
Kiwanis Club and past chairman of both the St. Peter's Hospital Foundation and
Diocese of Helena Finance Council. He is also a member of the Independent
Community Bankers of America National Policy Development Committee.
Executive Officers Who Are Not Directors
Peter J. Johnson is American Federal Savings Bank's Senior Vice
President and Treasurer, a position he has held since 1993. He joined American
Federal Savings Bank in 1981 and became its Treasurer in 1983. He serves on
various committees of the Helena area Chamber of Commerce. He is a member of the
Diocese of Helena Finance Council and the City of Helena Open Space Bond
Advisory Committee.
Michael C. Mundt is American Federal Savings Bank's Senior Vice
President for Lending. He joined American Federal Savings Bank in 1988 as a Vice
President for Commercial and Consumer Loans. He is a member of the Carroll
College Financial Affairs Committee and the Helena Housing Task Force.
Joanne Y. Sanderson is American Federal Savings Bank's Senior Vice
President of Operations. She joined American Federal Savings Bank in 1972 as a
teller. She is a member and past president of the Zonta Club of Helena.
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the
board and through activities of its committees. During the year ended June 30,
1999, the board of directors held 12 regular meetings and one special meeting.
No director attended fewer than 75% of the total meetings of the board of
directors and committees on which such director served during the year ended
June 30, 1999. American Federal Savings Bank has a standing Audit Committee, as
well as other standing committees such as Investment, Compensation, and Asset
Liability Management. The entire board of directors serves as a Nominating
Committee.
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The Compensation Committee consists of Directors Pennington, Hartzog
and Campbell. The Compensation Committee meets at least annually to review
performance and renumeration of the officers of American Federal Savings Bank.
It met once during the year ended June 30, 1999.
The Audit Committee consists of Directors Jacoby and Campbell. The
Audit Committee meets at least quarterly and meets with American Federal's
independent certified public accountants to review the results of the annual
audit and other related matters. The Audit Committee met five times during the
year ended June 30, 1999.
The Investment Committee consists of Directors Dreyer, Jacoby and
Maierle, as well as executive officers Johnson and Mundt. The Investment
Committee meets at least quarterly in order to review investment performance and
strategy. The Investment Committee met four times during the year ended June 30,
1999.
The Asset Liability Management Committee consists of Directors
Pennington and Dreyer as well as executive officers Johnson and Mundt. The Asset
Liability Management Committee meets at least quarterly to review American
Federal Savings Bank's policies concerning interest rate risk and loan and
deposit rates. It met four times during the year ended June 30, 1999.
Director Compensation
During 1999, each director, except for the Chairman of the Board, was
paid an annual fee of $12,000. The Chairman of the Board receives an annual fee
of $19,800. Also, each non-employee director, other than the Chairman of the
Board, was paid $130 for each committee meeting attended. The total fees paid to
the directors of American Federal Savings Bank for the year ended June 30, 1999,
were approximately $95,100. American Federal Savings Bank has no other director
compensation plans or director deferred compensation plans.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by American Federal's officers for
the year ended June 30, 1999, who earned in excess of $100,000.
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------------------
As of Other Annual All Other
Name and Position June 30,(1) Compensation Bonus Compensation(2) Compensation(3)
----------------- ----------- ------------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Larry A. Dreyer 1999 $96,000 $9,025 $12,000 $29,875
President and Chief
Executive Officer
</TABLE>
- ---------------
(1) Compensation information for the fiscal years ended June 30, 1998 and 1997
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has been omitted as American Federal Savings Bank was not a public company
nor a subsidiary thereof at such times.
(2) Represents compensation for serving on the board of directors of American
Federal.
(3) Includes $10,406 paid pursuant to American Federal's profit sharing plan as
well as employer paid medical and group term life premiums and employer
401(k) and deferred compensation payments.
Employment Agreement. American Federal Savings Bank has entered into an
Employment Agreement with its President, Larry A. Dreyer. The Employment
Agreement has an initial term of three years. The Employment Agreement is
effective on January 1, 2000. The Employment Agreement is terminable by us for
cause as defined in the Employment Agreement. If we terminate Mr. Dreyer without
cause, he will be entitled to a continuation of his salary plus bonuses and
deferred compensation from the date of termination through the remaining term of
the Employment Agreement. The aggregate payment made to Mr. Dreyer would be an
expense to us and would result in reductions to our net income and capital.
After the first three years, the Employment Agreement may be renewed annually by
our board of directors after a determination of the satisfactory performance of
Mr. Dreyer in the Board's sole discretion. If Mr. Dreyer becomes disabled during
the term of the Employment Agreement, he would continue to receive payment of
75% of the base salary until he returns to full-time employment at American
Federal Savings Bank, reaches age 65, accepts another full-time position with
another employer, or upon his death. Such payments shall be reduced by any other
benefit payments made under a disability plan in effect for Mr. Dreyer and
American Federal Savings Bank's other employees.
Non-Contributory Profit Sharing Plan. American Federal Savings Bank has
no pension plan for its employees, but has established a non-contributory profit
sharing plan for eligible employees who have completed one year of service with
American Federal Savings Bank. The non-contributory plan enables American
Federal Savings Bank to contribute up to 15% of qualified salaries each year.
Typically 10% is contributed. The percentage amount of the contribution is
determined by the board of directors each year and is based primarily on
profitability for the past year. For the year ended June 30, 1999, the Board
authorized profit sharing contributions to Mr. Dreyer of $10,406 and total
contributions of $169,000.
The Non-Contributory Profit Sharing Plan also allows employees to make
contributions to a tax-qualified defined contribution savings plan or an
employee owned 401(k) plan. Employees can contribute a portion of their
salaries, (up to a maximum of $10,000 for 1999), to a 401(k) plan. American
Federal Savings Bank's board of directors has the authority to match up to a
maximum of 50% of an employee's contribution provided that the matching amount
does not exceed 3.0% of such employee compensation. For the year ended June 30,
1999, American Federal Savings Bank contributed $1,418 to Mr. Dreyer's 401(k)
program and $18,000 in total to the 401(k) program.
Salary Continuation Agreement. Another benefit offered by American
Federal Savings Bank is a program to increase overall retirement benefits for
employees to levels which more closely approximate those in comparable
businesses. American Federal Savings Bank
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consulted with independent compensation consultants and developed a plan to
supplement retirement benefits. The plan American Federal Savings Bank adopted
covers eight of its senior officers, including Mr. Dreyer and all senior vice
presidents and vice presidents. It is a non-qualified retirement plan which is
designated the American Federal Savings Bank Salary Continuation Agreement (the
"Salary Continuation Agreement" or the "Plan."). Under the Salary Continuation
Agreement, each officer receives a fixed retirement benefit based on his or her
years of service with American Federal Savings Bank. This plan is funded by
insurance policies owned by American Federal Savings Bank. The Plan also
provides for partial payments in the event of early retirement, death or
disability. In Mr. Dreyer's case, if he retires at age 65, the Salary
Continuation Agreement provides for a lump sum payment of $414,000, or an annual
payment for life of $45,000. American Federal Savings Bank has purchased life
insurance contracts for each covered executive to fund the payments. American
Federal Savings Bank recognizes expenses to maintain the Plan. For the year
ended June 30, 1999, the total expenses were $84,000.
The Plan also contains a provision which reduces the annual or lump sum
benefit to Mr. Dreyer by 10% and to other executives by 5% in the event any of
the executives or Mr. Dreyer is the recipient of stock options from Eagle
Bancorp or American Federal Savings Bank.
Bonus Plan. American Federal Savings Bank also provides a discretionary
bonus program ("Bonus Program") for all eligible employees. The Bonus Program is
based on the after-tax net profitability of American Federal Savings Bank and is
linked specifically to American Federal Savings Bank's return on assets. In the
case of non-officer employees, bonus amounts are based on salary levels. Under
the Bonus Program, American Federal Savings Bank's return on assets for the
period from January through October is used to determine the bonus levels of
Bank officers. Officers' bonuses are directly linked to the return on assets.
For example, if American Federal Savings Bank produces a return on assets of
.90%, then each officer would receive a bonus of 9% of annual base salary. For
the year ended June 30, 1999, American Federal Savings Bank paid total bonuses
of $117,000. Mr. Dreyer's bonus during this period was $9,025.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan, or ESOP, for the exclusive benefit of participating employees of
ours, to be effective January 1, 2000. Participating employees are all employees
who have completed one year of service with us or our subsidiary and have
attained the age of 21. They must also have been credited with 1,000 or more
hours of service in any one year. An application for a letter of determination
as to the tax-qualified status of the employee stock ownership plan will be
submitted to the IRS. Although no assurances can be given, we expect that the
employee stock ownership plan will receive a favorable letter of determination
from the IRS.
The employee stock ownership plan is to be funded by contributions made
by us in cash or common stock. Benefits will be paid in shares of the common
stock. The ESOP is expected to borrow funds from Eagle with which to acquire up
to 8% of the common stock to be sold in the offering. The loan is expected to be
for a term of ten years at an annual interest rate equal to the prime rate as
published in The Wall Street Journal. Shares purchased with such loan proceeds
will be held in a suspense account and allocated among participants as principal
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on the loan is repaid. The loan will be secured by the unallocated shares held
in the suspense account. It is anticipated that all contributions to the plan
will be fully tax-deductible by American Federal.
Shares sold above the maximum of the offering range (i.e., more than
746,566 shares) may be sold to the employee stock ownership plan before
satisfying remaining unfilled orders of Eligible Account Holders to fill the
plan's subscription, or the plan may purchase some or all of the shares covered
by its subscription after the offering in the open market.
Contributions to the employee stock ownership plan and shares released
from the suspense account will be allocated among participants on the basis of
their annual compensation. Generally, annual compensation is defined as W-2 pay
increased by salary reduction contributions to a 401(k) plan and by pre-tax
contributions to a cafeteria plan, up to a maximum of $80,000 for each
participant. All participants must be employed on the last day of the plan
calendar year and have worked at least 1,000 hours in the plan year, or have
terminated employment following death, disability or retirement, in order to
receive an allocation for the year. Participants become fully vested in their
plan allocations based on a seven year graded vesting schedule which provides 0%
vesting for the first two years of service; 20% vesting for three years; 40%
vesting for four years; 60% vesting for five years; 80% vesting for six years
and 100% vesting after seven years. Vesting years of service are plan years in
which an employee is credited with 1,000 or more hours of service and include
periods of employment before the adoption of the employee stock ownership plan.
Our contributions to the employee stock ownership plan to the extent necessary
to repay the acquisition loan are mandatory and may cause a reduction in
discretionary contributions to other qualified plans.
The board of directors will appoint Larry A. Dreyer, Peter J. Johnson
and Don O. Campbell to serve as the plan's trustees and Larry A. Dreyer, Peter
J. Johnson and Teresa Artz make up the committee which administers the plan. The
trustees must vote all allocated shares held in the plan as directed by plan
participants. Allocated shares for which no instructions are received will not
be voted. Unallocated shares will be voted as directed by the trustees in the
exercise of their fiduciary responsibilities.
