PROSPECTUS
Up to 678,500 Shares
of
Common Stock
of
RESERVE BANCORP, INC.
Holding Company for Mt. Troy Bank
2000 Mt. Troy Road
Pittsburgh, Pennsylvania, 15212
(412) 322-6787
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Reserve Bancorp, Inc. is offering for sale up to 678,500 shares of
common stock at $10.00 per share in accordance with the conversion of Mt. Troy
Savings Bank, FSB from a federal mutual savings bank to a federal stock savings
bank to be called Mt. Troy Bank. As part of the conversion, Mt. Troy Bank will
become a wholly owned subsidiary of Reserve Bancorp, Inc. The deadline for
ordering stock is 12:00 noon, eastern time, on March 19, 2002, and may be
extended to April 8, 2002. The minimum purchase is 25 shares (minimum investment
of $250). All funds submitted shall be placed in a segregated deposit account at
Mt. Troy Savings Bank until the shares are issued or the funds are returned. No
stock will be sold if Reserve Bancorp, Inc. does not receive orders for at least
501,500 shares.
There is currently no public market for the stock. Reserve Bancorp,
Inc. anticipates that the stock will be quoted on the OTC Bulletin Board, and if
so, the trading symbol is expected to be "RESB." See Market for the Stock on
page 14 of this document.
Trident Securities is not required to sell any specific number or
dollar amount of stock but will use their best efforts to sell the stock
offered.
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MINIMUM MAXIMUM
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Number of Shares 501,500 678,500
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Total Underwriting Commissions and Expenses $356,000 $389,000
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Net Proceeds $4,659,000 $6,396,000
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Net Proceeds Per Share $9.29 $9.43
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Based upon market conditions and the approval of the Office of Thrift
Supervision, Reserve Bancorp, Inc. may increase the offering by up to 15% of the
678,500 shares to be sold, which would bring the number of shares to be sold to
780,275 shares.
Please refer to "Risk Factors" beginning on page 7 of this document.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
TRIDENT SECURITIES A Division of
McDonald Investments, Inc.
The Date of this Prospectus is February 12, 2002
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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 stock
offering fully, you should read this entire document carefully, including the
financial statements and the notes to the financial statements of Mt. Troy
Savings Bank. References in this document to "we", "us", "our" and "the Bank"
refer to Mt. Troy Savings Bank either in its present form or as a stock savings
bank following the conversion, or in both cases, as the context indicates. In
certain instances where appropriate, "we", "us", or "our" refers collectively to
Reserve Bancorp, Inc. and Mt. Troy Savings Bank. References in this document to
the "Company" refer to Reserve Bancorp, Inc.
Reserve Bancorp, Inc.
Reserve Bancorp, Inc. is a new company incorporated under Pennsylvania
law and has not engaged in any significant business to date. Its primary
activity will be owning all the stock of Mt. Troy Savings Bank (sometimes
referred to herein as the "Bank"). It will invest its initial capitalization as
discussed under "Use of Proceeds" on page 12. In the future, it may pursue other
business activities, including mergers and acquisitions, investment alternatives
and diversification of operations. There are, however, no current arrangements,
understandings or agreements for these activities, and any acquisition, merger
or diversification opportunities would not replace holding all the stock of the
Bank as the primary activity of Reserve Bancorp, Inc. See page 35.
Mt. Troy Savings Bank
Mt. Troy Savings Bank is a federally chartered mutual savings bank. It
is converting from the mutual to the stock form of ownership as part of the
conversion. At September 30, 2001, the Bank had assets, deposits and retained
earnings of $44.6 million, $39.0 million and $5.2 million, respectively.
Approximately 85% of total assets were comprised of loans.
How the conversion will occur.
We will effect the conversion by exchanging our federal mutual savings
bank charter for a federal stock savings bank charter and becoming a wholly
owned subsidiary of Reserve Bancorp, Inc. Our depositors will receive
liquidation interests in the newly formed stock savings bank as they have in us
before the conversion. On the effective date, Reserve Bancorp, Inc. will
commence business as a savings and loan holding company, and Mt. Troy Savings
Bank will continue its business but as a federally chartered stock savings bank.
See pages 65 to 70.
Purposes of the conversion.
Over the past several years, the Board of Directors of Mt. Troy Savings
Bank has extensively discussed both long range and short range business
strategies to achieve profitability and growth. The Board concluded that
operation in the future as a mutual thrift would limit the Bank's ability to
raise capital and to compete in a changing business environment. The Board has
therefore determined that it is in the best interest of the Bank to convert to a
stock association. The business purposes for the conversion include the
following:
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o The proceeds from the sale of common stock of Reserve Bancorp, Inc. will
provide us with additional equity capital, which will support future
deposit growth and expanded operations. While we currently meet or exceed
our regulatory capital requirements, the sale of stock in connection with
the conversion, coupled with the accumulation of earnings, less dividends
or other reductions in capital, from year to year, represents a means for
the orderly preservation and expansion of our capital base, and allows us
flexibility to respond to sudden and unanticipated capital needs.
o Although we do not have any current arrangements, understandings or
agreements regarding any opportunities, we will be in a position after the
conversion and offering, subject to regulatory limitations and our
financial position, to take advantage of any acquisition, merger or
diversification opportunities that may arise. The holding company form of
organization is expected to provide us with additional flexibility to
diversify our business activities through existing or newly formed
subsidiaries, or through acquisitions of or mergers with other financial
institutions, as well as other companies. See pages 66 to 67.
Our use of the proceeds raised from the sale of stock.
Reserve Bancorp, Inc. will use at least 50% of the cash received in the
offering to purchase all of Mt. Troy Savings Bank's stock. Reserve Bancorp, Inc.
will also lend Mt. Troy Savings Bank's employee stock ownership plan cash to
enable the plan to buy 8% of the shares sold in the offering. The balance will
be retained as Reserve Bancorp, Inc.'s initial capitalization and used for
general business purposes which may include investment in securities, paying
cash dividends or repurchasing shares of its common stock.
The funds received by Mt. Troy Savings Bank will be used for general
business purposes, including originating loans and purchasing securities. In
addition, the Bank may also use the proceeds of the offering to expand either
through opening or acquiring branch offices or acquiring other financial
institutions. The Bank does not, however, have any current understandings,
agreements or arrangements for the expansion of its business, either through the
addition of branch offices or the acquisition of other financial institutions.
See Use of Proceeds beginning on page 12.
How we determined the price per share and the number of shares we are offering.
The $10.00 per share price was determined by the Board of Directors in
consultation with Trident Securities. The number of shares offered is based on
an independent appraisal by FinPro, Inc. of the pro forma estimated market value
of the stock based on information as of December 14, 2001, divided by the
purchase price of $10.00. See pages 80 to 82.
FinPro has determined that as of December 14, 2001, our estimated
aggregate pro forma market value was $5,900,000. Based on that estimate, we are
required by Office of Thrift Supervision ("OTS") regulations to sell between a
minimum of $5,015,000 in stock and a maximum of $6,785,000 in stock, subject to
adjustment.
FinPro's appraisal contains an analysis of a number of factors,
including but not limited to:
o our financial condition and results of operations as of September 30, 2001;
o our operating trends;
o the competitive environment in which we operate;
o operating trends of certain savings institutions and savings and loan
holding companies;
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o relevant economic conditions both nationally and in Pennsylvania which
affect the operations of savings institutions;
o stock market values of certain institutions; and
o stock market conditions for publicly traded savings institutions and
savings and loan holding companies.
In preparing its independent appraisal, FinPro focused primarily on the
price/earnings and price/book valuation methodologies, both of which are
discussed in the appraisal report. See Where You Can Find Additional Information
on page 88 for how to obtain a copy of the appraisal report. The following table
compares Mt. Troy Savings Bank's pro forma price/earnings and price/book ratios
at the minimum and maximum of the offering range to the medians for all publicly
traded thrift institutions, all publicly traded Pennsylvania thrift institutions
and a comparable group of thirteen publicly traded thrift institutions
identified in the appraisal report. Thrift institutions in the mutual holding
company structure are excluded from each comparison group.
The pro forma price/earnings multiples for Mt. Troy Savings Bank
presented in the following table are based on earnings for the trailing twelve
months as required by regulatory appraisal guidelines. Therefore, these ratios
differ from the ratios presented in the tables under "Pro Forma Data" on page
16.
Price/Earnings Price/Book
Multiple Ratio
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Mt. Troy Savings Bank:
Minimum.......................................... 12.35x 54.38%
Maximum.......................................... 16.13x 63.13
Median for all publicly traded thrifts................ 13.29 103.80
Median for all publicly traded Pennsylvania thrifts... 12.26 95.78
Median for the comparable group....................... 14.64 89.00
In addition, FinPro's appraisal takes into account the effect of the
additional capital raised by the sale of the common stock on the estimated pro
forma market value. The number of shares is subject to change if the appraisal
changes at the conclusion of the offering, and any adjustments in our estimated
pro forma market value as a result of market and financial conditions would have
to be approved by the OTS. See pages 80 to 82.
The amount of stock you may purchase.
Minimum purchase = 25 shares
Maximum purchase = 10,000 shares
The maximum number of shares that any individual (or individuals through a
single account) may purchase is 10,000. The maximum number of shares that any
individual (or individuals through a single account) together with any associate
or group of persons acting in concert is 15,000 shares.
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How we will prioritize orders if we receive orders for more shares than are
available.
You might not receive any or all of the stock you request. Mt. Troy
Savings Bank has granted subscription rights in the following order of priority:
o Priority 1 - depositors of Mt. Troy Savings Bank at the close of business
on September 30, 2000 with deposits of at least $50.00.
o Priority 2 - the tax qualified employee stock benefit plans of Mt. Troy
Savings Bank.
o Priority 3 - depositors of Mt. Troy Savings Bank at the close of business
on December 31, 2001 with deposits of at least $50.00.
o Priority 4 - depositors as of January 31, 2002 and borrowers as of January
1, 1993 who continue as borrowers as of the close of business on January
31, 2002.
If shares remain available and depending on market conditions at or
near the completion of the subscription offering, we may conduct a community
offering. In a community offering, preference will be given to persons who
reside in Allegheny County, Pennsylvania, and we will have the right to reject
any stock order received in the community offering. If any shares remain after a
community offering, we may conduct a public offering, which would be open to the
general public beyond the local community, however, we will have the right to
reject orders, in whole or in part, in the public offering. A public offering,
if we conducted one, would commence just prior to, or as soon as practicable
after, the termination of the subscription offering, and orders received in
connection with a public offering would receive a lower priority than orders
received in the subscription offering and community offering. In addition, in
any community offering or public offering, we must first fill orders for our
common stock up to a maximum of 2% of the shares issued in the conversion in a
manner that will achieve a wide distribution of the stock, and thereafter any
remaining shares will be allocated in an equal number of shares per order basis,
until all orders have been filled. See The Offering beginning on page 71.
Our corporate documents may make it difficult for anyone to acquire Reserve
Bancorp, Inc.
Our articles of incorporation and bylaws contain provisions that make
it difficult for someone to acquire control of Reserve Bancorp, Inc. These
provisions may discourage takeover attempts and prevent you from receiving a
premium over the market price of your shares as part of a takeover. See Risk
Factors on page 7 and Restrictions on Acquisition of Reserve Bancorp, Inc. on
page 84.
Our officers, directors and employees may receive benefits from the offering or
within one year of the offering.
In order to tie our employees' and directors' interests closer to our
stockholders' interests, we intend to establish certain benefit plans that use
our stock as compensation. Officers, directors, and employees will not be
required to pay cash in exchange for shares received under the employee stock
ownership plan ("ESOP") or restricted shares but will be required to pay the
exercise price to exercise options.
The following table presents information regarding the participants in
each plan, total amount, the percentage, and the dollar value of the stock that
we intend to set aside for our employee stock ownership plan and stock-based
incentive plans. The table below assumes the sale of 590,000 shares in the
offering. It is assumed that the value of the stock in the table is $10.00 per
share. Options are given no value because their exercise price will be equal to
the fair market value of the stock on the day the options are granted. As a
result, anyone who receives an option will only benefit from the option if the
price of the stock rises
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above the exercise price and the option is exercised. See pages 64 to 65 for
more information, including regulatory restrictions on the maximum amount of
benefits participants may receive and the rate at which benefits may be earned
under the incentive plans.
