Whitman Bancorporation Plan Called ‘Immoral And Unethical’ If Shareholders Ok Plan, Some Investors Would Be Forced To Sell

Whitman Bancorporation Inc. shareholders will vote Thursday on a controversial management plan that would force those with only small stakes in the bank to sell their stock.

According to a proxy dated Nov. 12, the proposal will improve the tax status of the Colfax-based institution while increasing the liquidity of its thinly-traded stock.

But opponents say the move amounts to a coup that puts a thriving country bank in the hands of a relative few who stand to profit greatly if they sell the company in the future.

Whitman Bancorporation is the holding company for Bank of Whitman, which operates 11 branches around the Palouse and Columbia Basin. The bancorporation’s assets as of June 30 were $127.5 million.

The bank was founded in 1977, the holding company in 1993. President James Tribbett, who declined comment for this story, has been chief executive officer since 1979.

The proxy says the board of directors voted unanimously to recommend conversion of the company to an S corporation.

Under Internal Revenue Service rules, such companies pay little, if any, tax directly. Instead, earnings are passed through to shareholders, who must pay the tax.

Because the structure eliminates double taxation of dividends - once by the bank as earnings, then by the stockholder - the overall tax burden can be reduced.

But S corporations can have no more than 75 shareholders. Whitman Bancorporation has 230.

The reorganization plan would cut the excess by creating a another company, New Whitman Inc., that would be merged into Whitman Bancorporation.

Anyone who owns fewer than 1,348 shares of the bancorporation would be cashed out at $40 per share by the new company, which would take the Whitman Bancorporation name.

Spokane attorney Rial Moulton, who is among the dissident shareholders, said the terms alone are objectionable. But the truly vexed are those original shareholders who will not qualify for continued ownership after the restructuring, he said.

“It’s kind of an emotional issue,” he said.

Moulton said the smaller shareholders probably do not have the votes to turn back the plan. Management and the directors own or control 51 percent of the outstanding shares, including the largest single block, which is in an employee stock ownership program, or ESOP.

But a vote of two-thirds of shareholders is needed for approval, and Moulton said that even some of the larger shareholders who would not lose their hold on the new company support the small owners.

“I think it’s going to be real close,” he said of the vote.

Among the large, sympathetic shareholders are John and Rebecca Knott of Endicott, Wash., who lampoon the plan in a mailing titled “A Fleece-holder’s View, One of ESOP’s Fables, Stories with lessons in morality.”

The couple also retained Spokane attorney Douglas Siddoway, who drafted a letter on their behalf dated Nov. 25 encouraging shareholders to vote against the plan.

Besides being unfair to the minority shareholders, the letter says, the proposal will be detrimental to the long-term health of the bank, which will have to borrow $3 million to buy them out.

As an S corporation, the company will also have fewer avenues for raising new capital, the letter says.

In an interview, Siddoway called the tax-reduction rationale a “subterfuge.” The difference between the old bank’s tax obligations and dividends paid by the new bank to help shareholders pay the additional taxes will be minimal, he said.

Siddoway also said the company hired to put a value on bancorporation stock discounted the price because small blocks are less attractive than larger blocks. That approach appears to violate Washington court rulings, he said.

Siddoway sent a second letter to the trustees of the ESOP Tuesday suggesting that voting the shares held by the plan for the merger could violate their fiduciary responsibilities.

Arline Stueckle, a shareholder from Caldwell, Idaho, also issued a letter challenging the plan.

She says the transaction amounts to a hostile takeover that ousts friends and neighbors who risked their money in 1977 to create a community bank free of big-bank politics.

“To me, this is immoral and unethical,” she wrote.

The shareholders will vote in Colfax. If the merger is approved, the transaction would close by the end of the year, according to the proxy.