Potential Stock Benefit Plans
Stock Option Plans. Following the offering, we intend to adopt a stock
option plan for directors and key employees within one year after the
reorganization. Any plan adopted will be subject to stockholder approval and
applicable laws. Any plan adopted within one year of the reorganization will
require the approval of a majority of the shares of stock held by our
stockholders, other than Eagle Financial MHC, and will also be subject to
various other regulatory limitations. However, if a stock option plan is
implemented upon stockholder approval, options to purchase our common stock in
an amount up to 10% of the amount sold in our offering will be awarded to our
key employees and directors. Shares awarded upon the exercise of option plans
pursuant to the stock option plan will be acquired through open market purchases
or from authorized but unissued shares.
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The purpose of the stock option plan is to attract and retain qualified
personnel in key positions, provide officers, key employees and directors with a
proprietary interest in Eagle Bancorp as an incentive to contribute to our
success and reward officers and key employees for outstanding performance.
Although the terms of the stock option plan have not yet been determined, it is
expected that the stock option plan will provide for the grant of options to
purchase the common stock intended to qualify as incentive stock options under
the Internal Revenue Code. The stock plan will also provide for options that do
not so qualify. These are known as non-statutory stock options. Any stock option
plans would be in effect for up to ten years from the earlier of adoption by the
board of directors or approval by the stockholders.
Under the Office of Thrift Supervision regulations, a stock option plan
adopted within a year of the reorganization would provide for a term of 10
years, after which no awards could be made, unless earlier terminated by the
board of directors. The options awarded would vest equally over not less than a
five year period, beginning one year after the date of grant of the option.
Options would expire no later than 10 years from the date granted and would
expire earlier if the option committee so determines or in the event of
termination of employment. Options would be granted based on several factors,
including seniority, job duties and responsibilities, job performance, our
financial performance and a comparison of awards given by other savings
institutions converting from mutual to stock form.
Restricted Stock Program. Following the offering, we also intend to
establish a management recognition plan to provide our officers and outside
directors with a proprietary interest in Eagle Bancorp. The management
recognition plan is expected to provide for the award of common stock, subject
to vesting restrictions, at no cost to eligible officers, employees and
directors. Any management recognition plan adopted within one year of the
reorganization would require the approval of a majority of the shares of stock
held by our stockholders, other than Eagle Financial MHC, and will also be
subject to various other regulatory limitations.
We expect to contribute funds to the management recognition plan to
acquire, in the aggregate, up to 4% of the shares of common stock sold in the
offering. Shares used to fund the management recognition plan may be acquired
through open market purchases or from authorized but unissued shares. No
determinations have been made as to the specific terms of stock programs. If we
sell 746,566 shares of stock in the offering, and the shares of stock issued
pursuant to the management recognition plan are authorized but unissued stock,
existing stockholders would be diluted by up to approximately 1.0%.
Restrictions on Stock Benefit Plans. If we adopt a stock option plan or
management recognition plan within one year from the date of our reorganization,
these plans must comply with the following Office of Thrift Supervision
restrictions:
o the plans must be fully disclosed in this prospectus;
o for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares sold
in the reorganization;
o for the management recognition plan, the shares may not
exceed 4% of the shares sold in the reorganization;
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o the aggregate amount of stock purchased by the employee
stock ownership plan in the reorganization may not exceed
8%;
o no individual employee may receive more than 25% of the
available awards under the stock option plan or management
recognition plan;
o directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any
plan;
o all plans must be approved by a majority of the total votes
eligible to be cast (excluding the shares held by Eagle
Financial MHC) at any duly called meeting of Eagle Bancorp
stockholders held no earlier than six months following the
reorganization;
o for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant;
o neither stock option awards nor restricted stock awards may
vest earlier than 20% as of one year after the date of
stockholder approval and 20% per year thereafter, and
vesting may be accelerated only in the case of disability or
death, or if consistent with applicable Office of Thrift
Supervision regulations in effect at such time, after a
change in control;
o the proxy material must clearly state that the Office of
Thrift Supervision in no way endorses or approves of the
plans; and
o prior to implementing the plans, all plans must be submitted
to the Regional Director of the Office of Thrift Supervision
within five days after stockholder approval with a
certification that the plans approved by the stockholders
are the same plans that were filed with and disclosed in the
proxy materials relating to the meeting at which stockholder
approval was received.
Transactions with Management and Others
No directors, executive officers or immediate family members of such
individuals were engaged in transactions with American Federal Savings Bank or
any subsidiary involving more than $60,000 (other than through a loan) during
the fiscal year ended June 30, 1999. Furthermore, American Federal Savings Bank
had no "interlocking" relationships in which any executive officer is a member
of the board of directors of another entity, one of whose executive officers are
a member of American Federal's board of directors. It also does not have any
executive officer who is a member of the compensation committee of another
entity, one of whose executive officers is a member of American Federal's board
of directors.
American Federal Savings Bank has followed the policy of offering
residential mortgage loans for the financing of personal residences, and
consumer loans to its officers, directors and employees. Loans are made in the
ordinary course of business. They are also made on substantially the same terms
and conditions, including interest rate and collateral, as those of
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comparable transactions prevailing at the time with other persons. These loans
do not include more than the normal risk of collectibility or present other
unfavorable features. As of June 30, 1999, the aggregate principal balance of
loans outstanding to all directors, executive officers and immediate family
members of such individuals was approximately $89,000.
PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate
number of shares of our common stock, each director, executive officer and their
associates intends to purchase in the reorganization. All shares will be
purchased for investment purposes and not for purposes of resale. For purposes
of the following table, it has been estimated that 649,188 shares (the mid-point
of the offering range, of common stock will be sold at $8.00 per share and that
sufficient shares will be available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Aggregate Price Percentage of
Total Shares of Shares Total Shares
Name Position Purchased (1) Purchased Offered
---- -------- ------------- --------- -------
<S> <C> <C> <C> <C>
Robert L. Pennington Chairman of the Board 17,500 $140,000 2.70%
Charles G. Jacoby Vice-Chairman 13,750 110,000 2.12
Larry A. Dreyer President, CEO and Director 17,500 140,000 2.70
Don O. Campbell Director 6,250 50,000 *
Teresa Hartzog Director 11,250 90,000 1.73
James A. Maierle Director 12,500 100,000 1.93
Thomas J. McCarvel Director 8,250 66,000 1.27
Michael C. Mundt Senior Vice President/Lending 5,000 40,000 *
Peter J. Johnson Senior Vice President/Treasurer 12,500 100,000 1.93
Joanne Y. Sanderson Senior Vice President/Operations 17,500 140,000 2.70
------- -------- -----
Total 122,000 $976,000 18.79%
======= ======== =====
</TABLE>
- -------------
(1) Does not include shares expected to be purchased by the ESOP or shares
awarded to participants in the management recognition plan, if implemented,
or under the stock option plan, if implemented.
* Represents less than 1% of outstanding shares.
RESTRICTIONS ON ACQUISITION OF EAGLE BANCORP
The following discussion is a summary of statutory and regulatory
restrictions on the acquisition of our common stock. In addition, the following
discussion summarizes the mutual holding company structure, provisions of
charters and bylaws and regulatory provisions that have an anti-takeover effect.
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Mutual Holding Company Structure
The mutual holding company structure will restrict the ability of our
stockholders to effect a change of control of management because Eagle Financial
MHC, as long as it remains in existence as a mutual entity, will control a
majority of our voting stock. In addition, voting rights in Eagle Financial MHC
are vested with the depositors of American Federal. As a general matter, Eagle
Financial MHC will be able to control the outcome of all matters presented to
the stockholders for a vote (including election of directors) except for matters
that require a greater vote than a majority.
Change in Bank Control Act
Federal law provides that no person, acting directly or indirectly or
through or in concert with one or more other persons, may acquire control of a
savings association unless the Office of Thrift Supervision has been given 60
days prior written notice. Federal law provides that no company may acquire
control of a savings and loan holding company without the prior approval of the
Office of Thrift Supervision. Any company that acquires control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the Office of Thrift Supervision. Pursuant to federal regulations,
control is conclusively deemed to have occurred when an entity, among other
things, has acquired more than 25 percent of any class of voting stock of the
institution or the ability to control the election of a majority of the
directors of an institution. Moreover, control is presumed to have occurred,
subject to rebuttal, after the acquisition of more than 10 percent of any class
of voting stock, or of more than 25 percent of any class of stock, of a savings
institution, where enumerated control factors are also present in the
acquisition. The Office of Thrift Supervision may prohibit an acquisition of
control if:
o it would result in a monopoly or substantially lessen
competition;
o the financial condition of the acquiring person might jeopardize
the financial stability of the institution; or
o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors
or of the public to permit the acquisition of control by such
person.
The foregoing restrictions do not apply to the acquisition of stock by
one or more tax-qualified employee stock benefit plans, provided that the plan
or plans do not have beneficial ownership in the aggregate of more than 25
percent of any class of our equity security.
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EAGLE BANCORP'S CHARTER AND BYLAWS
General
Our charter and bylaws are available at our administrative office or by
writing or calling us, at 1400 Prospect Avenue, P.O. Box 4999, Helena, MT
59604-4999. Our telephone number is (406) 442-3080.
Classified Board of Directors and Related Provisions. Our board of
directors is divided into three classes which are as nearly equal in number as
possible. Directors serve for terms of three years. As a result, each year, only
one-third of the directors are to be elected and it would take at least two
years to elect a majority of our directors. A director may be removed only by
the affirmative vote of the holders of a majority of the shares then entitled to
vote.
Restrictions on Voting of Securities. The charter provides that for
five years no person shall directly or indirectly acquire the beneficial
ownership of 10% or more of our securities other than Eagle Financial MHC. Any
shares so acquired will not be counted as shares entitled to vote, shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to stockholders for a vote, and shall not be counted as outstanding
for purposes of determining a quorum or the affirmative vote necessary to
approve any matter submitted to the stockholders for a vote. It is possible for
such a person to have voting authority for less than 10% of our shares,
depending on how the shares are registered.
Prohibition Against Cumulative Voting. Our charter also prohibits
cumulative voting by stockholders in the election of directors. Cumulative
voting allows a shareholder in an election for directors to cast a total number
of votes equal to the number of directors to be elected, multiplied by the
number of shares he owns. He may then distribute such votes in any manner he
chooses, including casting them for a single director. The absence of cumulative
voting rights effectively means that the holders of a majority of the shares
voted at a meeting of stockholders may, if they so choose, elect all directors
elected at the meeting. It therefore precludes a minority stockholder from
obtaining representation on the board of directors unless the minority
stockholder is able to obtain the support of a majority. In accordance with the
law that relates to mutual holding companies, Eagle Financial MHC must remain
the majority holder of our voting stock for as long as it exists.
Additional Anti-Takeover Provisions. The provisions described above are
not the only provisions of our charter and bylaws having an anti-takeover
effect. For example, the charter authorizes the issuance of up to 1,000,000
shares of preferred stock, which conceivably would represent an additional class
of stock required to approve any proposed acquisition. This preferred stock,
none of which has been issued, together with authorized but unissued shares of
the common stock (the charter authorizes the issuance of up to eight million
shares of the common stock), also could represent additional capital required to
be purchased by the acquiror.