Estimated Percentage of
Value Number Total Shares Sold
Participants of Shares of Shares in the Offering
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Employee Stock Ownership Plan..... Employees $472,000 47,200 8.0%
Stock-Based Incentive Plans:
Stock Awards............. Officers and
Directors 236,000 23,600 4.0
Stock Options............ Officers and
Directors - - 10.0
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Total............... $708,000 70,800 22.0%
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It is important for us to reassure our management of our commitment to
their employment with Mt. Troy Savings Bank. With this in mind, the Board of
Directors may enter into an employment agreement or change in control agreement
with the Bank's president and its treasurer/controller. It is anticipated that
such agreements, if they are entered into, would provide that if Reserve
Bancorp, Inc. or Mt. Troy Savings Bank is acquired and the officer's employment
is terminated, he will receive a cash severance payment. Such severance payment
will in no event exceed 2.999 times the terminated officer's prior five year
average taxable compensation. The actual details of such agreements have not yet
been determined. Any payments under the agreements will be an expense to us and
would result in reductions to our net income and capital. See Management -
Executive Compensation - Change in Control/Employment Agreements on page 62.
Participants in our stock-based benefit plans may also receive benefits if
Reserve Bancorp, Inc. or Mt. Troy Savings Bank is acquired.
Dividends.
We anticipate paying cash dividends after the conversion, although the
timing, amount and frequency have not been determined. At the minimum, midpoint
and maximum of the offering range, respectively, our initial capitalization will
be $1.9 million, $2.3 million, and $2.7 million. A portion of these funds may be
used to pay dividends. However, there is no assurance that such funds will be
used to pay dividends. Our appraisal report states that the median dividend
yield ratio for comparable banks like us, after conversion, was 3.61%, ranging
from a high of 5.32% to a low of 2.32%. There are also restrictions on our
ability to pay dividends. See Use of Proceeds beginning on page 12 and Dividend
Policy on page 13. See also, Where You Can Find Additional Information on page
88 for our appraisal report.
Deadlines for purchasing stock.
The subscription offering will terminate at 12:00 noon, eastern time,
on March 19, 2002 unless extended. The subscription offering may be extended to
April 8, 2002. A community offering and a public offering, if such offerings are
conducted, may terminate at any time without notice but no later than May 23,
2002. See The Offering beginning on page 71.
Subscription rights are not transferrable.
Selling or transferring your right to buy stock in the subscription
offering is illegal. If you exercise this right you must state that you are
purchasing stock for your own account. If we believe your order
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violates this restriction, your order will not be filled. You also may be
subject to penalties imposed by the OTS.
We believe that subscription rights have no value and that your tax basis in our
common stock will be the purchase price, but the Internal Revenue Service may
disagree.
Our tax counsel, Malizia Spidi & Fisch, PC, believes that it is more
likely than not that the nontransferable subscription rights to purchase common
stock have no value in the absence of both an oversubscription in the
subscription offering and an increase in the market price of the common stock
upon commencement of trading following completion of the conversion. Tax counsel
expresses no belief as to whether or not the subscription rights have value, if
both an oversubscription in the subscription offering occurs and the market
price of the common stock increases upon commencement of trading following
completion of the conversion, as the issue of whether or not the subscription
rights have value is dependent upon all of the facts and circumstances that
occur. If the Internal Revenue Service determines that your subscription rights
have ascertainable value, you could be taxed in an amount equal to the value of
those rights.
We have received the opinion of Malizia Spidi & Fisch, PC that the tax
basis to the stockholders of the common stock purchased in the conversion will
be the amount paid for the common stock, and that the conversion will not be a
taxable event for either Reserve Bancorp, Inc. or Mt. Troy Savings Bank under
federal or Pennsylvania state income tax laws. These opinions, however, are not
binding on the Internal Revenue Service. The full texts of the opinions are
filed as exhibits to the Registration Statement of which this document is a
part, and copies may be obtained from the SEC. See Where You Can Find Additional
Information on page 88.
There are conditions that must be satisfied before we can complete the offering
and issue the stock.
The following must occur before we can complete the offering and issue
our stock:
o We must receive all the required approvals from the government agencies
that regulate us;
o Mt. Troy Savings Bank's members must approve the conversion; and
o We must sell at least the minimum number of shares offered.
Proposed stock purchases by management.
Our directors and officers are expected to purchase approximately
76,430 shares of stock in the offering, 12.9% if a total of 590,000 shares are
sold in the offering. See page 12.
Market for the stock.
We expect the stock to be traded on the over-the-counter market with
quotations available on the OTC Electronic Bulletin Board. The stock is not
expected to meet the listing requirements for the Nasdaq system and it is not
expected that an application to the Nasdaq system will be made. Prior to this
offering, there has not been a public market for the stock, and it is highly
unlikely that an active and liquid trading market for the stock will develop.
The lack of an active and liquid trading market may adversely affect the
liquidity and price of the stock. See Market for the Stock.
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RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
The small amount of stock being offered 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, an
active market for the stock is not expected to exist after the offering. This
means that there will be very limited secondary market liquidity for our stock,
and this might make it difficult for you to buy or sell the stock after the
initial offering. See Market for the Stock.
Future changes in interest rates may reduce our profits.
Our ability to make a profit largely depends on our net interest
income, which could be negatively affected by changes in interest rates. Net
interest income is the difference between:
o the interest income we earn on our interest-earning assets, such as
mortgage loans and investment securities; and
o the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
The rates we earn on our assets and the rates we pay on our liabilities
are generally fixed for a contractual period of time. We, like many savings
institutions, have liabilities that generally have shorter contractual
maturities than our assets. This imbalance can create significant earnings
volatility, because market interest rates change over time. In a period of
rising interest rates, the interest income earned on our assets may not increase
as rapidly as the interest paid on our liabilities. In a period of declining
interest rates, the interest income earned on our assets may decrease more
rapidly than the interest paid on our liabilities. See Management's Discussion
and Analysis of Financial Condition and Results of Operations - Management of
Interest Rate Risk and Market Risk on page 27.
In addition, changes in interest rates can also affect the average life
of loans and mortgage-backed and related securities. A reduction in interest
rates results in increased prepayments of loans and mortgage-backed and related
securities, as borrowers refinance their debt in order to reduce their borrowing
cost. This causes reinvestment risk. This means that we may not be able to
reinvest prepayments at rates that are comparable to the rates we earned on the
prepaid loans or securities.
We intend to increase our origination of construction loans, commercial real
estate loans and consumer loans after the offering. The risk related to these
types of loans is greater than the risk related to residential loans.
At September 30, 2001 the Bank's loan portfolio included approximately
$6.2 million of construction loans, or 15.17% of its total loan portfolio. The
increase in capital from the offering will permit us to increase the size of
this portfolio. Construction lending is generally considered to involve a higher
degree of credit risk than long-term financing of residential properties. The
Bank's risk of loss on a construction loan is dependent largely upon 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
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and the marketability of the property upon completion of the project prove to be
inaccurate, the Bank 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 assure the repayment of the loan.
In addition to construction loans, we also currently originate
commercial real estate loans and consumer loans. The increase in capital from
the offering will permit us to increase the size of these portfolios. The risk
that commercial real estate loans and consumer loans will not be repaid or will
be late in paying is generally greater than the same risks associated with
residential loans. Any failure to pay or late payments would hurt our earnings.
See Business of Mt. Troy Savings Bank - Lending Activities - Commercial Real
Estate Loans and - Consumer Loans on pages 40 and 41.
Our return on equity after the offering will be low; this may negatively affect
the price of our stock.
The net proceeds from the offering will substantially increase our
equity capital. It will take a significant period of time to prudently invest
this capital in assets that produce high rates of return. As a result, our
return on equity, which is the ratio of our earnings divided by our equity
capital, will decrease as compared to previous years and may be lower than that
of similar companies. Because the stock market values a company based in part on
its return on equity, a decline in our return on equity could cause the trading
price of our stock to decline.
We intend to adopt an employee stock ownership plan as part of the
conversion. We also intend to adopt other stock-based benefit plans. The money
that we use to buy stock to fund our stock-based benefit plans will not be
available for investment and will increase our future expenses. In addition, the
public company costs of preparing reports for stockholders and the SEC will also
cause our expenses to be higher than they would be if we remained in mutual form
and did not expand our employee benefit plans. See Pro Forma Data and Management
- - Executive Compensation - Employee Stock Ownership Plan.
We intend to remain independent and the steps we have taken to discourage
takeover attempts may prevent you from receiving a premium over market price for
your shares as part of a takeover and may make it difficult to remove our
current management.
Mt. Troy Savings Bank has operated as an independent financial
institution since its establishment in 1891. It is our intent to continue that
tradition, and you are urged not to invest in our stock if you are anticipating
a quick sale of Reserve Bancorp, Inc. Provisions in our articles of
incorporation and bylaws may make it difficult for another company to acquire us
if such acquisition is opposed by our Board of Directors. These provisions
include:
o restrictions on the acquisition of our stock;
o limitations on voting rights;
o the election of only approximately one-quarter of our Board of
Directors each year;
o restrictions on the ability of stockholders to call meetings,
make stockholder proposals or nominate persons as directors;
o the right of the Board of Directors to issue shares of preferred
or common stock without stockholder approval; and
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o the requirement of an 80% vote of stockholders for the approval
of business combinations not approved by two-thirds of the Board
of Directors.
The overall effect of these provisions could:
o limit the trading price potential of our stock;
o result in Reserve Bancorp, Inc. being less attractive to a
potential acquiror;
o prevent an acquisition of Reserve Bancorp, Inc. even if the
acquisition would result in our stockholders receiving a
substantial premium over the market price of our stock; and/or
o make it difficult to remove our current Board of Directors or
management.
In addition, if we are faced with challenges to our independence, such
as a hostile takeover attempt or a proxy contest, we intend to defend ourselves
against such actions. Our defense would significantly increase our expenses and
reduce our net income and return on equity, which could negatively impact our
stock price.
Further, the Board's ability to issue authorized but unissued shares of
preferred or common stock without stockholder approval except as otherwise
required to approve the transaction in which the additional shares would be
issued, could be a useful anti-takeover device, but existing stockholders would
experience a reduction in ownership interest and their voting interests would be
diluted. See Restrictions on Acquisition of Reserve Bancorp, Inc.
Recent regulatory actions may have the effect of precluding or discouraging a
takeover of us for three years.
Further, the OTS has recently stated its intention to impose more
stringent restrictions on the approval of acquisitions of greater than 10% in
the three years after a conversion and has stated that it intends to approve
only those acquisitions of control within three years that comply strictly with
the regulatory criteria. In addition, the OTS may require as a condition of
approving our conversion that the Bank keep its federal stock charter for a
minimum of three years following the conversion. These actions could preclude or
discourage an acquisition of us and prevent you from receiving the premium on
your stock that an acquisition of us could otherwise create. See Restrictions on
Acquisition of Reserve Bancorp, Inc.
The amount of stock held by our officers and directors and stock benefit plans
could make it difficult for stockholders to adopt proposals or approve takeover
attempts not supported by management.
The amount of ownership and control of our stock by directors and
officers could make it difficult for stockholders to make successful stockholder
proposals if they are opposed by management and the Board of Directors. In
addition, directors and officers could use their voting power to block the
approval of transactions, such as business combinations and amendments to
Reserve Bancorp, Inc.'s articles of incorporation or bylaws, which are required
by the articles of incorporation to be approved by at least 80% of the
stockholders. Our directors and officers are expected to purchase approximately
76,430 shares of stock in the offering, 12.9% if 590,000 shares are sold. In
addition, approximately 8% of the shares of common stock issued in the offering
are expected to be purchased by our employee stock ownership plan. Shares owned
by the Mt. Troy Savings Bank's employee stock ownership plan which have not yet
been allocated to the accounts of employees will be voted by a committee of
non-employee directors. If we
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implement stock benefit plans, the ownership and control by officers and
directors would increase, causing voting dilution to the other stockholders. See
Management - Executive Compensation - Employee Stock Ownership Plan and
Management - Potential Stock Benefit Plans.
We are a relatively small institution, and our size is a factor in our ability
to compete successfully.
Our ability to compete successfully is a significant factor affecting
our profitability. Mt. Troy Savings Bank faces substantial competition in its
attraction of deposits, which are its primary source of funds for lending, and
in the origination of loans, and many of its competitors are larger institutions
with greater financial and managerial resources. At September 30, 2001, we had
nine full-time and two part- time employees. Our limited resources restrict our
ability to undertake the development of new products and to pursue diversified
lines of business, which in turn has a negative effect on our ability to
compete.
Increases in market rates of interest could adversely affect our equity.
At September 30, 2001, Mt. Troy Savings Bank held approximately
$1,962,000 in available-for- sale securities, which consisted of $1,645,000 of
investment securities and $317,000 of mortgage-backed securities. Generally
accepted accounting principles require that these securities be carried at fair
value on the Bank's balance sheet. Unrealized holding gains or losses on these
securities, that is, the difference between the fair value and the amortized
cost of these securities, net of deferred taxes, is reflected in equity.