In addition to discouraging a takeover attempt which a majority of our
stockholders might determine to be in their best interest or in which our
stockholders might receive a premium over the current market prices for their
shares, the effect of these provisions may render
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the removal of our management more difficult. It is possible that incumbent
officers and directors might be able to retain their positions even though a
majority of our stockholders, other than Eagle Financial MHC, desire a change.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 10,000,000 shares of common stock, par value
$0.01 per share and 1,000,000 shares of preferred stock, no par value. We
currently expect to issue between 1,174,063 and 1,588,438 shares of common stock
in the reorganization, including between 551,809 and 746,566 shares to persons
other than Eagle Financial MHC. After payment of the purchase price shares of
common stock issued in the offering will be fully paid and non-assessable. The
common stock will represent nonwithdrawable capital, will not be an account of
an insurable type and will not be insured by the FDIC or any other governmental
agency.
Voting Rights
The holders of common stock will possess exclusive voting rights in
Eagle Bancorp. The holders of shares of common stock will be entitled to one
vote for each share held on all matters subject to stockholder vote.
Liquidation Rights
After any liquidation, dissolution, or winding-up of Eagle Bancorp, the
holders of the common stock generally would be entitled to receive, after
payment of all debts and liabilities of Eagle Bancorp and American Federal, all
assets of Eagle Bancorp available for distribution. See also "The Reorganization
- -- Effects of the Reorganization -- Liquidation Rights."
Preemptive Rights; Redemption
The holders of the common stock do not have any preemptive rights with
respect to any shares we may issue. Any subsequent stock issuance, however, may
only be effected through a Stock Issuance Plan approved by the Office of Thrift
Supervision which would grant subscription priorities to Eagle Financial MHC's
members unless Eagle Bancorp demonstrates that a non-conforming stock issuance
would be more beneficial to Eagle Bancorp. The common stock will not be subject
to any redemption provisions.
Preferred Stock
We are authorized to issue up to 1,000,000 shares of preferred stock
and to fix and state voting powers, designations, preferences, or other special
rights of such shares and the qualifications, limitations and restrictions of
those shares as the board of directors may determine in its discretion.
Preferred stock may be issued in distinctly designated series, may be
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<PAGE>
convertible into common stock and may rank prior to the common stock as to
dividends rights, liquidation preferences, or both, and may have full or limited
voting rights. Accordingly, the issuance of preferred stock could adversely
affect the voting and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares. Depending on the circumstances, however, stockholder approval may be
required pursuant to requirements for eligibility for quotation of the common
stock on the Nasdaq Stock Market or by any exchange on which the common stock
may then be listed.
INDEMNIFICATION
The Office of Thrift Supervision's regulations concerning the
permissible extent of indemnification of directors and officers will govern
Eagle Bancorp's indemnification of its directors and executive officers against
any potential liability under the Securities Act of 1933, as amended.
Specifically, Eagle Bancorp will provide indemnification to executive officers
and directors, including the payment of such officer's or director's reasonable
costs and expenses, in connection with defense or settlement of a claim under
the Securities Act of 1933, as amended, if there shall be a final judgment on
the merits in favor of such officer or director, or in the case of settlement of
such action other than on the merits, if the majority of the directors of Eagle
Bancorp determine that the director or executive officer seeking indemnification
acted in good faith within what he was reasonably entitled to believe under the
circumstances was in the best interests of Eagle Bancorp or its stockholders.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors and executive officers of Eagle
Bancorp pursuant to the forgoing provisions or otherwise Eagle Bancorp has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is therefore unenforceable.
CHANGE IN AUDITORS
On August 19, 1999, the board of directors of American Federal Savings
Bank approved a change in auditors. Specifically, the Board determined to
replace Anderson ZurMuehlen & Co., P.C. with Moss Adams LLP. Moss Adams LLP was
engaged to audit the financial statements of American Federal Savings Bank for
the year ended June 30, 1999. The board of directors engaged Moss Adams LLP
because the Board determined that it was in our best interests to engage an
auditor with broad experience in the auditing of public companies in
anticipation of the reorganization.
Anderson ZurMuehlen & Co., P.C.'s report on the financial statements
for the fiscal year ended June 30, 1998, did not contain an adverse opinion or
disclaimer of opinion and was not
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qualified as to uncertainty, audit scope or accounting principles. During the
fiscal year ended June 30, 1998, and through the date hereof, there were no
disagreements between us and Anderson ZurMuehlen & Co., P.C. on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
During the fiscal year ended June 30, 1999, and through the date
hereof, Anderson ZurMuehlen & Co., P.C. did not advise, and has not indicated to
us that it had any reason to advise us of the following:
o that the internal controls necessary for us to develop reliable
financial statements did not exist;
o that information had come to Anderson ZurMuehlen & Co. P.C.'s
attention that had led it to no longer be able to rely on
management's representations, or that made it unwilling to be
associated with the financial statements prepared by management;
o that it needed to expand significantly the scope of our audit, or
that information had come to Anderson ZurMuehlen & Co. P.C.'s
attention during such time period that if further investigated
might materially impact the fairness or reliability of a
previously issued audit report or the underlying financial
statements. Further, Anderson ZurMuehlen & Co., P.C. did not
advise us that matters came to its attention which would
materially impact upon the financial statements issued or to be
issued covering the fiscal periods subsequent to the date of the
most recent financial statements covered by an audit report
(including information that may prevent it from rendering an
unqualified audit report on those financial statements). In
addition, we were not advised by Anderson ZurMuehlen & Co., P.C.
of any matters that would cause it to be unwilling to rely on
management's representation or to be associated with our
financial statements'
o that information had come to Anderson ZurMuehlen & Co., P.C.'s
attention that it had concluded materially impacted the fairness
or reliability of either a previously issued audit report or the
underlying financial statements, or the financial statements
issued or to be issued covering the fiscal periods subsequent to
the date of the most recent financial statements covered by an
audit report (including information that, unless resolved to
Anderson ZurMuehlen & Co., P.C.'s satisfaction, have prevented it
from rendering an unqualified audit report on those financial
statements);
During the two most recent fiscal years and the subsequent interim
periods preceding the selection of Moss Adams LLP, we had not consulted Moss
Adams LLP regarding the application of accounting principles, either
contemplated or proposed, the type of audit opinion that might be rendered on
our financial statements or any other matters that would be required to be
reported therein.
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LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
matters relating to the reorganization and federal taxation will be passed upon
for us by Nixon Peabody LLP , Washington, D.C. Matters relating to state
taxation will be passed upon for us by Anderson ZurMuehlen & Co., P.C., Helena,
Montana. Legal matters will be passed upon for Ryan, Beck & Co., Inc. by Luse,
Lehman, Gorman, Pomerenk & Schick, PC, Washington, D.C.
EXPERTS
Our financial statements as of June 30, 1999, and for the year ended
June 30, 1999, have been included in this prospectus in reliance upon the report
of Moss Adams LLP, independent certified public accountants, appearing elsewhere
in this prospectus, and upon the authority of this firm as experts in accounting
and auditing.
Our financial statements as of June 30, 1998, and for the year ended
June 30, 1998, have been included in this prospectus in reliance upon the report
of Anderson ZurMuehlen & Co., P.C., independent certified public accountants,
appearing elsewhere in this prospectus, and upon the authority of this firm as
experts in accounting and auditing.
Feldman Financial has consented to the publication in this document of
a summary of its letter to American Federal Savings Bank setting forth its
opinion as to the estimated pro forma market value of the common stock upon the
reorganization and stock offering and its opinion setting forth the value of
subscription rights and to the use of its name and statements with respect to it
appearing in this document.
REGISTRATION REQUIREMENTS
Our common stock will be registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended. We will be subject to the
information, proxy solicitation, insider trading restrictions, tender offer
rules, periodic reporting and other requirements of the SEC under the Securities
Exchange Act of 1934, as amended. We may not deregister the common stock under
the Securities Exchange Act of 1934, as amended for a period of at least three
years following the reorganization.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended and must file reports and other information
with the SEC.
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. Such information, including the appraisal report which is an exhibit
to the registration statement, can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. You may obtain information on the operation of the Public
Reference Room by calling 1-800-SEC-0330. The SEC also maintains an internet
address or website that contains reports, proxy and information statements and
other information regarding registrants, including Eagle Bancorp, that file
electronically with the SEC. The address for the SEC site is
"http://www.sec.gov." The statements contained in this document as to the
contents of any
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contract or other document filed as an exhibit to the Form SB-2 are, of
necessity, brief descriptions and are not necessarily complete; each such
statement is qualified by reference to such contract or document.
A copy of the Amended and Restated Plan Of Mutual Holding Company
Reorganization And Stock Issuance, our charter and bylaws, as well as those of
American Federal Savings Bank and Eagle Financial MHC, are available for review
without charge from American Federal. They are available at all of our branches.
We filed a notice of mutual holding company reorganization with the
Office of Thrift Supervision on Form MHC-1 and Form MHC-2 and an application
H-(e)1 with the Office of Thrift Supervision. This prospectus omits some
information contained in that application. The Application may be examined at
the principal office of the Office of Thrift Supervision, 1700 G Street, N.W.,
Washington, D.C. 20552, and at the West Regional Office of the Office of Thrift
Supervision, Pacific Telesis Tower, 1 Montgomery Street, Suite 400, San
Francisco, CA 94104.
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AMERICAN FEDERAL SAVINGS BANK
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
CONTENTS
- --------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITOR'S REPORT .................................... F2-3
FINANCIAL STATEMENTS
Statements of financial condition ........................... F4-5
Statements of income ........................................ F6-7
Statements of retained earnings and accumulated other
comprehensive income .................................... F8
Statements of cash flows .................................... F9-10
Notes to financial statements ............................... F11-38
- -------------
1. Certain schedules are omitted because the required information is not
applicable or is included in the financial statements and related notes.
2. The mutual holding company financial statements have not been included
because it has not yet been formed.
<PAGE>
[MOSS ADAMS LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Federal Savings Bank
We have audited the accompanying statement of financial condition of American
Federal Savings Bank (the "Bank") as of June 30, 1999, and the related
statements of income, retained earnings and accumulated other comprehensive
income, and cash flows for the year ended June 30, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Federal Savings Bank
as of June 30, 1999, and the results of its operations and its cash flows for
the year ended June 30, 1999, in conformity with generally accepted accounting
principles.
Moss Adams LLP
Portland, Oregon
October 26, 1999
F-2
<PAGE>
[ANDERSON ZURMUEHLEN LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Federal Savings Bank
We have audited the accompanying statements of financial condition of American
Federal Savings Bank (the Bank) as of June 30, 1998, and the related statements
of income, equity, and cash flows for the year 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Federal Savings Bank
as of June 30, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Anderson ZurMuehlen & Co., P.C.