Recently, market rates of interest have decreased which caused the fair value of
Mt. Troy Savings Bank's available-for-sale securities to increase and also
caused equity to increase. As of September 30, 2001, Mt. Troy Savings Bank's
equity included approximately $14,000 in other comprehensive income, which was
comprised exclusively of net unrealized holding gains on its available-for-sale
securities portfolio. However, when interest rates increase, the fair value of
Mt. Troy Savings Bank's available-for- sale securities generally decreases,
which also decreases equity. If market interest rates increase, our equity could
be adversely affected.
The implementation of stock-based benefit plans may dilute your ownership
interest in Reserve Bancorp, Inc.
We intend to adopt a stock option plan and a restricted stock plan
following the conversion. These stock benefit plans will be funded through
either open market purchases or from the issuance of authorized but unissued
shares. Stockholders would experience a reduction in ownership interest in the
event newly issued shares are used to fund stock options and awards made under
the restricted stock plan. The use of newly issued shares of stock to fund the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.85%. The use of newly
issued shares of stock to fund the stock option plan instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 9.09%. See Management - Potential Stock Benefit Plans beginning on
page 64.
10
MT. TROY SAVINGS BANK
Mt. Troy Savings Bank was originally founded in 1891 by the
Commonwealth of Pennsylvania and the Mt. Troy Building & Loan Association. The
Bank's deposits are federally insured by the Savings Association Insurance Fund
as administered by the Federal Deposit Insurance Corporation (the "FDIC'). The
Bank is regulated by the OTS and the FDIC.
The Bank is a community-oriented savings organization, providing
traditional retail banking services, one- to four-family residential mortgage
loans, residential construction loans and consumer loan products, including home
equity, auto, and personal loans. The Bank conducts its operations through its
main office and a full service branch office, both located in the north
Pittsburgh area.
At September 30, 2001, the Bank had total assets, deposits, and equity
of $44.6 million, $39.0 million, and $5.2 million, respectively. The Bank
attracts deposits from the general public and uses these deposits primarily to
originate loans and to purchase mortgage-backed and other securities. The
principal sources of funds for the Bank's lending and investing activities are
deposits, the repayment and maturity of loans and the sale, maturity, and call
of securities. The principal source of income is interest on loans and
investment and mortgage-backed securities. The principal expense is interest
paid on deposits.
At September 30, 2001, net loans receivable amounted to approximately
$37.7 million or 84.5% of total assets, consisting principally of first mortgage
loans. The Bank invests excess liquidity in mortgage-backed and other
securities, primarily in U.S. government agency securities. Mortgage-backed and
other securities amounted to $4.3 million, or approximately 10% of total assets
at September 30, 2001. The Bank had no borrowings outstanding at September 30,
2001. See Business of Mt. Troy Savings Bank.
RESERVE BANCORP, INC.
Reserve Bancorp, Inc. is a Pennsylvania corporation organized in
December 2001 for the purpose of acquiring all of the capital stock that Mt.
Troy Savings Bank will issue upon its conversion from the mutual to stock form
of ownership. Reserve Bancorp, Inc. has not engaged in any significant business
to date but will serve as a holding company of the Bank following the
conversion. Reserve Bancorp, Inc. has applied for approval to acquire control of
the Bank. Reserve Bancorp, Inc. will use approximately 50% of the net proceeds
of the offering to purchase all of the stock to be issued by Mt. Troy Savings
Bank. Reserve Bancorp, Inc. will also lend Mt. Troy Savings Bank's employee
stock ownership plan cash to enable the plan to buy 8% of the shares sold in the
offering. The balance will be retained as Reserve Bancorp, Inc.'s initial
capitalization. Upon completion of the conversion, Reserve Bancorp, Inc. will
have no significant assets other than that portion of the net proceeds of the
offering, the promissory note representing the amount of its loan to the
employee stock ownership plan, and the shares of the Bank's capital stock
acquired in the conversion, and it will have no significant liabilities. Reserve
Bancorp, Inc.'s cash flow will be dependent upon earnings from the investment of
the portion of net proceeds it retains in the conversion and any dividends
received from the Bank. See Use of Proceeds.
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies. Although there are no current arrangements, understandings,
or agreements regarding any acquisition, merger or expansion opportunities,
Reserve Bancorp, Inc. will be in a position after the conversion, subject to
regulatory limitations and its financial condition, to take advantage of any
acquisition, merger and expansion opportunities that may arise. However, some of
these activities could
11
be considered to entail a greater risk than the activities permissible for
federally chartered savings banks such as Mt. Troy Savings Bank. The initial
activities of Reserve Bancorp, Inc. are anticipated to be funded by the portion
of the net proceeds retained by it and earnings thereon.
PROPOSED STOCK PURCHASES BY MANAGEMENT
The following table sets forth for each of the directors of the Bank
and for all of the directors and officers of the Bank as a group (including in
each case all "associates" of the directors and officers) the number of shares
of common stock which each director and officer intends to purchase, assuming
the sale of 590,000 shares of common stock at $10.00 per share. The table does
not include purchases by the employee stock ownership plan (8% of the common
stock sold in the offering), and does not take into account any stock benefit
plans to be adopted within one year following the conversion. See Management -
Potential Stock Benefit Plans.
Percentage of
Total Number Total Dollar 590,000 Total
of Shares Amount of Shares Shares Sold in
Name to be Purchased to be Purchased the Offering(1)
- ------------------------- --------------- --------------- ---------------
David P. Butler 15,000 $150,000 2.5%
Louis J. Slais 500 5,000 *
Richard A. Sinewe 15,000 150,000 2.5
Fred L. Maitz, Jr. 2,500 25,000 *
Robert B. Shust 15,000 150,000 2.5
Timothy Schneider 15,000 150,000 2.5
Non-director officers of
the Bank 13,430 134,300 2.3
------ -------- ----
Total 76,430 $764,300 12.9%
====== ======== ====
- ---------------
* Less than 1%.
(1) In the event the stockholders of Reserve Bancorp, Inc. approve the stock
benefit plans as discussed in this prospectus (restricted stock plan (4% of
the common stock sold in the offering) and the stock option plans (10% of
the common stock sold in the offering)), and all of the shares of common
stock available for award under the restricted stock plan are awarded and
all of the options available under the stock option plan are awarded and
exercised, directors and officers would own 159,030 or 26.9% of the shares
of common stock outstanding, or 20.3% if the option plan and restricted
stock plan were funded with newly issued shares instead of shares acquired
in open market purchases. If fewer than 590,000 shares were publicly sold,
these percentage ownership estimates would increase. See Management -
Potential Stock Benefit Plans.
USE OF PROCEEDS
The net proceeds will depend on the expenses incurred by us in
connection with the offering and the total number of shares of stock issued in
the offering, which will depend on the independent valuation and marketing
considerations. Although the actual net proceeds from the sale of the common
stock cannot be determined until the offering is completed, we estimate that we
will receive net proceeds from the sale of common stock of between $4,659,000 at
the minimum and $6,396,000 at the maximum of the offering range.
Assuming the sale of $5,015,000, $5,900,000 and $6,785,000 of common
stock at the minimum, midpoint and maximum, respectively, of the offering range,
expenses of $356,000, $373,000 and $389,000, at the minimum, midpoint and
maximum, respectively, and the purchase of 8% of the shares
12
by the employee stock ownership plan, the following table shows the manner in
which we will use the net proceeds:
MINIMUM MIDPOINT MAXIMUM
------------------ ------------------- ------------------
$ % $ % $ %
---------- ------- ----------- ------ ---------- ------
Loan to employee stock ownership plan... $ 401,000 8.6% $ 472,000 8.5% $ 543,000 8.5%
Investment in Mt. Troy Savings Bank..... 2,329,500 50.0 2,763,500 50.0 3,198,000 50.0
Reserve Bancorp, Inc. working capital... 1,928,500 41.4 2,291,500 41.5 2,655,000 41.5
---------- ---- ---------- ---- ---------- ----
Net Proceeds................... $4,659,000 100.0% $5,527,000 100.0% $6,396,000 100.0%
========== ===== ========== ===== ========== =====
We will use at least 50% of the cash received in the offering to
purchase all of Mt. Troy Savings Bank's stock. We will also lend the Bank's
employee stock ownership plan cash to enable the plan to buy 8% of the shares
sold in the offering. The balance will be retained as our initial capitalization
and used for general business purposes which may include investment in
securities, paying cash dividends or repurchasing shares of our common stock.
The funds received by the Bank from us in exchange for all its stock to
be issued in the conversion will be used for general business purposes,
including originating loans and purchasing securities. Net proceeds may also be
used by the Bank to make contributions to the employee stock ownership plan
which in turn would be used to repay the loan from us.
In addition, the Bank may also use the proceeds of the offering to
expand either through opening or acquiring branch offices or acquiring other
financial institutions. The Bank does not, however, have any current
understandings, agreements or arrangements for the expansion of its business,
either through the addition of branch offices or the acquisition of other
financial institutions.
If the employee stock ownership plan does not purchase common stock in
the offering, it may purchase shares of common stock in the market after the
conversion. If the purchase price of the common stock is higher than $10 per
share, the amount of proceeds required for the purchase by the employee stock
ownership plan will increase and the resulting stockholders' equity will
decrease.
The net proceeds may vary significantly because total expenses of the
conversion may be significantly more or less than those estimated. The net
proceeds will also vary if the number of shares to be issued in the conversion
are adjusted to reflect a change in the estimated pro forma market value of
Reserve Bancorp, Inc. and Mt. Troy Savings Bank. Payments for shares made
through withdrawals from existing deposit accounts at the Bank will not result
in the receipt of new funds for investment but will result in a reduction of the
Bank's deposits and interest expense as funds are transferred from interest-
bearing certificates or other deposit accounts.
DIVIDEND POLICY
Reserve Bancorp, Inc. anticipates the establishment of a policy to pay
cash dividends. The timing, frequency and initial annual amount of the dividends
have not yet been determined. Dividends will be subject to determination and
declaration by the Board of Directors of Reserve Bancorp, Inc. In making its
decision, the Board of Directors will consider several factors, including:
o financial condition;
13
o results of operations;
o tax considerations;
o industry standards; and
o general economic conditions.
There can be no assurance that dividends will in fact be paid on the
stock or that, if paid, dividends will not be reduced or eliminated in future
periods.
Reserve Bancorp, Inc.'s ability to pay dividends also depends on the
receipt of dividends from Mt. Troy Savings Bank which is subject to a variety of
regulatory limitations on the payment of dividends. See Regulation - Regulation
of the Bank - Dividend and Other Capital Distribution Limitations. Furthermore,
as a condition to OTS approval of the conversion, Reserve Bancorp, Inc. has
agreed that it will not initiate any action within one year of completion of the
conversion in the furtherance of payment of a special distribution or return of
capital to stockholders of the Company.
MARKET FOR THE STOCK
Reserve Bancorp, Inc. has never issued capital stock. Consequently,
there is not, at this time, any market for the stock. Following the completion
of the offering, Reserve Bancorp, Inc. anticipates that its stock will be traded
on the over-the-counter market under the symbol "RESB" with quotations available
through the OTC Electronic Bulletin Board. Reserve Bancorp, Inc. expects that
Trident Securities will use its best efforts to make a market in the stock.
Making a market may include the solicitation of potential buyers and sellers in
order to match buy and sell orders. However, Trident Securities will not be
obligated with respect to these efforts.
The development of an active trading market depends on the existence of
willing buyers and sellers. Due to the small size of the offering, it is highly
unlikely that an active trading market will develop and be maintained after the
offering. The small amount of stock being issued to the public may make it
difficult to buy or sell our stock in the future. You could have difficulty
disposing of your shares and you should not view the shares as a short term
investment. You may not be able to sell your shares at a price equal to or above
the price you paid.
14
CAPITALIZATION
Set forth below is the historical capitalization of the Bank as of
September 30, 2001, as restated, and the pro forma capitalization of Reserve
Bancorp, Inc. after giving effect to the offering. The table also gives affect
to the assumptions set forth under "Pro Forma Data." A change in the number of
shares sold in the offering may affect materially the pro forma capitalization.