Helena, Montana
August 13, 1998
F-3
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ---------------------------
1999 1999 1998
---- ---- ----
(Unaudited)
ASSETS
<S> <C> <C> <C>
Cash and due from banks ................. $ 3,381,616 $ 2,566,171 $ 2,387,538
Interest-bearing deposits with banks .... 550,000 4,175,000 4,400,000
------------ ------------ ------------
Total cash and cash equivalents .. 3,931,616 6,741,171 6,787,538
Investment securities available-for-sale,
at market value ......................... 16,349,061 16,590,332 15,880,243
Investment securities held-to-maturity,
market value of $14,513,681, in September
1999, $14,409,769 and $11,458,818 in
June 1999 and 1998, respectively ........ 14,601,372 14,497,696 11,365,879
Federal Home Loan Bank stock, at cost ........ 1,324,900 1,301,200 1,207,400
Mortgage loans held-for-sale ................. 585,449 1,066,384 3,050,827
Loans receivable, net of deferred loan fees
and allowance for loan losses ........... 99,863,665 97,036,135 95,048,906
Accrued interest and dividends receivable .... 886,903 739,071 769,016
Mortgage servicing rights .................... 1,322,960 1,279,041 751,573
Property and equipment, net .................. 7,242,207 7,361,072 7,167,527
Cash surrender value of life insurance ....... 1,971,445 1,948,570 1,857,652
Other assets ................................. 299,160 330,700 538,829
------------ ------------ ------------
Total assets ..................... $148,378,738 $148,891,372 $144,425,390
============ ============ ============
</TABLE>
F-4
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, -------------------------
1999 1999 1998
---- ---- ----
(Unaudited)
LIABILITIES
Deposit accounts:
<S> <C> <C> <C>
Noninterest-bearing ............... $ 5,960,717 $ 5,222,747 $ 4,376,198
Interest-bearing .................. 117,843,579 115,598,941 110,352,392
Advances from Federal Home Loan Bank . 8,507,778 12,574,445 14,841,111
Accrued expenses and other liabilities 1,991,408 1,601,720 2,000,611
------------ ------------ ------------
Total liabilities ......... 134,303,482 134,997,853 131,570,312
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
(Note 12)
EQUITY
Retained earnings (substantially
restricted) .................... 14,308,482 14,099,920 12,847,668
Accumulated other comprehensive
(loss) income .................. (233,226) (206,401) 7,410
------------ ------------- ----------
Total equity ............... 14,075,256 13,893,519 12,855,078
------------ ------------- ----------
Total liabilities and equity $ 148,378,738 $ 148,891,372 $144,425,390
============= ============= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
------------------------------ -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans ......................... $ 1,982,300 $ 2,074,220 $ 8,048,779 $ 8,494,705
Interest on deposits with banks .................... 41,466 90,086 381,255 225,143
Federal Home Loan Bank stock
dividends ....................................... 23,778 22,825 93,925 90,603
Interest and dividends on investment
securities available-for-sale ................... 245,610 210,408 728,099 687,596
Interest and dividends on investment
securities held-to-maturity ..................... 214,820 184,838 769,918 769,027
------------ ------------ ------------ ------------
Total interest and dividend income .......... 2,507,974 2,582,377 10,021,976 10,267,074
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits ........................................... 1,119,214 1,122,197 4,355,392 4,504,605
Federal Home Loan Bank advances .................... 168,790 222,591 837,692 934,863
------------ ------------ ------------
Total interest expense ...................... 1,288,004 1,344,788 5,193,084 5,439,468
------------ ------------ ------------
NET INTEREST INCOME ..................................... 1,219,970 1,237,589 4,828,892 4,827,606
LOAN LOSS PROVISION ..................................... 15,000 15,000 60,000 60,000
------------ ------------ ------------ ------------
Net interest income after loan
loss provision .......................... 1,204,970 1,222,589 4,768,892 4,767,606
------------ ------------ ------------ ------------
NONINTEREST INCOME
Demand deposit service charges ..................... 118,605 119,388 463,320 469,377
Net gain on sale of loans .......................... 88,337 187,901 714,369 629,244
Mortgage loan servicing fees ....................... 37,347 31,832 115,113 129,535
Net (loss) gain on sale of available-for-
sale securities ................................. (30,355) (6,039) (6,039) 4,903
Other .............................................. 81,678 95,272 365,808 354,232
------------ ------------ ------------ ------------
Total noninterest income .................... 295,612 428,354 1,652,571 1,587,291
------------ ------------ ------------ ------------
</TABLE>
F-6
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
------------------------------ -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
NONINTEREST EXPENSE
<S> <C> <C> <C> <C>
Salaries and employee benefits ..................... $ 642,073 $ 603,604 $ 2,421,586 $ 2,370,471
Occupancy .......................................... 106,670 107,302 430,805 425,858
Furniture and equipment depreciation ............... 79,466 61,838 289,246 245,282
Data processing .................................... 38,843 42,065 164,454 132,973
Advertising ........................................ 40,521 34,265 160,297 145,068
Federal insurance premiums ......................... 16,866 17,360 68,384 69,450
Consulting ......................................... 16,620 -- 40,168 2,100
Postage ............................................ 23,636 25,920 98,709 87,952
ATM processing ..................................... 19,674 15,050 69,407 60,743
Legal, accounting, and examination fees ............ 17,909 19,931 78,861 84,672
Other .............................................. 169,625 181,834 639,723 573,590
------------ ------------ ------------ ------------
Total noninterest expense ................... 1,171,903 1,109,169 4,461,640 4,198,159
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES ....................................... 328,679 541,774 1,959,823 2,156,738
PROVISION FOR INCOME TAXES .............................. 120,117 201,800 707,571 914,474
------------ ------------ ------------ ------------
NET INCOME .............................................. $ 208,562 $ 339,974 $ 1,252,252 $ 1,242,264
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
OTHER COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
-------- ------ -----
<S> <C> <C> <C>
BALANCE, July 1, 1997 ....................... $ 11,605,404 $ 15,108 $ 11,620,512
Comprehensive income:
Net income ............................. 1,242,264 -- 1,242,264
Change in net unrealized gain on
securities available-for-sale, net of
tax effects of $(4,810) ............. -- (7,698) (7,698)
------------ ------------ ------------
Total comprehensive income ...... 1,234,566
------------
BALANCE, June 30, 1998 ...................... 12,847,668 7,410 12,855,078
------------ ------------ ------------
Comprehensive income:
Net income ............................. 1,252,252 -- 1,252,252
Change in net unrealized gain on
securities available-for-sale, net of
tax effects of $133,595 ............. -- (213,811) (213,811)
------------ ------------ ------------
Total comprehensive income ...... 1,038,441
------------
BALANCE, June 30, 1999 ...................... 14,099,920 (206,401) 13,893,519
------------ ------------ ------------
Comprehensive income:
Net income ............................. 208,562 -- 208,562
Change in net unrealized loss on
securities available-for-sale, net of
tax effects of $(16,760) ............ -- (26,825) (26,825)
------------ ------------ ------------
Total comprehensive income ...... 181,737
------------
BALANCE, September 30, 1999
(Unaudited) ............................ $ 14,308,482 $ (233,226) $ 14,075,256
============ ============ ============
</TABLE>
See accompanying notes.
F-8
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
--------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income .................................................... $ 208,562 $ 339,974 $ 1,252,252 $ 1,242,264
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses .................................. 15,000 15,000 60,000 60,000
Depreciation, accretion, and amortization expense .......... 212,660 182,170 729,821 558,356
Deferred loan fees ......................................... (16,180) (33,746) (82,211) (14,532)
Gain on sale of loans ...................................... (88,337) (187,901) (714,369) (629,244)
Net realized (gain) loss on sale of available-for-sale
securities ............................................. 30,355 6,039 6,039 (4,903)
Federal Home Loan Bank stock dividends ..................... (23,700) (22,800) (103,460) (114,902)
Increase in cash surrender value of life insurance ......... (22,875) (22,861) (90,918) (90,936)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accrued interest and dividends receivable .............. (147,832) (89,897) 29,945 (35,096)
Proceeds from sale of loans held-for-sale .............. 5,348,248 13,078,851 48,243,228 37,203,421
Origination of loans held-for-sale ..................... (4,674,616) (10,717,612) (46,258,785) (37,452,873)
Other assets ........................................... 31,540 (672) 64,656 9,915
Increase (decrease) in liabilities:
Accrued expenses and other liabilities ................. 389,688 532,873 (234,558) 326,911
------------ ------------ ------------ ------------
Net cash from operating activities .............. 1,262,513 3,079,418 2,901,640 1,058,381
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, maturities, and redemptions of
securities held-to-maturity ................................ 330,706 367,761 5,613,994 6,704,805
Purchase of securities held-to-maturity ....................... (449,936) (2,620,400) (8,762,848) (3,170,909)
Proceeds from sales of securities available-for-sale .......... 1,715,580 5,531,870 9,446,590 6,385,814
Purchase of securities available-for-sale ..................... (1,576,303) (1,586,752) (10,457,313) (11,993,725)
Net (increase) decrease in loans receivable ................... (2,982,031) (1,408,168) (1,930,354) 128,404
Proceeds from the sale of real estate ......................... -- 159,000 159,000 --
Purchase of property and equipment ............................ (247,297) (235,646) (673,133) (161,857)
Proceeds from sale of equipment ............................... 221,274 --
Principal payments received on contract receivable ............ -- -- -- 43,742
------------ ------------ ------------ ------------
Net cash from investing activities .............. (2,988,007) 207,665 (6,604,064) (2,063,726)
------------ ------------ ------------ ------------
</TABLE>
F-9
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
--------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C> <C>
Payments on mortgages ......................................... $ -- $ (138,029) $ (138,029) $ (22,551)
Net increase (decrease) in checking and savings accounts ...... 2,322,616 (642,528) 5,063,235 3,172,147
Net increase in certificates of deposit ....................... 659,990 674,443 1,023,831 1,242,116
Net increase (decrease) in short-term borrowings .............. -- -- (26,314) 5,538
Net increase (decrease) in FHLB advances ...................... (4,066,667) (2,066,666) (2,266,666) 1,058,333
------------ ------------ ------------ ------------
Net cash from financing activities .............. (1,084,061) (2,172,780) 3,656,057 5,455,583
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH .................................... (2,809,555) 1,114,303 (46,367) 4,450,238
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, beginning of period ..................... 6,741,171 6,787,538 6,787,538 2,337,300
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period ........................... $ 3,931,616 $ 7,901,841 $ 6,741,171 $ 6,787,538
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ................................................... $ 103,890 $ 111,256 $ 5,199,828 $ 5,432,053
============ ============ ============ ============
Income taxes ............................................... $ 73,000 $ 109,500 $ 905,900 $ 565,000
============ ============ ============ ============
NONCASH INVESTING ACTIVITIES:
Real estate acquired through the settlement of loans .......... $ -- $ -- $ -- $ 161,180
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-10
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS
American Federal Savings Bank (the "Bank") is a federally chartered savings
bank subject to the regulations of the Office of Thrift Supervision. The
Bank is a member of the Federal Home Loan Bank System and its deposit
accounts are insured to the applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
The Bank is headquartered in Helena, Montana, and operates additional
branches in Butte, Bozeman, and Townsend, Montana. The Bank's market area
is concentrated in south central Montana, to which it primarily offers
commercial, residential, and consumer loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement presentation and use of estimates - The financial
statements have been prepared in accordance with generally accepted
accounting principles and reporting practices applicable to the banking
industry. The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates are necessary in determining the recorded value of
the allowance for loan losses and available-for-sale securities. Management
believes the assumptions used in arriving at these estimates are
appropriate.