Pro Forma Capitalization at September 30, 2001
---------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
501,500 590,000 678,500 780,275
Actual, at Shares at Shares at Shares at Shares at
September 30, $10.00 per $10.00 per $10.00 per $10.00 per
2001, Restated share share share share(1)
-------------- ----------- ----------- ---------- -----------
(In thousands)
Deposits(2)................................... $39,038 $39,038 $39,038 $39,038 $39,038
Borrowed funds................................ - - - - -
-------- ------- ------- ------- -------
Total deposits and borrowed funds............. $39,038 $39,038 $39,038 $39,038 $39,038
======= ======= ======= ======= =======
Stockholders' equity:
Preferred stock, $0.10 par value, 2,000,000
shares authorized; none to be issued........ $ - $ - $ - $ - $ -
Common stock, $0.10 par value, 8,000,000
shares authorized, assuming shares
outstanding as shown(3)................... - 50 59 68 78
Additional paid-in capital(3)(4).............. - 4,609 5,468 6,328 7,317
Retained earnings............................. 5,150 5,150 5,150 5,150 5,150
Accumulated other comprehensive income, net
of taxes.................................. 14 14 14 14 14
Less:
Common stock acquired by ESOP(5)............ - (401) (472) (543) (624)
Common stock acquired by
stock programs(6)......................... - (201) (236) (271) (312)
------- ------- ------- ------- -------
Total equity/stockholders' equity............. $5,164 $ 9,221 $ 9,983 $10,746 $11,623
======= ======= ======= ======= =======
- ------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect changes
in market and financial conditions.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
stock in the offering. Any withdrawals would reduce pro forma deposits by
an amount equal to the withdrawals.
(3) No effect has been given to the issuance of additional shares of stock
pursuant to any stock option plans that may be adopted by Reserve Bancorp,
Inc. and the Bank and presented for approval by the stockholders after the
offering. An amount equal to 10% of the shares of stock sold in the
offering would be reserved for issuance upon the exercise of options to be
granted under the stock option plans within one year following the
conversion. See Management - Potential Stock Benefit Plans - Stock Options
Plans.
(4) Additional paid-in capital amounts are net of operating expenses.
(5) Assumes that 8.0% of the shares sold in the offering will be purchased by
the employee stock ownership plan, and that the funds used to acquire the
ESOP shares will be borrowed from Reserve Bancorp, Inc. For an estimate of
the impact of the loan on earnings, see Pro Forma Data. The Bank intends to
make scheduled discretionary contributions to the employee stock ownership
plan sufficient to enable the plan to service and repay its debt over a ten
year period. The amount of shares to be acquired by the ESOP is reflected
as a reduction of stockholders' equity. See Management - Executive
Compensation - Employee Stock Ownership Plan. If the employee stock
ownership plan is unable to purchase stock in the conversion due to an
oversubscription in the offering by eligible account holders having first
priority, and the purchase price in the open market is greater than the
original $10.00 price per share, there will be a corresponding reduction in
stockholders' equity. See The Offering - Subscription Offering -
Subscription Rights.
(6) Assumes that an amount equal to 4% of the shares of stock sold in the
offering is purchased by stock programs within one year following the
conversion. The stock purchased by the stock programs is reflected as a
reduction of stockholders' equity. See footnote (2) to the table under Pro
Forma Data. See Management - Potential Stock Benefit Plans - Stock
Programs.
15
PRO FORMA DATA
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. However, investable net proceeds to Reserve
Bancorp, Inc. are currently estimated to be between approximately $4,057,000 and
$5,582,000 (or $6,459,000 if the independent valuation is increased by 15%)
based on the following assumptions:
o an amount equal to 8% of the shares issued will be loaned to the ESOP to
fund its purchase of 8% of the shares issued;
o an amount equal to 4% of the shares issued will be awarded pursuant to the
stock programs adopted no sooner than six months following the offering,
funded through open market purchases; and
o expenses of the offering are estimated to be between approximately $356,000
and $389,000 ($408,000 if the independent valuation is increased by 15%).
We have prepared the following table, which sets forth our historical
net income and net worth prior to the conversion and our pro forma consolidated
net income and stockholders' equity following the conversion. In preparing this
table and in calculating pro forma data, we have made the following assumptions:
o Pro forma earnings have been calculated assuming the stock had been sold at
the beginning of the period and the net proceeds had been invested at an
average yield of 3.60% for the year ended September 30, 2001, which
approximates the yield on a one-year U.S. Treasury bill on September 30,
2001. 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, has been used to estimate income on net proceeds because
it is believed that the one-year U.S. Treasury bill rate is a more accurate
estimate of the rate that would be obtained on an investment of net
proceeds from the offering.
o The pro forma after-tax yield on the net proceeds is assumed to be 2.30%
for the year ended September 30, 2001, based on an effective tax rate of
36%.
o We did not include any withdrawals from deposit accounts to purchase shares
in the offering.
o Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of
stock, as adjusted in the pro forma net earnings per share to give effect
to the purchase of shares by the employee stock ownership plan.
o Pro forma stockholders' equity amounts have been calculated as if the stock
had been sold on September 30, 2001, and no effect has been given to the
assumed earnings effect of the transactions.
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the amount of money that
would be distributed to stockholders if we liquidated Reserve Bancorp, Inc. The
pro forma data does not predict how much we will earn in the future.
16
The following table summarizes historical data of Mt. Troy Savings Bank
and pro forma data of Reserve Bancorp, Inc. at or for the year ended September
30, 2001 based on the assumptions set forth above and in the table and should
not be used as a basis for projections of market value of the stock following
the conversion. No effect has been given in the table to the possible issuance
of additional stock reserved for future issuance pursuant to a stock option plan
that may be adopted by the Board of Directors of Reserve Bancorp, Inc. within
one year following the conversion, nor does book value give any effect to the
liquidation account to be established or the bad debt reserve in liquidation.
See The Conversion - Effects of Conversion - Liquidation Rights and Management -
Potential Stock Benefit Plans - Stock Option Plans.
At or For the Year Ended September 30, 2001
-------------------------------------------------------
$5,015,000 $5,900,000 $6,785,000 $7,802,750
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
----------- ------------ ------------ ------------
501,500 590,000 678,500 780,275
Shares Shares Shares Shares
----------- ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
Gross proceeds ................................... $ 5,015 $ 5,900 $ 6,785 $ 7,803
Less expenses .................................... (356) (373) (389) (408)
--------- --------- --------- ---------
Estimated net proceeds ........................ 4,659 5,527 6,396 7,395
Less ESOP funded by Reserve Bancorp, Inc. ........ (401) (472) (543) (624)
Less stock programs adjustment ................... (201) (236) (271) (312)
--------- --------- --------- ---------
Estimated investable net proceeds ............. $ 4,057 $ 4,819 $ 5,582 $ 6,459
========= ========= ========= =========
Net Income:
Historical (Restated) ......................... $ 340 $ 340 $ 340 $ 340
Pro forma income on net proceeds .............. 93 111 128 149
Pro forma ESOP adjustments(1) ................. (26) (30) (35) (40)
Pro forma stock programs adjustment(2) ........ (26) (30) (35) (40)
--------- --------- --------- ---------
Pro forma net income(1)(3)(4) ................. $ 381 $ 391 $ 398 $ 409
========= ========= ========= =========
Per share net income
Historical (Restated) ......................... $ 0.73 $ 0.62 $ 0.54 $ 0.47
Pro forma income on net proceeds .............. 0.20 0.20 0.20 0.21
Pro forma ESOP adjustments(1) ................. (0.06) (0.05) (0.06) (0.06)
Pro forma stock programs adjustment(2) ........ (0.06) (0.05) (0.06) (0.06)
--------- --------- --------- ---------
Pro forma net income per share(1)(3)(4) ....... $ 0.81 $ 0.72 $ 0.62 $ 0.56
========= ========= ========= =========
Shares used in calculation of income per share(1) 465,392 547,520 629,648 724,095
Stockholders' equity:
Historical (Restated) ......................... $ 5,164 $ 5,164 $ 5,164 $ 5,164
Estimated net proceeds ........................ 4,659 5,527 6,396 7,395
Less: Common Stock acquired ESOP(1) ........... (401) (472) (543) (624)
Less: Common Stock acquired by stock
programs(2) ............................. (201) (236) (271) (312)
--------- --------- --------- ---------
Pro forma stockholders' equity(1)(3)(4) ....... $ 9,221 $ 9,983 $ 10,746 $ 11,623
========= ========= ========= =========
Stockholders' equity per share:
Historical (Restated) ......................... $ 10.30 $ 8.75 $ 7.61 $ 6.62
Estimated net proceeds ........................ 9.29 9.37 9.43 9.48
Less: Common Stock acquired by the ESOP(1) .... (0.80) (0.80) (0.80) (0.80)
Less: Common stock acquired by stock
programs(2) ............................. (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma stockholders' equity per share(4) ... $ 18.39 $ 16.92 $ 15.84 $ 14.90
========= ========= ========= =========
Offering price as a percentage of pro forma
stockholders' equity per share ................. 54.38% 59.10% 63.13% 67.11%
========= ========= ========= =========
Offering price to pro forma
net income per share ........................... 12.35X 13.89X 16.13X 17.86X
========= ========= ========= =========
Shares used in calculation of stockholders' equity
per share ...................................... 501,500 590,000 678,500 780,275
(Footnotes on following page)
17
- -----------
(1) Assumes that 8% of the shares of stock sold in the offering will be
purchased by the employee stock ownership plan and that the plan will
borrow funds from Reserve Bancorp, Inc. The stock acquired by the employee
stock ownership plan is reflected as a reduction of stockholder's equity.
The Bank intends to make annual contributions to the plan in an amount at
least equal to the principal and interest requirement of the loan. This
table assumes a 10 year amortization period. See Management - Executive
Compensation - Employee Stock Ownership Plan. The pro forma net earnings
assumes: (i) that the Bank's contribution to the employee stock ownership
plan for the principal portion of the debt service requirement for year
ended September 30, 2001 was made at the end of the period; (ii) that
4,012, 4,720, 5,428 and 6,242 shares at the minimum, midpoint, maximum, and
15% above the maximum of the range, respectively, were committed to be
released during the year ended September 30, 2001, at an average fair value
of $10.00 per share and were accounted for as a charge to expense in
accordance with Statement of Position ("SOP") No. 93-6; and (iii) only the
employee stock ownership plan shares committed to be released were
considered outstanding for purposes of the net earnings per share
calculations. All employee stock ownership plan shares were considered
outstanding for purposes of the stockholders' equity per share
calculations.
(2) Gives effect to the stock programs that may be adopted by the Bank
following the conversion and presented for approval at a meeting of
stockholders to be held within one year after completion of the conversion.
If the stock programs are approved by the stockholders, the stock programs
would be expected to acquire an amount of stock equal to 4% of the shares
of stock sold in the offering, or 20,060, 23,600, 27,140 and 31,211 shares
of stock respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range through open market purchases. Funds used by the stock
programs to purchase the shares will be contributed to the stock programs
by the Bank. In calculating the pro forma effect of the stock programs, it
is assumed that the required stockholder approval has been received, that
the shares were acquired by the stock programs at the beginning of the year
ended September 30, 2001 through open market purchases, at $10.00 per
share, and that 20% of the amount contributed was amortized to expense
during the year ended September 30, 2001. The plan will be amortized over 5
years. The issuance of authorized but unissued shares of stock to the stock
plans instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.85% and pro forma net income per
share for the year ended September 30, 2001 would be $.79, $.69, $.62, and
$.55, at the minimum, midpoint, maximum and 15% above the maximum of the
range, respectively, and pro forma stockholders' equity per share at
September 30, 2001 would be $17.68, $16.27, $15.23 and $14.32 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that stockholder approval of the
stock programs will be obtained, or the actual purchase price of the shares
will be equal to $10.00 per share. See Management - Potential Stock Benefit
Plans - Stock Programs.
(3) The retained earnings of Reserve Bancorp, Inc. and the Bank will continue
to be substantially restricted after the conversion. See Dividend Policy,
The Conversion - Effects of Conversion - Liquidation Rights and Regulation
- Regulation of the Bank - Dividends and Other Capital Distribution
Limitations.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to the stock option plans that may be adopted by the Bank
following the conversion which, in turn, would be presented for approval at
a meeting of stockholders to be held within one year after the completion
of the conversion. If the stock option plans are presented and approved by
stockholders, an amount equal to 10% of the stock sold in the offering, or
50,150, 59,000, 67,850 and 78,027 shares at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the stock
option plans. The issuance of authorized but unissued shares of stock to
the stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 9.09%. Assuming
stockholder approval of the stock option plans and the exercise of all
options at the end of the period at an exercise price of $10.00 per share,
the pro forma net earnings per share would be $.74, $.64, $.57 and $.51,
respectively at the minimum, midpoint, maximum and 15% above the maximum of
the range for the year ended September 30, 2001; pro forma stockholders'
equity per share would be $17.62, $16.29, $15.31, and $14.45, respectively
at the minimum, midpoint, maximum and 15% above the maximum of the range at
September 30, 2001. See Management - Potential Stock Benefit Plans - Stock
Option Plans.
18
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Mt. Troy Savings Bank's historical and
pro forma capital position relative to its capital requirements as of September
30, 2001. Pro forma capital levels assume receipt by Mt. Troy Savings Bank of
the net proceeds of the offering and retention by Reserve Bancorp, Inc. of 50%
of the net proceeds, and that the ESOP purchases 8% of the stock sold in the
offering, and that 4% of the shares of stock sold in the offering is purchased
by the stock programs at the purchase price subsequent to the offering. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see Use of Proceeds, Capitalization and Pro Forma Data. The
definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to the Bank, see Regulation - Regulation of the Bank - Regulatory
Capital Requirements.