Interim unaudited financial statements - The financial statements as of
September 30, 1999, and for the three-month periods ended September 30,
1999 and 1998, have been prepared in accordance with generally accepted
accounting principles for interim financial information. This interim
information is unaudited, but in management's opinion, reflects all normal
and recurring adjustments necessary for a fair presentation. The results of
operations for the three months ended September 30, 1999, are not
necessarily indicative of results to be anticipated for the year ending
June 30, 2000.
Cash and cash equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash, interest-bearing deposits with correspondent
banks, and federal funds sold.
The Bank maintains cash balances at several banks. Accounts at each
institution are insured by the FDIC up to $100,000. No account balances
were held with correspondent Banks that were in excess of FDIC insured
levels.
F-11
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Investment securities - The Bank designates debt and equity securities as
either held-to-maturity, available-for-sale, or trading.
Held-to-maturity - Investment securities that management has the positive
intent and ability to hold until maturity are classified as
held-to-maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the interest method over the
period remaining until maturity.
Available-for-sale - Investment securities that will be held for indefinite
periods of time, including securities that may be sold in response to
changes in market interest or prepayment rates, needs for liquidity, and
changes in the availability of and the yield of alternative investments,
are classified as available-for-sale. These assets are carried at fair
value. Unrealized gains and losses, net of tax, are reported as other
comprehensive income. Gains and losses on the sale of available- for-sale
securities are determined using the specific identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary are recognized by write-downs of the individual securities to
their fair value. Such write-downs would be included in earnings as
realized losses.
Trading - No investment securities were designated as trading at September
30, 1999, or at June 30, 1999 and 1998, respectively.
Federal Home Loan Bank stock - The Bank's investment in Federal Home Loan
Bank (FHLB) stock is a restricted investment carried at par value ($100 per
share), which approximates its fair value. As a member of the FHLB system,
the Bank is required to maintain a minimum level of investment in FHLB
stock based on specific percentages of its outstanding FHLB advances. 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 made at the
discretion of the FHLB.
Mortgage loans held-for-sale - Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of cost or estimated
market value, determined in aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income.
F-12
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Loans receivable - Loans receivable that management has the intent and
ability to hold until maturity are reported at the outstanding principal
balance adjusted for any charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans and unamortized premiums or
unaccreted discounts on purchased loans. Loan origination fees, net of
certain direct origination costs are deferred and amortized over the
contractual life of the loan, as an adjustment of the yield, using the
interest method.
Impaired loans and related income - A loan is considered impaired when
management determines that it is probable that all contractual amounts of
principal and interest will not be paid as scheduled in the loan agreement.
These loans may include nonaccrual loans past due 90 days or more, loans
restructured in the current year, and other loans that management considers
to be impaired.
When a loan is placed on nonaccrual status, all interest previously
accrued, but not collected, is reversed and charged against interest
income. Income on nonaccrual loans is then recognized only when the loan is
brought current, or when, in the opinion of management, the borrower has
demonstrated the ability to resume payments of principal and interest.
Interest income on restructured loans is recognized pursuant to the terms
of new loan agreements. Interest income on other impaired loans is
monitored and based upon the terms of the underlying loan agreement.
However, the recorded net investment in impaired loans, including accrued
interest, is limited to the present value of the expected cash flows of the
impaired loan, the observable fair market value of the loan, or the fair
value of the loan's collateral.
Provision for loan losses - The allowance for loan losses is increased by
the provision for loan losses charged to operations and is decreased by
loan charge-offs, net of recoveries. Management estimates the provision for
loan losses by evaluating known and inherent risks in the loan portfolio.
These factors include changes in the size and composition of the loan
portfolio, actual loan loss experience, current economic conditions,
detailed analysis of individual loans for which full collectibility may not
be assured, determination of the existence and realizable value of the
collateral, and guarantees securing the loans. The allowance is based upon
market factors and trends which extend beyond the Bank's control, and which
may result in losses or recoveries differing significantly from those
provided for in the financial statements.
F-13
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with the foreclosures or in
satisfaction of loans. In connection with the determination of the
estimated losses on loans and foreclosed assets held-for-sale, management
obtains independent appraisals for significant properties.
The majority of the Bank's loan portfolio consists of commercial loans and
single-family residential loans secured by real estate in south central
Montana. Real estate prices in this market have been stable. However, the
ultimate collectibility of a substantial portion of the Bank's loan
portfolio may be susceptible to changes in local market conditions in the
future.
While management used available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based
on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process periodically review the
estimated losses on loans. Such agencies may require the Bank to recognize
additional losses based on their judgment about information available to
them at the time of their examination.
Mortgage servicing rights - The Bank allocates its total cost in mortgage
loans between mortgage servicing rights and loans, based upon their
relative fair values, when loans are subsequently sold or securitized, with
the servicing rights retained. Fair values are generally obtained through
quoted market prices. Impairment of mortgage servicing rights is measured
based upon the characteristics of the individual loans, including note
rate, term, underlying collateral, current market conditions, and estimates
of net servicing income. The Bank accounts for its recorded value, and
possible impairment of mortgage servicing rights, on a loan-by-loan basis.
The cost allocated to mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing income.
Real estate owned - Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at the lower of the unpaid
principal balance of the related loan or its fair market value less
estimated selling costs. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations of foreclosed real estate and changes in the valuation allowance
are included in gain on sale of real estate owned when the property is
disposed of.
F-14
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Property and equipment - Property and equipment is recorded at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the expected useful lives of the assets, ranging from 3 to 35
years. The costs of maintenance and repairs are expensed as they are
incurred, while major expenditures for renewals and betterments are
capitalized.
Income taxes - Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Deferred
taxes result from temporary differences in the recognition of certain
income and expense amounts between the Bank's financial statements and its
tax returns.
Advertising costs - The Bank expenses advertising costs as they are
incurred. Advertising costs were $40,521 and $34,265 for the three-month
periods ended September 30, 1999 and 1998, respectively, and were $160,297
and $145,068 for the years ended June 30, 1999 and 1998, respectively.
Impact of new accounting standards - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which was to be adopted by the Bank as of July 1, 1999.
However, in June 1999, FASB issued SFAS No. 137 which defers the effective
date of this statement by one year. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities. Upon adoption of the Statement, all derivatives must be
recognized at fair value as either assets or liabilities in the statement
of financial condition. Changes in the fair value of derivatives not
designed as hedging instruments are to be recognized currently in earnings
or are to be recognized as a component of other comprehensive income,
depending on the intended use of the derivatives and the resulting
designations. Upon adoption, retroactive application of this Statement to
financial statements of prior periods is not permitted. Management has
determined that the impact of adopting SFAS No. 133 will not be significant
to its financial condition and results of operations.
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
No. 65." This statement amends SFAS No. 65 to require that after the
securitization of mortgage loans held-for-sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
securities or other retained interest based on its ability and interest to
sell or hold these investments. Management does not expect this Statement
to have a significant impact on the Bank's financial condition or results
of operations.
F-15
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Reclassifications - Certain items in the 1998 financial statements have
been reclassified to conform with the presentation in the 1999 financial
statements. These reclassifications have no effect on the Bank's previously
reported financial position or results of operation.
NOTE 3 - REORGANIZATION TO CAPITAL STOCK FORM OF OWNERSHIP
(UNAUDITED)
On September 16, 1999, the Board of Directors of the Bank adopted a Mutual
Holding Company Plan of Reorganization and Stock Issuance ("the Plan") to
convert from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank with the concurrent formation of a
mutual holding company which will own the majority of the voting stock of
the newly formed capital stock holding company. The Bank will become a
wholly owned subsidiary of the capital stock holding company. This
reorganization is subject to approval by regulatory authorities and members
of the Bank. The reorganization is expected to be accomplished through
amendment of the Bank's federal charter and the sale of less than a
majority of the capital stock holding company's common stock. A
subscription offering of such shares of common stock will be offered
initially to eligible account holders, employee benefit plans of the Bank,
and other eligible customers of the Bank. Any shares of common stock not
sold in the subscription offering are expected to be sold to the general
public.
At the time of the reorganization, the Bank will establish a liquidation
account in an amount equal to its retained earnings as of the date of the
latest statement of financial condition appearing in the prospectus for the
offering. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the
Bank after the reorganization. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will
not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of the Bank, each eligible
account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
Subsequent to the reorganization, the capital stock holding company may not
declare or pay cash dividends on, or repurchase, any of its shares of
common stock if the effect thereof would cause equity to be reduced below
applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
F-16
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - REORGANIZATION TO CAPITAL STOCK FORM OF OWNERSHIP
(UNAUDITED) - (continued)
Reorganization costs will be deferred and reduce the proceeds of the shares
sold in the offering. If the reorganization is not completed, all costs
will be charged as an expense. As of September 30, 1999, reorganization
costs of approximately $33,000 had been incurred and are included in
prepaid expenses in the statement of financial condition.
In connection with the reorganization, the Bank is forming an employee
stock ownership plan (ESOP), and also intends to adopt additional stock
benefit plans as allowed by regulation.
The ESOP will become effective January 1, 2000. Employees who will become
eligible to participate include all employees who have completed one year
of service, have attained the age of 21, and who have been credited with
1,000 or more hours of service in any one year. An application for a letter
of determination as to the tax-qualified status of the ESOP will be
submitted to the IRS. Although no assurances can be given, management
expects that the ESOP will receive a favorable letter of determination from
the IRS.
Participants will become fully vested in their ESOP allocations based on a
seven-year vesting schedule as follows:
First two years of service........................ 0%
Three years....................................... 20%
Four years........................................ 40%
Five years........................................ 60%
Six years......................................... 80%
After seven years................................. 100%
F-17
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - REORGANIZATION TO CAPITAL STOCK FORM OF OWNERSHIP
(UNAUDITED) - (continued)
Following the offering, the Bank intends to adopt a stock option plan for
directors and key employees within one year after the reorganization. Up to
10% of the shares of common stock sold in the offering will be reserved for
issuance under the stock option plan. No determinations have been made as
to the specific terms of, or awards under, the proposed stock option plan.
The Bank also intends to establish stock programs for officers and outside
directors. The stock programs are expected to provide for the award of
common stock, subject to vesting restrictions, to eligible officers,
employees, and directors.
Finally, the Bank has entered into an Employment Agreement (the
"Agreement") with its President that has an initial term of three years,
and may be extended for an additional year with Board approval. Under this
Agreement, the President is entitled to a continuation of his salary plus
bonuses and deferred compensation from the date of termination through the
remaining term of the Agreement for a minimum of one year, if terminated
without cause. Continuing payments equal to 75% of the President's base
salary will be made to the President if he should become disabled. These
payments will continue until the President returns to full-time employment
at the Bank, reaches age 65, accepts another full-time position with
another employer, or upon his death. The Agreement becomes effective
January 1, 2000, and extends to December 31, 2002.
NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain cash reserves on deposit with the Federal
Reserve Bank based on deposits.
As of September 30, 1999, and June 30, 1999 and 1998, the Bank was required
to have aggregate cash deposits with the Federal Reserve Bank of
approximately $351,000, $290,000, and $404,000, respectively.
F-18
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT SECURITIES
The Bank's investment policy requires that the Bank purchase only
high-grade investment securities. Municipal obligations are categorized as
"AAA" or better by a nationally recognized statistical rating organization.
These ratings are achieved because the securities are backed by the full
faith and credit of the municipality and also supported by third-party
credit insurance policies. Mortgage backed securities and collateralized
mortgage obligations are issued by government sponsored corporations,
including Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association and the Guaranteed National Mortgage Association. The amortized
cost and estimated fair values of securities, together with unrealized
gains and losses, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------------------
(Unaudited)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government and agency
obligations .............. $ 4,430,688 $15,144 $(60,822) $ 4,385,010
Muncipal obligations ......... 3,309,058 - (282,684) 3,026,374
Corporate obligations ........ 4,536,631 - (31,784) 4,504,847
Mortgage-backed securities ... 3,993,183 - (12,789) 3,980,394
Collateralized mortgage
obligations .............. 458,453 - (6,017) 452,436
---------- ------- ---------- -----------
Total ................. $16,728,013 $15,144 $(394,096) $16,349,061
========== ======= ========== ===========
Held-to-maturity:
U.S. government and agency
obligations .............. $ 6,699,894 $ - $ (4,322) $ 6,695,572
Muncipal obligations ......... 1,063,132 - (19,206) 1,043,926
Mortgage-backed securities ... 6,838,346 - (64,163) 6,774,183
----------- ------- ----------- -----------
Total ................. $14,601,372 $ - $ (87,691)$ 14,513,681
=========== ======= =========== ===========
</TABLE>
F-19
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT SECURITIES - (Continued)
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government and agency
obligations ........... $ 3,609,163 $ 20,760 $ (93,811) $ 3,536,112
Municipal obligations .... 3,309,422 -- (191,723) 3,117,699
Corporate obligations .... 5,620,621 -- (77,047) 5,543,574
Mortgage-backed securities 3,809,157 14,167 -- 3,823,324
Collateralized mortgage
obligations ........... 577,337 -- (7,714) 569,623
----------- ----------- ----------- -----------
Total ............. $16,925,700 $ 34,927 $ (370,295) $16,590,332
=========== =========== =========== ===========
Held-to-maturity:
U.S. government and agency
obligations ........... $ 6,699,734 $ 4,323 $ -- $ 6,704,057
Municipal obligations .... 954,704 -- (10,110) 944,594
Mortgage-backed securities 6,843,258 -- (82,140) 6,761,118
----------- ----------- ----------- -----------
Total ............. $14,497,696 $ 4,323 $ (92,250) $14,409,769
=========== =========== =========== ===========
</TABLE>
F-20
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT SECURITIES - (Continued)
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government and agency
obligations ........... $ 6,368,197 $ 3,467 $ (6,394) $ 6,365,270
Corporate obligations .... 3,596,052 -- (623) 3,595,429
Mortgage-backed securities 2,212,608 32,967 -- 2,245,575
Collateralized mortgage
obligations ........... 1,666,845 -- (11,339) 1,655,506
Mutual Funds ............. 2,024,502 -- (6,039) 2,018,463
----------- ----------- ----------- -----------
Total ............. $15,868,204 $ 36,434 $ (24,395) $15,880,243
=========== =========== =========== ===========
Held-to-maturity:
U.S. government and agency
obligations ........... $ 6,416,868 $ 32,280 $ -- $ 6,449,148
Municipal obligations .... 786,183 350 -- 786,533
Mortgage-backed securities 4,162,828 60,309 -- 4,223,137
----------- ----------- ----------- -----------
Total ............. $11,365,879 $ 92,939 $ -- $11,458,818
=========== =========== =========== ===========
</TABLE>
Gross realized (losses) gains on securities available-for-sale, were
$(30,355) and $(6,039) for the three-month periods ended September 30, 1999
and 1998, respectively, and were $(6,039) and $4,903 for the years ended
June 30, 1999 and 1998, respectively.
F-21
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT SECURITIES - (continued)
The amortized cost and estimated fair value of securities at September 30,
1999, and June 30, 1999, by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------
(Unaudited)
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due within one year ........ $ 4,529,036 $ 4,530,181 $ 427,959 $ 428,124
Due after one year through
five years ............ 3,123,990 3,105,892 5,598,210 5,563,993
Due after five years through
ten years ............. 110,000 103,425 1,501,570 1,453,520
Due after ten years ........ -- -- 4,748,638 4,470,594
----------- ----------- ----------- -----------
7,763,026 7,739,498 12,276,377 11,916,231
Mortgage-backed securities . 6,838,346 6,774,183 3,993,183 3,980,394
Collateralized mortgage
obligations ........... -- -- 458,453 452,436
----------- ----------- ----------- -----------
Total .......... $14,601,372 $14,513,681 $16,728,013 $16,349,061
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------
(Unaudited)
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due within one year ........ $ 4,417,332 $ 4,422,172 $ 429,215 $ 429,114
Due after one year through
five years ............ 3,137,106 3,131,320 5,691,406 5,603,525
Due after five years through
ten years ............. 100,000 95,159 1,503,861 1,452,260
Due after ten years ........ -- -- 4,914,724 4,712,486
----------- ----------- ----------- -----------
7,654,438 7,648,651 12,539,206 12,197,385
Mortgage-backed securities . 6,843,258 6,761,118 3,809,157 3,823,324
Collateralized mortgage
obligations ........... -- -- 577,337 569,623
----------- ----------- ----------- -----------
Total .......... $14,497,696 $14,409,769 $16,925,700 $16,590,332
=========== =========== =========== ===========
</TABLE>
F-22
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT SECURITIES - (continued)
A federal agency obligation bond valued at approximately $501,000 amortized
cost has been pledged to the Federal Reserve Bank to serve as collateral
for the Bank's treasury, tax, and loan account at September 30, 1999, and
June 30, 1999 and 1998.
NOTE 6 - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ------------------------------
1999 1999 1998
---- ---- ----
(Unaudited)
First mortgage loans
<S> <C> <C> <C> <C>
Residential mortage (1-4 family) $ 71,936,291 $ 71,119,512 $ 69,723,904
Commercial real estate ......... 7,528,695 6,811,426 7,555,342
Real estate construction ....... 1,210,301 654,046 1,131,871
Other loans
Home equity .................... 11,823,181 11,867,266 10,103,271
Consumer ....................... 6,334,743 5,331,388 4,549,260
Commercial ..................... 1,908,412 2,119,684 2,876,442
------------- ------------- -------------
Total ................... 100,741,623 97,903,322 95,940,090
Less: Allowance for loan losses ..... (747,758) (736,624) (678,410)
Deferred loan fees, net ....... (130,200) (130,563) (212,774)
------------- ------------- -------------
Total ................... $ 99,863,665 $ 97,036,135 $ 95,048,906
============= ============= =============
</TABLE>
Loans, net of related allowance for loan losses, on which the accrual of
interest has been discontinued was $875,046 at September 30, 1999, and
$804,828 and $262,466 at June 30, 1999 and 1998, respectively. Interest
income not accrued on these loans and cash received on interest income was
immaterial for the three-month periods ended September 30, 1999 and 1998,
and for the years ended June 30, 1999 and 1998. The allowance for loan
losses on nonaccrual loans as of September 30, 1999 and June 30, 1999 and
1998, was $33,030, $28,898, and $48,381, respectively. The Bank expects to
collect all amount due on nonaccrual loans, including interest accrued at
contractual rates, accordingly there are no loans considered impaired at
September 30, 1999 or June 30, 1999 and 1998, respectively.
F-23
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - LOANS RECEIVABLE - (continued)
There were no loans considered impaired during the period ended September
30, 1999, or during the years ending June 30, 1999 and 1998, respectively.
The following is a summary of changes in the allowance for loan losses:
THREE-MONTH
PERIODS ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
------------------------ -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
BALANCE,
beginning of period .... $ 736,624 $ 678,410 $ 678,410 $ 683,951
Provision charged to
operations ............. 15,000 15,000 60,000 60,000
Charge-offs ................. (8,620) (19,200) (18,330) (81,057)
Recoveries .................. 4,754 20,542 16,544 15,516
--------- --------- --------- ---------
BALANCE,
end of period .......... $ 747,758 $ 703,752 $ 736,624 $ 678,410
========= ========= ========= =========
Loans are granted to directors and officers of the Bank in the ordinary
course of business. Such loans are made in accordance with policies
established for all loans of the Bank, except that directors, officers, and
employees may be eligible to receive discounts on loan origination costs.
Loans receivable from directors and senior officers of the Bank at
September 30, 1999, and June 30, 1999 and 1998, were $89,364, $88,538, and
$105,561, respectively. Interest income from these loans was $6,947 and
$8,357 for the years ended June 30, 1999 and 1998, respectively. Interest
income on these loans for the three-month periods ended September 30, 1999
and 1998, was immaterial to the financial statements.
F-24
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - MORTGAGE SERVICING RIGHTS
The Bank is servicing loans for the benefit of others totaling
approximately $112,229,000, and $90,592,000 at September 30, 1999 and 1998,
respectively, and $108,931,000, and $81,739,000 at June 30, 1999 and 1998,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors, and foreclosure processing.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $829,000,
$1,112,000, $524,000, and $403,000 at September 30, 1999 and 1998,
respectively, and June 30, 1999 and 1998, respectively.
The following is a summary of mortgage servicing rights:
<TABLE>
<CAPTION>
THREE-MONTH
PERIODS ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
BALANCE,
beginning of period $ 1,279,041 $ 751,573 $ 751,573 $ 263,434
Mortgage servicing rights
capitalized ........ 80,681 179,282 670,265 549,000
Amortization of mortgage
servicing rights ... (36,762) (26,779) (142,797) (60,861)
----------- ----------- ----------- -----------
BALANCE,
end of period ...... $ 1,322,960 $ 904,076 $ 1,279,041 $ 751,573
=========== =========== =========== ===========
</TABLE>
No write-offs of mortgage servicing rights have occurred during the
three-month periods ended September 30, 1999 and 1998, and the years ended
June 30, 1999 and 1998. Accordingly, the Bank believes that no valuation
allowance is required.
F-25
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment is summarized by major classification as follows:
JUNE 30,
SEPTEMBER 30, -----------------------------
1999 1999 1998
---- ---- ----
(Unaudited)
Land, buildings, and
improvements ................ $ 7,730,642 $ 7,723,090 $ 7,389,215
Furniture and equipment ........ 2,720,596 2,719,272 2,528,934
------------ ------------ ------------
Total .................. 10,451,238 10,442,362 9,918,149
Accumulated depreciation ....... (3,209,031) (3,081,290) (2,750,622)
------------ ------------ ------------
Total .................. $ 7,242,207 $ 7,361,072 $ 7,167,527
============ ============ ============
Depreciation expense totaled $144,890 and $133,350 for the three-month
periods ended September 30, 1999 and 1998, respectively, and $479,053 and
$435,151 for the years ended June 30, 1999 and 1998, respectively.