Pro Forma at September 30, 2001
-------------------------------------------------------------------------------------
Actual, at
September 30, 2001, $5,015,000 $5,900,000 $6,785,000 $7,802,750
Restated Offering Offering Offering Offering(1)
--------------------- -------------------- -------------------- -------------------- -------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
GAAP Capital(3)....... $5,164 11.59% $6,891 14.89% $7,219 15.49% $7,548 16.08% $7,925 16.75%
Tangible Capital:
Actual or
Pro Forma......... $5,136 11.53% $6,864 14.83% $7,192 15.43% $7,520 16.02% $7,898 16.69%
Required............ 668 1.50 694 1.50 699 1.50 704 1.50 710 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.............. $4,468 10.03% $6,170 13.33% $6,493 13.93% $6,816 14.52% $7,188 15.19%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Core Capital:
Actual or
Pro Forma......... $5,136 11.53% $6,864 14.83% $7,192 15.43% $7,520 16.02% $7,898 16.69%
Required(4)......... 1,337 3.00 1,388 3.00 1,398 3.00 1,408 3.00 1,419 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.............. $3,799 8.53% $5,476 11.83% $5,794 12.43% $6,112 13.02% $6,479 13.69%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Risk-Based Capital:
Actual or
Pro Forma(5)(6)... $5,303 20.43% $7,031 26.22% $7,359 27.28% $7,687 28.32% $8,065 29.51%
Required............ 2,076 8.00 2,145 8.00 2,158 8.00 2,171 8.00 2,187 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.............. $3,227 12.43% $4,886 18.22% $5,201 19.28% $5,516 20.32% $5,878 21.51%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- -----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% as a
result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
offerings.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. The risk-based capital level is shown as a percentage of
risk-weighted assets.
(3) GAAP Capital includes unrealized gain on available-for-sale securities,
net, which is not included as regulatory capital.
(4) The current OTS core capital requirement for savings banks is 3% of total
adjusted assets for thrifts that receive the highest supervisory rating for
safety and soundness and a 4% to 5% core capital ratio requirement for all
other thrifts. See Regulation - Regulation of the Bank - Regulatory Capital
Requirements.
(5) Assumes net proceeds are invested in assets that carry a 50% risk-weighing.
(6) The difference between equity under GAAP and regulatory risk-based capital
is attributable to the addition of the general valuation allowance of
$166,000 at September 30, 2001 and the subtraction of accumulated other
comprehensive income of approximately $14,000, net of applicable income
taxes and the subtraction of net unrealized losses on available for sale
equity securities of $13,000.
19
RECENT DEVELOPMENTS
The information set forth below at or for the periods ended December
31, 2001 and 2000 is unaudited and, in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation or the results for the unaudited periods have been made. The
results of operations for the three months ended December 31, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2002 or any other period. This information should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements contained
elsewhere in this prospectus.
Selected Financial Highlights
(Dollars in thousands)
Balance Sheet: December 31, September 30,
2001 2001
------------ -------------
(Unaudited) (Restated)
Assets ............................................ $45,843 $44,554
Loans receivable, net ............................. 37,414 37,731
Investment securities ............................. 4,614 4,347
Cash and cash equivalents ......................... 2,417 1,060
Deposits .......................................... 40,103 39,038
FHLB advances ..................................... -- --
Total equity ...................................... 5,274 5,164
Summary of Operations: For the Three Months Ended December 31,
---------------------------------------
2001 2001
------------ -------------
(Unaudited)
Interest and dividend income ...................... $ 805 $ 775
Interest expense .................................. 416 425
------- -------
Net interest income ............................... 389 350
Provision for loan losses ......................... 5 5
------- -------
Net interest income after provision for loan losses 384 345
Noninterest income ................................ 44 43
Noninterest expense ............................... 245 239
------- -------
Income before income taxes ........................ 183 149
Income taxes ...................................... 67 53
------- -------
Net income ........................................ $ 116 $ 96
======= =======
Actual number (not in thousands):
Real estate loans outstanding ..................... 397 411
Deposit accounts .................................. 5,751 5,885
Full service offices .............................. 2 2
Selected Financial Ratios
20
At or For the
Three Months
Ended December 30,
2001(1) 2000(1)
-------- -------
Performance Ratios: ................................... (unaudited)
Return on average assets (net income divided by
average total assets) ........................... 1.02% 0.84%
Return on average equity (net income divided by
average equity) .................................. 8.98 7.43
Net interest rate spread ............................ 3.07 2.91
Net interest margin on average interest-earning
assets ........................................... 3.51 3.41
Average interest-earning assets to average
interest-bearing liabilities ..................... 111.70 111.97
Efficiency ratio (noninterest expense divided by the
sum of net interest income and noninterest income) 56.58 60.81
Asset Quality Ratios:
Non-performing loans to total loans, net ............ 0.34 0.40
Non-performing assets to total assets ............... 0.28 0.33
Net charge-offs to average loans outstanding ........ - -
Allowance for loan losses to total loans ............ 0.46 0.45
Capital Ratios:
Average equity to average assets ratios
(average equity divided by average total assets) . 11.33 11.50
Equity to assets at period end ...................... 11.50 11.59
- ------------------
(1) Ratios for the three month periods are stated on an annualized basis. Such
ratios and results are not necessarily indicative of results that may be
expected for the full year or any other period.
Comparison of Financial Condition at December 31, 2001 and September 30, 2001
Assets. Total assets increased $1.3 million, or 2.9%, to $45.9 million
at December 31, 2001 from $44.6 million at September 30, 2001. The increase in
total assets resulted from a $1.4 million increase in cash and cash equivalents
and a $170,000 net increase in investment securities and interest-bearing
deposits in other banks, offset by a $300,000 decrease in net loans outstanding.
Liabilities. Total liabilities increased $1.2 million, or 3.0%, to
$40.6 million at December 31, 2001 from $39.4 million at September 30, 2001. The
increase in total liabilities resulted from a $1.1 million increase in deposits
and an increase in escrow and other liabilities of $100,000.
21
Equity. The increase of $110,000 in the Bank's equity reflects the
$116,000 in net income for the three months ended December 31, 2001 and an
decrease of $6,000 in unrealized gains on investments available for sale, net of
tax.
Comparison of Operating Results for Three Months Ended December 31, 2001 and
2000.
Net Income. Net income for the three months ended December 31, 2001
increased 20.8% to $116,000 compared to net income of $96,000 for the same
period in 2000. Net interest income increased as interest income increased by
3.9% while interest expense decreased by 2.1%, as the result of a 44 basis point
decrease in the average cost of interest-bearing liabilities. Noninterest income
increased by $1,000, or 2.3%, for the three months ended December 31, 2001 as
compared to the same period in 2000. The increase in noninterest income was the
result of an increase in income from fees and service charges. The increase in
noninterest income, however, was more than offset by a $6,000, or 2.5%, increase
in noninterest expense.
Net Interest Income. Net interest income increased by $39,000, or 11.1%
for the three months ended December 31, 2001 compared to the same period in
2000. Interest income increased by $30,000 and interest expense decreased by
$9,000.
Interest Income. Total interest income increased $30,000, or 3.9%, for
the three months ended December 31, 2001 compared to the same period in 2000, as
a result of an approximately $3.4 million increase in the average balance of
interest-earning assets, consisting of a $3.0 million increase in the average
balance of loans and a $319,000 increase in the average balance of securities,
partially offset by a decrease of 30 basis points in the average interest rates
earned. Interest income on loans increased by $45,000 to $733,000 for the 2001
period from $688,000 for the 2000 period due to the increase in the average
balance of loans from $37.8 million for the three months ended December 31, 2001
compared to $34.8 million for the same period in 2000. The average yield on
loans decreased by 16 basis points from 7.91% for the 2000 period to 7.75% for
the 2001 period. Interest income on investment securities decreased by $15,000
due to a decrease of 117 basis points in the average interest rates earned from
5.52% for the three months ended December 31, 2000 to 4.35% for the same period
in 2001, partially offset by increases in the average balance of investment
securities from $6.3 million for the 2000 period to $6.6 million for the 2001
period.
Interest Expense. Total interest expense decreased by $9,000 to
$416,000 for the three months ended December 31, 2001, as a result of a 44 basis
point decrease in the average rates paid on interest- bearing liabilities to
4.19% for the 2001 period compared to 4.63% for the same period in 2000, even
though the average balance of interest-bearing liabilities increased to $39.7
million for 2001 from $36.7 million for the three months ended December 31,
2000. The average balances of NOW and savings accounts increased $698, or 11.7%,
and $1,488 or 13.9%, respectively, while the average rate paid on NOW accounts
fell 7 basis points and the average rate paid on savings accounts decreased by
10 basis points. The average balance of certificates increased $996, or 5.0%,
while the average rate fell 57 basis points. The increase in rates paid on
interest-bearing liabilities reflects market rates. The average balance of FHLB
advances fell from $217,000 for the three months ended December 31, 2000 to $0
for the same period in 2001.
Provision for Loan Losses. The Bank maintains an allowance for loan
losses through provisions for loan losses which are charged to operations. The
provision is made to adjust the total allowance for loan losses to an amount
that represents management's best estimate of known and inherent losses in the
loan portfolio at the balance sheet date that are both probable and reasonably
estimable. In determining
22
the appropriate level of the allowance for loan losses, management considers
factors such as its internal analysis of credit quality, general levels of loan
delinquencies, collateral values, the Bank's historical loan loss experience,
changes in loan concentrations by loan category, peer group information and
economic and market trends. See Business of Mt. Troy Savings Bank -
Non-Performing Loans and Problem Assets - Allowance for Loan Losses beginning on
page 44. The provision established each quarter for loan losses reflects
management's assessment of these factors in relation to the level of the
allowance at such time.
The provision for loan losses was $4,500 for the three months ended
December 31, 2001 and 2000. The Bank had net charge-offs of $0 for the three
months ended December 31, 2001 compared to net charge-offs of $137 for 2000.
Management's evaluation of the adequacy of the allowance for loan losses
involved consideration of the general factors described in the paragraph above,
and its evaluation did not change either in estimation methods or assumptions
for the 2001 period as compared to the 2000 period. The level of non-performing
loans was 0.34% and 0.40% of net loans at December 31, 2001 and 2000,
respectively.
The Bank's allowance for loan losses stood at $171,000 at December 31,
2001 compared to $166,000 at September 30, 2001. Management allocates the
allowance to various categories based on its assessment of the risk
characteristics of each loan category and the relative balances at the end of
each quarter for each loan category. The allocation did not change materially
from September 30, 2001 to December 31, 2001. See Business of Mt. Troy Savings
Bank - Non-Performing Loans and Problem Assets - Allowance for Loan Losses and -
Allocation of Allowance for Loan Losses.
Noninterest Income. Noninterest income, which is primarily composed of
loan fees and service charges, increased $1,000 from $43,000 for the three
months ended December 31, 2000 to $44,000 for 2001. Loan fees and service
charges increased $1,000 from $36,000 for the three months ended December 31,
2000 to $37,000 for 2001. The increase reflects the Bank's emphasis on charging
appropriate fees for its services.
Noninterest Expense. Noninterest expense increased by $6,000 to
$245,000 for the three months ended December 31, 2001 from $239,000 for 2000.
This increase was due primarily to a $13,000 increase in compensation and
employee benefits offset by a decrease of $7,000 in legal, marketing, and other
professional services.
The Bank expects increased expenses in the future as a result of the
establishment of the employee stock ownership plan, potential stock benefit
plans, and the adoption of the directors and executive retirement plans, as well
as increased costs associated with being a public company such as periodic
reporting, annual meeting materials, transfer agent, and professional fees.
Provision for Income Taxes. Provision for income taxes increased by
$14,000 for the three months ended December 31, 2001 as compared to 2000. The
increase reflects higher net income for the three months.
23
SELECTED FINANCIAL AND OTHER DATA
The following financial information and other data in this section is
derived from the Bank's audited financial statements for the years ended
September 30, 2001 and 2000 and should be read together with the Bank's
financial statements and the notes thereto beginning at page F-2 of this
prospectus. The historical financial and other data at or for the years ended
September 30, 2001 and 2000 may not be indicative of results for the year ended
September 30, 2002 or for any other period.