NOTE 9 - DEPOSITS
Deposits are summarized as follows:
JUNE 30,
SEPTEMBER 30, --------------------------
1999 1999 1998
---- ---- ----
(Unaudited)
Noninterest checking .............. $ 5,960,717 $ 5,222,747 $ 4,376,198
Interest-bearing checking
(1.50%, 1.50%, 2.00%) ........ 21,990,296 21,466,834 21,286,969
Passbook (3.00%, 3.00%, 3.00%) .... 21,030,302 21,429,656 20,174,375
Money market (3.71%, 3.61%, 3.43%) 15,906,353 14,445,816 11,658,457
Time certificates of deposit
(4.07% - 7.70%) .............. 58,916,628 58,256,635 57,232,591
------------ ------------ ------------
$123,804,296 $120,821,688 $114,728,590
============ ============ ============
F-26
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - DEPOSITS - (continued)
The weighted average cost of funds was 3.64%, 3.66%, and 3.98% at September
30, 1999, and June 30, 1999 and 1998, respectively.
Time certificates of deposit maturities are as follows:
SEPTEMBER 30, JUNE 30,
1999 1999
---- ----
(Unaudited)
Within one year ...................... $42,008,413 $40,480,805
One to two years ..................... 11,021,919 11,001,483
Two to three years ................... 5,018,741 5,905,332
Three to four years .................. 273,444 395,943
Four to five years ................... 152,243 453,032
Thereafter ........................... 441,868 20,040
----------- -----------
Total ........................ $58,916,628 $58,256,635
=========== ===========
Interest expense on deposits is summarized as follows:
THREE-MONTH
PERIODS ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
----------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Checking ................... $ 74,709 $ 81,483 $ 298,129 $ 362,978
Passbook ................... 161,432 152,974 614,071 602,660
Money market ............... 141,662 97,641 434,360 385,871
Time certificates
of deposit ................ 741,411 790,099 3,008,832 3,153,096
---------- ---------- ---------- ----------
Total ...... $1,119,214 $1,122,197 $4,355,392 $4,504,605
========== ========== ========== ==========
At September 30, 1999, and June 30, 1999 and 1998, the Bank held
$6,850,000, $8,659,000, and $8,600,000, respectively, in deposit accounts
of $100,000 or more. Deposit accounts in excess of $100,000 are not insured
by the FDIC.
Directors' and senior officers' deposit accounts at September 30, 1999 and
June 30, 1999 and 1998, were $639,061, $485,045, and $530,798,
respectively.
F-27
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank mature as follows:
JUNE 30,
SEPTEMBER 30, ----------------------------
Maturing period 1999 1999 1998
--------------- ---- ---- ----
(Unaudited)
Within one year ............. $ 2,266,667 $ 2,266,667 $ 2,266,667
One to two years ............ 266,667 266,667 2,266,667
Two to three years .......... 2,266,667 2,266,667 266,667
Three to four years ......... 266,667 2,266,667 2,266,667
Four to five years .......... 266,667 266,667 2,266,667
Thereafter .................. 3,174,443 5,241,110 5,507,776
----------- ----------- -----------
$ 8,507,778 $12,574,445 $14,841,111
=========== =========== ===========
Two advances require combined annual principal payments of $266,667. The
remaining advances are due at maturity. One advance is subject to a
quarterly put option by the FHLB which would allow the FHLB to require the
Bank to repay the advance ahead of its scheduled maturity. The next put
date is December 3, 1999. The advances are subject to prepayment penalties
and subsequent to year-end, two advances totaling $4,000,000 were paid
prior to their scheduled maturity. The weighted average interest rate for
these advances at September 30, 1999, and June 30, 1999 and 1998, was
6.32%, 6.48%, and 6.43%, respectively. The weighted average amount
outstanding was $10,389,000 for the period ended September 30, 1999, and
$12,892,000 and $14,463,000 for the years ended June 30, 1999 and 1998,
respectively.
The maximum amount outstanding at any month-end during the months ended
September 30, 1999, was $12,552,222, and $14,818,889 and $15,018,889 during
the years ended June 30, 1999 and 1998, respectively.
The advances are collateralized by U.S. Federal agency securities subject
to various pledge requirements. At September 30, 1999, and June 30, 1999
and 1998, the Bank exceeded the collateral requirements of the FHLB. The
Bank's investment in FHLB stock is pledged as collateral on these advances.
The total FHLB credit line available to the Bank at September 30, 1999, and
June 30, 1999, was 25% of total assets, or approximately $37,000,000. No
balance was
F-28
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK - (continued)
outstanding on the line of credit as of September 30, 1999, and June 30,
1999 and 1998. In addition, the Bank has a cash management agreement with
the FHLB allowing cash advances up to $7,265,850, subject to the credit
limitation above.
NOTE 11 - INCOME TAXES
The components of the Bank's income tax provision (benefit) are as follows:
THREE-MONTH
PERIODS ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Current:
U.S. federal ....... $ 74,166 $ 176,957 $ 522,695 $ 701,853
Montana ............ 18,951 38,443 112,876 139,788
--------- --------- --------- ---------
93,117 215,400 635,571 841,641
--------- --------- --------- ---------
Deferred:
U.S. federal ....... 27,750 (13,000) 65,000 74,484
Montana ............ (750) (600) 7,000 (1,651)
--------- --------- --------- ---------
27,000 (13,600) 72,000 72,833
--------- --------- --------- ---------
Total ........... $ 120,117 $ 201,800 $ 707,571 $ 914,474
========= ========= ========= =========
The nature and components of deferred tax assets and liabilities are as
follows:
JUNE 30,
SEPTEMBER 30, ---------------------
1999 1999 1998
---- ---- ----
(Unaudited)
Deferred tax assets:
Deferred compensation .............. $217,000 $215,000 $207,000
Allowance for loan losses
(state only) ...................... 50,000 50,000 48,000
Deferred loan fees ................. 44,000 53,000 85,000
Securities available-for-sale ...... 154,000 129,000 --
Other .............................. 30,000 37,000 29,000
-------- -------- --------
Total deferred tax assets ....... 495,000 484,000 369,000
-------- -------- --------
F-29
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES - (continued)
JUNE 30,
SEPTEMBER 30, --------------------
1999 1999 1998
---- ---- ----
(Unaudited)
Deferred tax liabilities:
Accumulated depreciation ................. 222,000 218,000 169,000
Federal Home Loan Bank stock ............. 396,000 387,000 348,000
Interest receivable ...................... 4,000 4,000 4,000
Allowance for loan losses (federal
only) ................................. 138,000 138,000 170,000
Other .................................... 5,000 5,000 3,000
-------- -------- --------
Total deferred tax liabilities ........ 765,000 752,000 694,000
-------- -------- --------
Net deferred tax liabilities ............... $270,000 $268,000 $325,000
======== ======== ========
The Bank believes, based upon the available evidence, that all deferred tax
assets will be realized in the normal course of operations. Accordingly,
these assets have not been reduced by a valuation allowance.
A reconciliation of the Bank's effective income tax provision to the
statutory federal income tax rate is as follows:
THREE-MONTH
PERIODS ENDED YEARS ENDED
SEPTEMBER 30, JUNE 30,
------------------------ -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Federal income taxes at the
statutory rate of 34% .... $ 111,751 $ 184,203 $ 666,340 $ 733,291
State income taxes, net of
federal income tax benefit 12,508 27,008 77,700 92,260
Nontaxable interest income . (15,696) (2,658) (25,264) (8,500)
Other, net ................. 11,554 (7,253) (11,205) 97,423
--------- --------- --------- ---------
Income tax expense ......... $ 120,117 $ 201,300 $ 707,571 $ 914,474
========= ========= ========= =========
Effective tax rate ......... 36.5% 37.2% 36.1% 42.4%
========= ========= ========= =========
F-30
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES - (continued)
Prior to January 1, 1987, the Bank was allowed a special bad debt deduction
limited generally in the current year to 32% (net of preference tax) of
otherwise taxable income and subject to certain limitations based on
aggregate loans and savings account balances at the end of the year. If the
amounts that qualified as deductions for federal income tax purposes are
later used for purposes other than for bad debt losses, they will be
subject to federal income tax at the then current corporate rate. Retained
earnings include approximately $915,000 at September 30, 1999, and June 30,
1999 and 1998, for which federal income tax has not been provided.
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
All financial instruments held or issued by the Bank are held or issued for
purposes other than trading. In the ordinary course of business, the Bank
enters into off-balance-sheet financial instruments consisting of
commitments to extend credit and forward delivery commitments for the sale
of whole loans to the secondary market.
Commitments to extend credit - In response to marketplace demands, the Bank
routinely makes commitments to extend credit for fixed rate and variable
rate loans with or without rate lock guarantees. When rate lock guarantees
are made to customers, the Bank becomes subject to market risk for changes
in interest rates that occur between the rate lock date and the date that a
firm commitment to purchase the loan is made by a secondary market
investor. Generally, as interest rates increase, the market value of the
loan commitment goes down. The opposite effect takes place when interest
rates decline.
Commitments to extend credit are agreements to lend to a customer as long
as the borrower satisfies the Bank's underwriting standards and related
provisions of the borrowing agreements. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
commitments. The Bank uses the same credit policies in making commitments
to extend credit as it does for on-balance-sheet instruments. Collateral is
required for substantially all loans, and normally consists of real
property. The Bank's experience has been that substantially all loan
commitments are completed or terminated by the borrower within 3 to 12
months.
F-31
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - (continued)
Forward delivery commitments - The Bank uses mandatory sell forward
delivery commitments to sell whole loans. These commitments are also used
as a hedge against exposure to interest-rate risks resulting from rate
locked loan origination commitments and certain mortgage loans
held-for-sale. Gains or losses incurred in completing these commitments
offset corresponding gains and losses in the items hedged, and are deferred
and recognized in the statement of income when the contract is closed and
the related assets are sold. Credit risks on these instruments arise when
the Bank's position in these securities becomes positive (i.e.
"in-the-money") and the Bank is a net creditor to the counterparty to the
agreement. To manage this risk, the Bank only enters into these agreements
with major, well-known financial institutions. Gains and losses resulting
from such financial instruments are recorded when they are funded or
settled.
The notional amount of the Bank's commitments to extend credit at fixed and
variable interest rates were approximately $7,500,000, $6,700,000, and
$5,600,000 at September 30, 1999, and June 30, 1999 and 1998, respectively.
Fixed rate commitments are extended at rates ranging from 6.5% to 8.125%,
5.875% to 7.9%, and 5.875% to 8.125%, at September 30, 1999, June 30, 1999
and 1998, respectively.
The Bank also made commitments as of September 30, 1999, June 30, 1999 and
1998, to deliver approximately $2,600,000 and $2,700,000 and $8,200,000,
respectively, in loans to various investors, all at fixed interest rates
ranging from 6.5% to 8.625%, 5.875% to 7.875%, and 5.875% to 7.25% at
September 30, 1999, June 30, 1999 and 1998, respectively.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instrument 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
F-32
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS - (continued)
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.