Selected Financial Highlights
(Dollars in thousands)
Balance Sheet: At September 30,
----------------------
2001 2000
------- -------
(Restated)
Assets ............................................ $44,554 $42,586
Loans receivable, net ............................. 37,731 35,685
Investment securities ............................. 4,347 4,353
Interest-bearing deposits in other bank ........... 400 597
Cash and cash equivalents ......................... 1,060 989
Deposits .......................................... 39,038 36,011
FHLB advances ..................................... -- 1,450
Total equity ...................................... 5,164 4,777
Summary of Operations: For the Year Ended September 30,
--------------------------------
2001 2000
------- -------
(Restated)
Interest and dividend income ...................... $ 3,161 $ 3,121
Interest expense .................................. 1,696 1,644
------- -------
Net interest income ............................... 1,465 1,477
Provision for loan losses ......................... 18 18
------- -------
Net interest income after provision for loan losses 1,447 1,459
Noninterest income ................................ 145 98
Noninterest expense ............................... 1,097 906
------- -------
Income before income taxes ........................ 495 651
Income taxes ...................................... 155 227
------- -------
Net income ........................................ $ 340 $ 424
======= =======
Actual number (not in thousands):
Real estate loans outstanding ..................... 411 396
Deposit accounts .................................. 5,885 5,769
Full service offices .............................. 2 2
24
Selected Financial Ratios
At or For
the Year Ended
September 30,
------------------
2001 2000
------- -------
Performance Ratios:
Return on average assets (net income divided by
average total assets) ........................... 0.79% 1.00%
Return on average equity (net income divided by
average equity) .................................. 6.88 9.54
Net interest rate spread ............................ 2.97 3.14
Net interest margin on average interest-earning
assets ........................................... 3.46 3.57
Average interest-earning assets to average
interest-bearing liabilities ..................... 112.34 110.88
Efficiency ratio (noninterest expense divided by the
sum of net interest income and noninterest income) 68.14 57.52
Asset Quality Ratios:
Non-performing loans to total loans, net ............ 0.20 0.36
Non-performing assets to total assets ............... 0.17 0.30
Net charge-offs to average loans outstanding ........ 0.01 0.05
Allowance for loan losses to total loans ............ 0.44 0.43
Capital Ratios:
Average equity to average assets ratios
(average equity divided by average total assets) . 11.48 10.49
Equity to assets at period end ...................... 11.59 11.22
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of the Bank's financial condition
and results of operations is intended to provide assistance and understanding of
the Bank's financial condition and results of operations. The information in
this section should be read with the financial statements and the notes thereto
beginning at page F-2.
The Bank's results of operations are primarily dependent on its net
interest income. Net interest income is a function of the balances of loans and
investments outstanding in any one period, the yields earned on those loans and
investments and the interest paid on deposits and borrowed funds that were
outstanding in that same period. To a lesser extent, the Bank's results of
operations are also affected by the relative levels of the Bank's noninterest
income and noninterest expense. The Bank's noninterest income consists of
primarily fees and service charges, and to a lesser extent, gains on the sale of
securities held by the Bank. The results of operations are significantly
impacted by the amount of provisions for loan losses which, in turn, are
dependent upon, among other things, the size and makeup of the loan portfolio,
loan quality and loan trends. The noninterest expenses consist primarily of
employee compensation and benefits, occupancy and equipment expenses, data
processing costs, marketing costs, professional fees, office supplies, telephone
and postage costs, and federal deposit insurance premiums. The Bank's results of
operations are affected by general economic and competitive conditions,
including changes in prevailing interest rates and the policies of regulatory
agencies.
The financial statements for the years ended September 30, 2001 and
2000, respectively, were restated to reflect certain adjustments. Please refer
to Notes V and W of the notes to the financial statements beginning on page
F-29.
Forward - Looking Statements
This document contains statements that project the future operations of
Reserve Bancorp, Inc. which involve risks and uncertainties. Reserve Bancorp,
Inc.'s actual results may differ significantly from the results discussed in
these forward-looking statements. Factors that might cause a difference in
results include, but are not limited to, those discussed in "Risk Factors"
beginning on page 7 of this document.
Business Strategy
The Bank's business strategy has been to operate as a well-capitalized
independent community savings bank dedicated to providing quality service at
competitive prices. Generally, the Bank has sought to implement this strategy by
maintaining a substantial part of its assets in loans secured by one-to-four
family residential real estate located in the Bank's market area, home equity
and second mortgage loans. To the extent that new deposits have exceeded loan
originations, the Bank has invested these deposits primarily in securities,
including fixed rate corporate bonds, state and local government obligations,
U.S. government and agency obligations and mortgage-backed securities.
Management believes that the Bank benefits from its ability to quickly
and effectively provide personal service tailored to customer needs and
inquiries, in comparison to many of its local competitors.
26
In fall of 2000, the Bank enhanced its capabilities as a full service community
bank with the issuance of check cards/debit cards.
While management intends to maintain its community orientation by
continuing to emphasize traditional deposit and loan products, primarily
single-family residential mortgages and to a lesser extent, construction,
commercial real estate and consumer loans, the additional capital provided by
the offering will allow the Bank to take steps toward achieving greater growth
and profitability, including increasing its loan originations. In addition, the
Bank may also use the proceeds of the offering to expand either through opening
or acquiring branch offices or acquiring other financial institutions. The Bank
does not, however, have any current understandings, agreements or arrangements
for the expansion of its business, either through the addition of branch offices
or the acquisition of other financial institutions. Initially, the Bank will
invest the proceeds in short term securities.
Analysis of Net Interest Income
The Bank's earnings have historically been most significantly affected
by the Bank's net interest income, which is the difference between interest
income earned on its loans and investments ("interest- earning assets") and
interest paid on its deposits and any borrowed funds ("interest-bearing
liabilities"). Net interest income is affected by (a) the difference between
rates of interest earned on the Bank's interest- earning assets and rates paid
on its interest-bearing liabilities ("interest rate spread") and (b) the
relative amounts of its interest-earnings assets and interest-bearing
liabilities.
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of the Bank's assets and
liabilities are sensitive to changes in interest rates, the Bank's most
significant form of market risk is interest rate risk, or changes in interest
rates. The Bank is vulnerable to an increase in interest rates to the extend
that interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets. The lending activities of the Bank have historically
emphasized the origination of long-term, fixed rate loans secured by
single-family residences. The Bank's primary source of funds has been deposits
with substantially shorter maturities. While having interest-bearing liabilities
that reprice more frequently than interest-earnings assets is generally
beneficial to net interest income during a period of declining interest rates,
this type of an asset/liability mismatch is generally detrimental during periods
of rising interest rates.
The Board of Directors has established an asset/liability committee
which consists of the Bank's president, treasurer/controller and two members of
the Board of Directors. The committee meets periodically to review loan and
deposit pricing and production volumes, interest rate risk analysis, liquidity
and borrowing needs, and a variety of other assets and liability management
topics.
To reduce the effect of interest rate changes on net interest income
the Bank has adopted various strategies to enable it to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
main elements of these strategies include seeking to:
(1) originate loans with adjustable rate features or fixed rate loans with
short maturities;
(2) lengthen the maturities of its liabilities when it would be cost effective
through the pricing and promotion of certificates of deposit and
utilization of FHLB advances;
27
(3) attract low cost checking and transaction accounts which tend to be less
interest rate sensitive when interest rates rise;
(4) when market conditions permit, to originate and hold in its portfolio
adjustable rate loans which have annual interest rate adjustments; and
(5) maintain an investment portfolio that provides a stable cash flow, thereby
providing investable funds in varying interest rate cycles.
The Bank has also made a significant effort to maintain its level of
lower cost deposits as a method of enhancing profitability. At September 30,
2001, the Bank had approximately 44% of its deposits in low-cost passbook
savings accounts and NOW accounts. These deposits have traditionally remained
relatively stable and are expected to be only moderately affected in a period of
rising interest rates.
Quantitative Analysis. Exposure to interest rate risk is actively
monitored by management. The Bank's objective is to maintain a consistent level
of profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Bank uses the OTS Net Portfolio Value
("NPV") Model to monitor its exposure to interest rate risk which calculates
changes in net portfolio value. Reports generated from assumptions provided and
modified by management are reviewed by the Asset/Liability Management Committee
and reported to the Board of Directors quarterly. The Interest Rate Sensitivity
of Net Portfolio Value Report shows the degree to which balance sheet line items
and net portfolio value are potentially affected by a 100 to 300 basis point
(1/100th of a percentage point) upward and downward shift (shock) in the
Treasury yield curve.
The following table presents the Bank's NPV as of September 30, 2001.
The NPV was calculated by the OTS, based on information provided by the Bank.
(Net Portfolio Value ("NPV") NPV as % of Present Value of Assets
---------------------------- -----------------------------------
Change Basis Point
in Rates(1) $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------------
(Dollars in thousands)
+300 bp 5,254 -2,447 -32% 11.75% -433 bp
+200 bp 6,135 -1,566 -20% 13.38% -270 bp
+100 bp 6,981 -720 -9% 14.87% -120 bp
0 bp 7,701 16.08%
-100 bp 8,063 361 5% 16.62% +54 bp
-200 bp 8,285 584 8% 16.91% +83 bp
- -------------
(1) The -300bp scenario is not shown due to abnormally low prevailing interest
rate environment.
Future interest rates or their effect on NPV or net interest income are
not predictable. Nevertheless, the Bank's management does not expect current
interest rates to have a material adverse effect on the Bank's NPV or net
interest income in the near future. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. Although certain 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 certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets
28
and liabilities may lag behind changes in market interest rates. Certain assets
such as adjustable rate mortgages, generally have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
In the event of 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 as the ability of
many borrowers to service their debt may decrease in the event of an interest
rate increase.
Comparison of Financial Condition at September 30, 2001 and 2000
Assets. Total assets increased $2.0 million, or 4.7%, to $44.6 million
at September 30, 2001 from $42.6 million at September 30, 2000. The increase in
total assets resulted primarily from a $2.0 million increase in net loans
outstanding. The loan increase was mainly attributable to an increase in
construction lending demand.
Liabilities. Total liabilities increased $1.6 million, or 4.2%, to
$39.4 million at September 30, 2001 from $37.8 million at September 30, 2000.
The increase in total liabilities resulted primarily from a $3.0 million
increase in deposits, partially offset by a decrease in FHLB advances of $1.5
million.
Equity. The increase of $387,000 in the Bank's equity reflects the
$340,000 in net income for the year ended September 30, 2001 and an increase of
$47,000 in unrealized gains on investments available for sale, net of tax.
Liquidity and Capital Resources
The Bank maintains liquid assets at levels it considers adequate to
meet its liquidity needs. The liquidity of a savings institution reflects its
ability to provide funds to meet loan requests, accommodate possible outflows in
deposits, fund current and planned expenditures and take advantage of interest
rate market opportunities in connection with asset and liability management
objectives. Funding of loan requests, providing for liability outflows, and
management of interest rate fluctuations require continuous analysis in order to
match the maturities of specific categories of short-term loans and investments
with specific types of deposits and borrowings. Savings institution liquidity is
normally considered in terms of the nature and mix of the savings institution's
sources and uses of funds.
The Bank's primary sources of liquidity are deposits, scheduled
amortization and prepayment of loans and mortgage-backed securities and
maturities and calls of investment securities. In addition, the Bank invests
excess funds in short-term investments, both interest-earning and non-interest
earning, which provide liquidity. The Bank's cash and cash equivalents, defined
as cash and deposits in other financial institutions with original maturities of
three months or less, totaled approximately $1.0 million at September 30, 2001.
To a lesser extent, the earnings and funds provided from the Bank's operations
are a source of liquidity.
For the year ended September 30, 2001, purchases of available-for-sale
securities totaled approximately $608,000, proceeds from sales, maturities and
calls of available-for-sale securities totaled approximately $1.1 million, and
proceeds from principal repayments of mortgage-backed securities
available-for-sale totaled approximately $71,000. The Bank's available-for-sale
securities portfolio totaled approximately $2.0 million at September 30, 2001.
For the year ended September 30, 2001, purchases of held-to-maturity securities
totaled approximately $1.7 million, proceeds from maturities and calls of
held-to-maturity securities totaled approximately $1.0 million, and proceeds
from principal repayments of
29
mortgage-backed securities held-to-maturity totaled approximately $74,000. The
Bank's held-to-maturity securities portfolio totaled approximately $2.4 million
at September 30, 2001.
Loan originations, net of principal repayments on loans, totaled
approximately $2.1 million for the year ended September 30, 2001.
The Bank sets the interest rates on its deposits to maintain a desired
level of total deposits. For the year ended September 30, 2001, the Bank
experienced a net increase of deposits of approximately $3.0 million, as
compared to a net increase of approximately $1.9 million during the prior year.
At September 30, 2001, certificates of deposit of $100,000 or more scheduled to
mature in less than one year totaled approximately $1.8 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank on maturity, although there can be no assurance that this
will be the case. In addition, the cost of such deposits may be significantly
higher upon renewal in a rising interest rate environment.
Liquidity management is both a daily and long-term function of business
management. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. If the Bank requires funds beyond its ability to
generate them internally, it has the ability to obtain advances from the Federal
Home Loan Bank of Pittsburgh, which provides an additional source of funds. See
Sources of Funds - Borrowings. At September 30, 2001, the Bank had no borrowings
outstanding.
The Bank is subject to federal regulations that impose minimum capital
requirements. For a discussion on these capital levels, see Historical and Pro
Forma Capital Compliance and Regulation - Regulation of the Bank - Regulatory
Capital Requirements.
Management is not aware of any known trends, events or uncertainties
that will have or are reasonably likely to have a material effect on the Bank's
liquidity, capital or operations nor is management aware of any current
recommendation by regulatory authorities, which if implemented, would have a
material effect on liquidity, capital or operations. The total amount of the
Bank's commitments to extend credit for mortgage and consumer loans as of
September 30, 2001, was approximately $276,000, excluding commitments on lines
of credit which totaled approximately $886,000.
30
Significant cash flows were as follows for the year ended September 30,
2001:
(In thousands)
------------
Cash provided by operations.................................. $ 334
Net loan originations........................................ (2,084)
Sales and redemptions of investment securities............... 2,249
Purchases of investment securities........................... (2,274)
Purchases of interest-bearing deposits in other banks........ (200)
Maturities of interest-bearing deposits in other banks....... 397
Net decrease in FHLB advances................................ (1,450)
Net increase in deposits..................................... 3,027
Other - net.................................................. 72
---------
Net increase in cash and cash equivalents $ 71
=========
For additional information about cash flows from the Bank's operating,
financing, and investing activities, see the Statements of Cash Flows included
in the Financial Statements.
Comparison of Operating Results for Year Ended September 30, 2001 to Year Ended
September 30, 2000.
Net Income. Net income for 2001 decreased 19.8% to $340,000 compared to
net income of $424,000 for 2000. Net interest income decreased slightly as
interest income increased by 1.3% while interest expense increased by 3.1%,
primarily as the result of a 11 basis point increase in the average cost of
interest-bearing liabilities. Noninterest income increased by $47,000, or 48.0%,
for the year ended September 30, 2001 as compared to 2000. The increase in
noninterest income was the result of an $18,000, or 21.7%, increase in income
from fees and service charges and an increase of $29,000 in gains from the sale
of real estate and investments. The increase in noninterest income, however, was
more than offset by a $191,000, or 21.1%, increase in noninterest expense,
primarily the result of a $132,000 loss on impairment of securities. Such loss
reflects management's analysis of the fair value of certain securities held to
maturity which were less than their carrying amount and the decline in the fair
value of such securities were other than temporary.
Net Interest Income. Net interest income decreased by $12,000, or 0.8%
in 2001 compared to 2000. Interest income increased by $40,000 but was more than
offset by an increase in interest expense of $52,000.
Interest Income. Total interest income increased $40,000, or 1.3%, in
2001 compared to 2000, as a result of an $873,000 increase in average
interest-earning assets, consisting of a $571,000 increase in the average
balance of loans and a $302,000 increase in the average balance of securities,
partially offset by a decrease of 6 basis points in the average interest rates
earned. Interest income on loans increased by $49,000 to $2.77 million for 2001
from $2.72 million for 2000 due primarily to the increase in the average balance
of loans from $35.2 million for 2000 to $35.8 million for 2001. The average
yield on loans
31
increased by 2 basis points from 7.72% for 2000 to 7.74% for 2001. Interest
income on investment securities decreased by $9,000 primarily due to a decrease
of 44 basis points in the average interest rates earned from 6.48% for 2000 to
6.04% for 2001, partially offset by increases in the average balance of
investment securities from $6.2 million for 2000 to $6.5 million for 2001.
Interest Expense. Total interest expense increased by $52,000 to $1.7
million in 2001, primarily as a result of an 11 basis point increase in the
average rates paid on interest-bearing liabilities to 4.51% for 2001 compared to
4.40% for 2000. Additionally, average interest-bearing liabilities increased to
$37.6 million for 2001 from $37.3 million for 2000. The average balances of NOW
accounts and certificates of deposit increased $493,000, or 8.6%, and $1.3
million, or 7.0%, respectively, while the average rate paid on NOW accounts fell
7 basis points and the average rate paid on certificates of deposits increased
by 35 basis points. The increase in rates paid on interest-bearing liabilities
reflects market rates. The average balance of FHLB advances fell dramatically,
from $2.1 million to $128,000 for 2001, while the average rate paid on advances
increased by 30 basis points.
Provision for Loan Losses. The Bank maintains an allowance for loan
losses through provisions for loan losses which are charged to operations. The
provision is made to adjust the total allowance for loan losses to an amount
that represents management's best estimate of losses inherent in the loan
portfolio at the balance sheet date that are both probable and reasonably
estimable. In determining the appropriate level of the allowance for loan
losses, management considers factors such as its internal analysis of credit
quality, general levels of loan delinquencies, collateral values, the Bank's
historical loan loss experience, changes in loan concentrations by loan
category, peer group information and economic and market trends. See Business of
Mt. Troy Savings Bank - Non-Performing Loans and Problem Assets - Allowance for
Loan Losses beginning on page 44. The provision established each quarter for
loan losses reflects management's assessment of these factors in relation to the
level of the allowance at such time.
The provision for loan losses was $18,000 for the years ended September
30, 2001 and 2000. The Bank had net charge-offs of $4,800 for the year ended
September 30, 2001 compared to net charge-offs of $17,000 for 2000. The major
change in the loan portfolio during the year ended September 30, 2001 was an
increase in the Bank's construction loan portfolio to approximately $6.2 million
at September 30, 2001. Management's evaluation of the adequacy of the allowance
for loan losses involved consideration of the general factors described in the
paragraph above, and its evaluation did not change either in estimation methods
or assumptions during the two years ended September 30, 2001. Its determination
to make an $18,000 provision for both the 2000 and the 2001 fiscal year reflects
the following:
o an approximately 72% decrease during 2001 in net charge-offs as
compared to 2000;
o the decrease in the level of non-performing loans to
approximately $74,000 at September 30, 2001, or 0.20% of net
loans;
o a $2.8 million, or 7.4%, increase in the total balance of
outstanding loans from September 30, 2000 to September 30, 2001,
including an approximately 49% increase in the Bank's
construction loan portfolio to approximately $6.2 million at
September 30, 2001; and
o management's assessment of national and local economic and market
trends and conditions impacting the Bank's lending area.
The Bank's allowance for loan losses stood at $166,000 at September 30,
2001 compared to $153,000 at September 30, 2000. Management allocates the
allowance to various categories based on its
32
assessment of the risk characteristics of each loan category and the relative
balances at year end of each loan category. The allocation did not change
materially from September 30, 2000 to September 30, 2001. See Business of Mt.
Troy Savings Bank - Non-Performing Loans and Problem Assets - Allowance for Loan
Losses and - Allocation of Allowance for Loan Losses.
Noninterest Income. Noninterest income, which is primarily composed of
loan fees and service charges, increased $47,000 from $98,000 for the year ended
September 30, 2000 to $145,000 for 2001. Noninterest income for 2001 includes
$38,000 from gains on sales of foreclosed real estate and investment securities
as compared to $9,000 for 2000. Loan fees and service charges increased $18,000
from $85,000 for the year ended September 30, 2000 to $103,000 for 2001. The
increase reflects the Bank's emphasis on charging appropriate fees for its
services.
Noninterest Expense. Noninterest expense increased by $191,000 to
$1,097,000 for the year ended September 30, 2001 from $906,000 for 2000. This
increase was due primarily to a $132,000 loss on impairment of securities. Such
loss reflects management's analysis of the fair value of certain securities held
to maturity which were less than their carrying amount and the decline in the
fair value of such securities were other than temporary. The fair value of these
securities could further decline due to the volatility of the cyclical nature of
the industries the bond issuers are engaged in as well as changes in interest
rates. Accordingly, the Bank could recognize further losses on these securities.
See Business of Mt. Troy Savings Bank - Non-Performing Loans and Problem Assets
- - Classified Assets.
Additionally, the Bank recorded a $40,000 increase in compensation and
employee benefits, including salary increases of existing employees and the
establishment of a directors retirement plan which was effective January 1,
2001. The Bank recorded expense related to the plan totaling $22,000 for the
year ended September 30, 2001. The increase is also attributable to a $23,000
increase in other noninterest expenses, which reflects increases of $5,000,
$6,000 and $12,000 in insurance costs, NOW account expenses and professional and
supervisory fees, respectively, offset by a $6,000 decrease in cash shortages.
The Bank expects increased expenses in the future as a result of the
establishment of the employee stock ownership plan, potential stock benefit
plans, and directors retirement plan, as well as increased costs associated with
being a public company such as periodic reporting, annual meeting materials,
transfer agent, and professional fees.
Provision for Income Taxes. Provision for income taxes decreased by
$72,000 for the year ended September 30, 2001 as compared to 2000. The decrease
reflects lower net income for the year.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations,
effective for all business combinations initiated after June 30, 2001, as well
as all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The new statement requires that the purchase
method of accounting be used for all business combinations and prohibits the use
of the pooling-of-interests method. The adoption of Statement No. 141 is not
expected to have a material effect on the Bank's financial position or results
of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. The new statement changes the
accounting for goodwill from an amortization method to an impairment-only
33
approach. Thus, amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of this statement. The adoption
of Statement No. 142 is not expected to have a material effect on the Bank's
financial position or results of operations.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, effective for fiscal years beginning after June 15,
2002. This statement requires entities to record the fair value of a liability
for an asset retirement obligation ("ARO") in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The adoption of
Statement No. 143 is not expected to have a material effect on the Bank's
financial position or results of operations.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment of Long- Lived Assets, effective for fiscal years beginning after
December 15, 2001. This statement replaces FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. The primary objectives of this project were to develop one accounting model
for long-lived assets to be disposed of by sale and to address significant
implementation issues using the framework established in SFAS No. 121. The
adoption of Statement No. 144 is not expected to have a material effect on the
Bank's financial position or results of operations.
Impact of Inflation and Changing Prices
The financial statements and accompanying notes presented elsewhere in
this Prospectus have been prepared in accordance with GAAP which generally
requires the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction, or to the same extent, as prices of goods and services.
34
Average Balance Sheet. The following tables set forth certain
information relating to the Bank for the years ended September 30, 2001 and
2000. The average yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the years
presented. Average balances are derived primarily from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material differences in the information
presented.
Year Ended September 30,
--------------------------------------------------------------------------
2001 2000
-------------------------------------------- -----------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable net (1)......................... $35,759 $2,767 7.74% $35,188 $2,718 7.72%
Investment securities (2)........................ 6,518 394 6.04 6,216 403 6.48
------- ------ ------- ------
Total interest-earning assets................... 42,277 3,161 7.48 41,404 3,121 7.54
------ ------
Non-interest-earning assets....................... 928 968
------- -------
Total assets.................................... 43,205 42,372
------- -------
Interest-bearing liabilities:
NOW accounts..................................... 6,232 139 2.23 5,739 132 2.30
Savings accounts................................. 10,804 349 3.23 10,311 330 3.20
Certificates of deposit.......................... 20,481 1,200 5.86 19,141 1,054 5.51
FHLB advances.................................... 128 8 6.25 2,151 128 5.95
------- ------ ------- ------
Total interest-bearing liabilities............. 37,645 1,696 4.51 37,342 1,644 4.40
------ ------
Non-interest-bearing liabilities.................. 608 586
------- -------
Total liabilities................................ 38,253 37,928
Retained earnings................................. 4,952 4,444
------- -------
Total liabilities and retained earnings.......... $43,205 $42,372
======= =======
Net interest income............................... $1,465 $1,477
====== ======
Interest rate spread(3)........................... 2.97% 3.14%
====== ======
Net yield on interest-earning assets(4).......... 3.47% 3.57%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 112.30% 110.88%
====== ======
- -------------------------------
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes government securities, mortgage-backed securities, corporate
bonds, interest-bearing deposits in banks, and FHLB stock.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
35
Rate/Volume Analysis. The relationship between the volume and rates of
the Bank's interest- bearing assets and interest-bearing liabilities influence
the Bank's net interest income. The following table reflects the sensitivity of
the Bank's interest income and interest expense to changes in volume and in
prevailing interest rates during the periods indicated. Each category reflects
the: (1) changes in volume (changes in volume multiplied by old rate); (2)
changes in rate (changes in rate multiplied by old volume); (3) changes in
rate/volume (change in rate multiplied by the change in volume); and (4) net
change. The net change attributable to the combined impact of volume and rate
has been allocated proportionally to the absolute dollar amounts of change in
each.