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ---------------------------------------------------------
1999 1999 1998
------------------------- --------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------ ----- ------ ----- ------ -----
(Unaudited) (Unaudited)
FINANCIAL ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ........... $ 3,931,616 $ 3,931,616 $ 6,741,171 $ 6,741,171 $ 6,787,538 $ 6,787,538
Investment securities available-
for-sale ......................... $ 16,349,061 $ 16,349,061 $ 16,590,332 $ 16,590,332 $ 15,880,243 $ 15,880,243
Investment securities held-to-
maturity ......................... $ 14,601,372 $ 14,513,681 $ 14,497,696 $ 14,409,769 $ 11,365,879 $ 11,458,818
Federal Home Loan Bank stock ........ $ 1,324,900 $ 1,324,900 $ 1,301,200 $ 1,301,200 $ 1,207,400 $ 1,207,400
Mortgage loans held-for-sale ........ $ 585,449 $ 587,000 $ 1,066,384 $ 1,086,000 $ 3,050,827 $ 3,170,000
Loans receivable, net ............... $ 99,863,665 $100,094,000 $ 97,036,135 $ 97,990,000 $ 95,048,906 $ 98,764,000
Mortgage servicing rights ........... $ 1,322,960 $ 1,453,000 $ 1,279,041 $ 1,394,000 $ 751,573 $ 825,000
Cash surrender value of life
insurance ........................ $ 1,971,445 $ 1,971,445 $ 1,948,570 $ 1,948,570 $ 1,857,652 $ 1,857,652
FINANCIAL LIABILITIES:
Deposits ............................ $ 64,887,668 $ 64,887,668 $ 62,565,053 $ 62,565,053 $ 57,495,999 $ 57,495,999
Time certificates of deposit ........ $ 58,916,628 $ 59,100,000 $ 58,256,635 $ 58,475,000 $ 57,232,591 $ 57,516,000
Advances from Federal Home
Loan Bank ........................ $ 8,507,778 $ 8,526,000 $ 12,574,445 $ 12,755,000 $ 14,841,111 $ 15,056,000
</TABLE>
The following methods and assumptions were used by the Bank in estimating
the fair value of the following classes of financial instruments.
Cash and cash equivalents - The carrying amounts for approximate fair value
due to the relatively short period of time between the origination of these
instruments and their expected realization.
Investment securities and stock in the FHLB - The fair value of investment
securities is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of stock in the FHLB approximates redemption value.
F-33
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS - (continued)
Loans receivable and mortgage loans held-for-sale - Fair values are
estimated by stratifying the loan portfolio into groups of loans with
similar financial characteristics. Loans are segregated by type such as
real estate, commercial, and consumer, with each category further segmented
into fixed and adjustable rate interest terms.
The fair value of fixed rate loans is calculated by discounting scheduled
cash flows through the anticipated maturities adjusted for prepayment
estimates. For mortgage loans, the Bank uses the secondary market rates in
effect for loans of similar size to discount cash flows. For other fixed
rate loans, cash flows are discounted at rates currently offered for
similar maturities. Adjustable interest rate loans are assumed to
approximate fair value because they generally reprice within the short
term.
Fair values are adjusted for credit risk based on assessment of risk
identified with specific loans, and risk adjustments on the remaining
portfolio based on credit loss experience.
Assumptions regarding credit risk are judgmentally determined using
specific borrower information, internal credit quality analysis, and
historical information on segmented loan categories for nonspecific
borrowers.
Mortgage servicing rights - Fair values are estimated by stratifying the
mortgage servicing portfolio into groups of loans with similar financial
characteristics, such as loan type, interest rate, and expected maturity.
When applicable, the Bank obtains bid quotations from secondary market
investors who regularly purchase mortgage servicing rights. If quoted
market price estimates are unavailable, the Bank compares the discounted
expected future cash flows to be received from servicing loans to the
future cash flows required to service the loans. Assumptions regarding loan
payoffs are determined using historical information on segmented loan
categories for nonspecific borrowers.
Cash surrender value of life insurance - They carrying amount for cash
surrender value of life insurance approximates fair value as policies are
recorded at redemption value.
Deposits and time certificates of deposit - The fair value of deposits with
no stated maturity, such as checking, passbook, and money market, is equal
to the amount payable on demand. The fair value of certificates of deposit
is based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for deposits of similar
maturities.
Advances from the FHLB - The fair value of the Bank's short-term advances
are estimated using discounted cash flow analysis based on the interest
rate that would be effective June 30, 1999, if the advances repriced
according to their stated terms.
F-34
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS - (continued)
Off-balance-sheet instruments - The Bank's off-balance-sheet instruments
include unfunded commitments to extend credit, forward delivery
commitments, and borrowing facilities available to the Bank. The fair value
of these instruments is not considered practicable to estimate because of
the lack of quoted market prices and the inability to estimate fair value
without incurring excessive costs.
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Bank's entire holdings
of a particular financial instrument.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within south
central Montana. The majority of such customers are also depositors of the
Bank. Investments in state and municipal securities are not significantly
concentrated within any one region of the United States. The Bank
originates first mortgage, home equity, consumer, and commercial loans. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Generally, loans are secured by real estate, personal
property, and deposit accounts. Rights to collateral vary and are legally
documented and enforceable to the extent practicable. Although the Bank has
a diversified loan portfolio, local economic conditions may affect
borrowers' ability to meet the stated repayment terms.
NOTE 15 - EMPLOYEE BENEFITS
The Bank provides a noncontributory profit sharing plan for eligible
employees. The amount of the Bank's annual contribution, limited to a
maximum of 15% of qualified employees' salaries is determined by the Board
of Directors. Profit sharing expense was $169,185 and $166,559 for the
years ended June 30, 1999 and 1998, respectively, and $44,775 and $41,632
for the three months ended September 30, 1999 and 1998, respectively.
The Bank's profit sharing plan includes a 401(k) feature. At the discretion
of the Board of Directors, the Bank may match annually up to 50% of
participants' contributions up to a maximum of 3% of participants'
salaries. For the years ended June 30, 1999 and 1998, the Bank's match was
$17,937 and $17,371, respectively, and $4,850 and $4,393 for the three
months ended September 30, 1999 and 1998, respectively.
F-35
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - EMPLOYEE BENEFITS - (continued)
The Bank has entered into a deferred compensation agreement for the benefit
of a previous director/employee. The agreement provides for payment of
$2,000 per month for the employee's and spouse's lifetime. The liability
was $55,845, $60,644, and $79,006 at September 30, 1999, and June 30, 1999
and 1998, respectively, based upon the present value of the payments over
the expected lifetime of the beneficiaries, discounted at 8%.
The Bank has also entered into deferred compensation contracts with current
key employees. The contracts provide fixed benefits payable in equal annual
installments upon retirement. The Bank has purchased life insurance
contracts which may be used to fund the payments. The charge to expense is
based on the present value computations of anticipated liabilities. For the
three-month periods ended September 30, 1999 and 1998, the total expense
was $17,304 and $32,327, respectively. For the years ended June 30, 1999
and 1998, the total expense was $83,513 and $84,230, respectively.
NOTE 16 - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary -
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table on the following page) of tangible and core capital (as defined in
the regulations) to total adjusted assets (as defined), and of risk-based
capital (as defined) to risk-weighted assets (as defined). Management
believes, as of September 30, 1999, and June 30, 1999 and 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
F-36
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - REGULATORY CAPITAL REQUIREMENTS - (continued)
The most recent notification from the Office of Thrift Supervision (OTS)
(as of April 13, 1998) categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum tangible, core, and
risk-based ratios as set forth in the table below. Since the most recent
notification from the OTS, the Bank's ratios have improved. As a result,
management believes that the Bank would be considered well-capitalized by
the OTS at September 30, 1999, and June 30, 1999 and 1998, respectively.
The Bank's actual capital amounts (in thousands) and ratios are presented
in the table below.
TO BE CONSIDERED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
As of September 30, 1999
(Unaudited)
Leverage $14,308 9.63% $5,944 4.0% $7,431 5.0%
Tier 1 risk-based $14,308 16.75% $3,416 4.0% $5,124 6.0%
Total risk-based $15,056 17.63% $6,833 8.0% $8,541 10.0%
As of June 30, 1999
Leverage $14,100 9.46% $5,964 4.0% $7,455 5.0%
Tier 1 risk-based $14,100 16.49% $3,420 4.0% $5,130 6.0%
Total risk-based $14,837 17.35% $6,840 8.0% $8,550 10.0%
As of June 30, 1998
Leverage $12,848 8.90% $5,777 4.0% $7,221 5.0%
Tier 1 risk-based $12,848 15.80% $3,253 4.0% $4,879 6.0%
Total risk-based $13,526 16.63% $6,505 8.0% $8,132 10.0%
F-37
<PAGE>
AMERICAN FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - REGULATORY CAPITAL REQUIREMENTS - (continued)
A reconciliation of capital determined by generally accepted accounting
principles to capital defined for regulatory purposes, is as follows:
September 30, June 30,
1999 1999 1998
---- ---- ----
Capital determined by generally
accepted accounting principles ...... $ 14,074 $ 13,894 $12,855
Unrealized gain or loss on
securities available-for-sale ....... 233 206 (7)
------ ------ ------
Tier I (core) capital ................. 14,308 14,100 12,848
Allowance for loan losses ............. 748 737 678
------ ------ ------
Total risk based capital ........... $ 15,056 $ 14,837 $13,526
====== ====== ======
F-38
<PAGE>
================================================================================
You should rely only on the information contained in this document or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of American Federal Savings Bank or Eagle Bancorp
may change after the date of this prospectus. Delivery of this document and the
sales of shares made hereunder does not mean or imply that the information
herein is correct as of any time subsequent to the date hereof.
Table of Contents
Summary................................................1
Risk Factors..........................................10
Selected Financial Data...............................14
Recent Developments...................................17
How We Intend To Use The Proceeds Of
The Offering........................................23
Our Policy Regarding Dividends........................24
Waiver Of Dividends By The Mutual
Holding Company.....................................25
Mutual Holding Company Conversion To
Stock Form..........................................26
Market For The Common Stock...........................27
Capitalization........................................28
Historical And Pro Forma Capital Compliance...........31
Pro Forma Data........................................33
The Reorganization....................................40
The Offering..........................................51
Management's Discussion And Analysis..................65
Business Of The Mutual Holding Company................81
Business Of Eagle.....................................81
Business Of American Federal..........................81
Regulation...........................................112
Taxation.............................................118
Management...........................................119
Proposed Management Purchases........................128
Restrictions On Acquisition Of Eagle Bancorp.........128
Eagle Bancorp's Charter And Bylaws...................130
Description Of Capital Stock.........................131
Indemnification......................................132
Change In Auditors...................................132
Legal And Tax Opinions...............................132
Experts..............................................134
Registration Requirements............................134
Where You Can Find Additional Information............134
Index to Financial Statements........................F-1
Until the later of Maarch 16, 2000, or 25 days after commencement of the
offering, all dealers effecting transactions in 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>
================================================================================
Up to 858,550 Shares
of Common Stock
EAGLE BANCORP
Proposed Holding Company
for American Federal Savings Bank
----------------
PROSPECTUS
----------------
Ryan, Beck & Co.
February 11, 2000
================================================================================