Year Ended September 30,
----------------------------------
2001 vs. 2000
----------------------------------
Increase (Decrease)
Due to
----------------------------------
Rate/
Volume Rate Volume Net
------ ------ ------ -----
(Dollars in thousands)
Interest and dividend income:
Loans receivable ...................... $ 44 $ 5 $ - $ 49
Investment securities and other ....... 20 (28) (1) (9)
----- ----- ----- -----
Total interest-earning assets ...... $ 64 $ (23) $ (1) $ 40
===== ===== ===== =====
Interest expense:
NOW accounts .......................... $ 11 $ (4) $ - $ 7
Savings accounts ...................... 16 3 - 19
Certificates of deposit ............... 74 67 5 146
Advances from FHLB and other borrowings (123) 87 (84) (120)
----- ----- ----- -----
Total interest-bearing liabilities . $ (22) $ 153 $ (79) $ 52
===== ===== ===== =====
Change in net interest income ............ $ 86 $(176) $ 78 $ (12)
===== ===== ===== =====
BUSINESS OF RESERVE BANCORP, INC.
Upon completion of the conversion we will own all of the stock of the
Bank. We have not engaged in any significant business to date. Prior to the
conversion, we will not transact any material business. We will invest our
initial capitalization as discussed in the Use of Proceeds section on page 12.
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 these activities. Initially, we will not
maintain offices separate from those of the Bank or employ any persons other
than certain of the Bank's officers. Officers of Reserve Bancorp, Inc. will not
be separately compensated for their service.
36
BUSINESS OF MT. TROY SAVINGS BANK
General
The Bank is a community-oriented savings organization, which was
originally chartered in 1891 by the Commonwealth of Pennsylvania as Mt. Troy
Building & Loan Association. The Bank provides traditional retail banking
services, one- to four-family residential mortgage loans, construction loans,
and consumer loan products, including home equity, auto, and personal loans.
At September 30, 2001, the Bank had total assets, deposits, and equity
of $44.6 million, $39.0 million, and $5.2 million, respectively. The Bank
attracts deposits from the general public and uses these deposits primarily to
originate loans and to purchase investment, mortgage-backed and other
securities. The principal sources of funds for the Bank's lending and investing
activities are deposits, the repayment and maturity of loans and the sale,
maturity, and call of securities. The principal source of income is interest on
loans and mortgage-backed and other securities. The principal expense is
interest paid on deposits.
Market Area and Competition
The Bank operates from its main office located in Reserve Township and
a full-service branch office located in the City of Pittsburgh. The Bank's
primary market area is Allegheny County, Pennsylvania with an emphasis on the
north Pittsburgh market. The Bank's market area can be characterized as a market
with moderate incomes.
The Bank's business of attracting deposits and making loans is
primarily conducted within its market area. A downturn in the local economy
could reduce the amount of funds available for deposit and the ability of
borrowers to repay their loans. As a result, the Bank's profitability could be
hurt.
The Bank faces substantial competition in its attraction of deposits,
which are its primary source of funds for lending, and in the origination of
loans. Many of the Bank's competitors are significantly larger institutions and
have greater financial and managerial resources. The Bank's ability to compete
successfully is a significant factor affecting its profitability.
The Bank's competition for deposits and loans historically has come
from other insured financial institutions such as local and regional commercial
banks, thrift institutions, and credit unions located in the Bank's primary
market area. The Bank also competes with mortgage banking companies for real
estate loans, and commercial banks and savings institutions for consumer loans;
and faces competition for funds from investment products such as mutual funds,
short-term money funds and corporate and government securities.
The Bank competes for loans by charging competitive interest rates and
loan fees, and emphasizing outstanding service for its customers. Lending
products include mortgage, construction and consumer loans. The Bank offers
consumer banking services such as checking and savings accounts, a check card
program, club accounts, money market accounts, retirement accounts, and
certificates of deposit. The Bank's debit/check cards are part of the Freedom
Alliance, which permits depositors of banks participating in the alliance to use
ATM machines of participating institutions without fees.
37
Lending Activities
General. The bank primarily originates home mortgages and construction
loans for its own portfolio. The Bank's loan portfolio is predominately
comprised of one- to four-family residential real estate loans, most of which
have fixed rates of interest.
Loan Portfolio Composition. The following table analyzes the
composition of the Bank's loan portfolio by loan category at the dates
indicated.
At September 30,
------------------------------------------------------
2001 2000
------------------------- --------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Type of Loans:
- -------------
First mortgage loans:
One- to four family residential...... $27,843,101 68.63% $27,179,935 71.96%
Multi-family......................... 538,826 1.33 656,320 1.73
Construction......................... 6,156,355 15.17 4,122,600 10.91
Commercial real estate............... 1,993,146 4.91 1,719,254 4.55
Home equity and second mortgage........ 2,700,781 6.66 3,044,028 8.06
Consumer loans:
Secured.............................. 490,187 1.21 595,498 1.58
Unsecured............................ 244,930 0.60 150,331 0.40
Share loans.......................... 156,416 0.39 168,524 0.45
Commercial business loans.............. 446,137 1.10 135,972 0.36
---------- ------ ---------- ------
Total loans............................ 40,569,879 100.00% 37,772,462 100.00%
====== ======
Less:
Undisbursed portions of
construction loans............... 2,567,972 1,832,816
Net deferred loan origination fees... 104,718 102,100
Allowance for loan losses............ 166,114 152,895
---------- ---------
Total loans, net....................... $37,731,075 $35,684,651
========== ==========
38
Loan Maturity Schedule. The following table sets forth the maturity or
repricing of Bank's loan portfolio at September 30, 2001. Demand loans, loans
having no stated maturity and overdrafts are shown as due in one year or less.
First Home Equity
----- and Second Commercial
Mortgage Mortgage Loans Consumer Business Loans Total
-------- -------------- -------- -------------- -----
Amounts Due:
Within 1 Year .......... $ 3,991,234 $ 695,495 $ 153,701 $ 245,917 $ 5,086,347
----------- ----------- ----------- ----------- -----------
After 1 year:
1 to 3 years ......... 3,100,385 378,182 250,040 - 3,728,607
3 to 5 years ......... 1,869,497 411,343 270,491 189,540 2,740,871
5 to 10 years ........ 7,938,236 553,068 217,301 10,680 8,719,285
10 to 15 years ....... 14,478,589 662,693 - - 15,141,282
Over 15 years ........ 5,153,487 - - - 5,153,487
----------- ----------- ----------- ----------- -----------
Total due after one year 32,540,194 2,005,286 737,832 200,220 35,483,532
----------- ----------- ----------- ----------- -----------
Total amount due ....... $36,531,428 $ 2,700,781 $ 891,533 $ 446,137 $40,569,879
=========== =========== =========== =========== ===========
The following table sets forth the dollar amount of all loans at
September 30, 2001 due after September 30, 2002, which have fixed interest rates
and which have floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----------
First Mortgage ................ $32,521,493 $ 18,701 $32,540,194
Home equity and second mortgage 2,005,286 - 2,005,286
Consumer ...................... 581,416 156,416 737,832
Commercial business loans ..... - 200,220 200,220
----------- ----------- -----------
Total ....................... $35,297,735 $ 185,797 $35,483,532
=========== =========== ===========
Residential Lending. The Bank's primary lending activity consists of
the origination of one- to four-family mortgage loans, the majority of which is
secured by property located in Allegheny County, Pennsylvania. The Bank will
generally originate a mortgage loan in an amount up to 95% of the lesser of the
appraised value or selling price of a mortgaged property, however, private
mortgage insurance for the borrower is required on the amount financed in excess
of 80%.
The Bank originates fixed rate mortgage loans for its own portfolio.
The fixed rate mortgage loans have terms of ten to thirty years. The Bank offers
a twenty year loan, which is generally not available from other lenders.
Although the Bank currently originates loans only for its own
portfolio, the Bank generally makes its fixed rate mortgage loans to meet the
secondary mortgage market standards of the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Bank also makes some non-conforming loans in order to
meet the needs of its community and customers.
39
Substantially all of the Bank's residential mortgages include "due on
sale" clauses, which are provisions giving the 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. Property appraisals on real estate securing the
Bank's single-family residential loans are made by state certified or licensed
independent appraisers approved by the Board of Directors. Appraisals are
performed in accordance with applicable regulations and policies. The Bank
requires title insurance policies on all first mortgage real estate loans
originated. All property secured loans require fire and casualty insurance.
Loans made on property located in designated flood zones require minimum flood
insurance coverage based on the amount of the loan.
Construction Lending. The Bank originates construction loans for
single-family residential properties in the Bank's market area. Construction
loans are made to local builders on a speculative basis. Construction loans and
the permanent end mortgage loan are made to owners for construction of their
primary residences. The Bank generally limits residential construction loans for
speculative purposes to not more than two units per builder. At September 30,
2001, the Bank had twenty-one construction loans outstanding with an aggregate
balance of approximately $6.2 million, or 15.17% of the total loan portfolio. Of
such amount, approximately $2.6 million was undisbursed at September 30, 2001.
With a total of approximately $4.1 million in construction loans outstanding at
September 30, 2000, the Bank's construction loan portfolio at September 30, 2001
increased by 49% from the prior year end. The Bank made an affirmative decision
to aggressively originate construction loans at competitive rates, due to the
market demand in its area and the shorter terms and higher rates than are
generally available for home mortgages.
Construction lending is generally considered to involve a higher degree
of credit risk than long- term permanent financing of residential properties.
The Bank's risk of loss on a construction loan is dependent largely upon 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 upon completion of the
project prove to be inaccurate, the Bank 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 assure the repayment of the loan.
Commercial Real Estate Loans. The Bank originates a limited number of
commercial real estate mortgage loans, including loans on multi-family
dwellings, retail/service space, and other income- producing properties. The
Bank requires no less than 20% downpayment or equity for commercial real estate
mortgage loans. Typically these loans are made with fixed rates of interest with
terms of up to fifteen years. Essentially all of the Bank's commercial real
estate loans are within the Bank's market area and all are within Pennsylvania.
As of September 30, 2001, the Bank had commercial real estate loans, totalling
$1,993,146 or 4.9% of the Bank's total loan portfolio. The Bank's largest
commercial real estate loan had a balance of approximately $592,000 on September
30, 2001 and was secured by an office building located in the Bank's market
area. At September 30, 2001 the Bank had three other loans totalling
approximately $500,000 each, two of which were participations on office
buildings, which were originated by a local financial institution.
Commercial real estate loans generally are considered to entail
significantly greater risk than that which is involved with single family real
estate lending. The repayment of these loans typically is dependent on the
successful operations and income stream of the commercial real estate and the
borrower. These risks can be significantly affected by economic conditions. In
addition, commercial real estate lending generally requires substantially
greater evaluation and oversight efforts compared to residential real estate
lending.
40
Home Equity and Second Mortgage Loans. Home equity and second mortgage
loans are originated in the Bank's market area and have maturities of up to
fifteen years. Outside professionals are generally employed to conduct
appraisals for loans over $50,000. At September 30, 2001, the Bank's home equity
and second mortgage loans totaled $2.7 million, or 6.7% of total loans.
Consumer Loans. At September 30, 2001, consumer loans amounted to
approximately $900,000 or 2.2% of the Bank's total loan portfolio, most of which
are auto loans. Consumer loans also consist of personal loans (unsecured),
savings secured loans (share loans) and personal lines of credit. Consumer loans
are originated in the Bank's market area and generally have maturities of up to
five years. For share loans, the Bank will generally lend up to 90% of the
account balance.
Consumer loans generally have shorter terms and higher interest rates
than residential loans. The consumer loan market can be helpful in improving the
spread between average loan yield and costs of funds and at the same time
improve the matching of the rate sensitive assets and liabilities.
Consumer loans entail greater risks than residential mortgage loans,
particularly consumer loans secured by rapidly depreciable assets such as
automobiles or loans that are unsecured. In these 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 are dependent on the borrower's continuing financial stability and
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 consumer loans in the event of a default.
The underwriting standards employed by the 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. The Bank's president is authorized to approve consumer loan
applications up to $10,000. Consumer loans over $10,000 are approved by the
Board of Directors.
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. Accordingly, as of September 30, 2001, the Bank's loans to one borrower
limit was approximately $786,000. At September 30, 2001, the Bank inadvertently
exceeded its loan to one borrower limit with a group of five loans outstanding
to a related group of borrowers. The Bank sold participations in some of the
loans while others were repaid, and the Bank is currently in compliance with its
limit. The increase in the capital of the Bank from this offering will increase
its lending limit.
Loan Originations, Purchases and Solicitation and Processing. The
Bank's customary sources of loan applications include repeat customers,
real-estate broker referrals, builders and "walk-in" customers. The Bank
generally does not purchase loans, except for a few commercial real estate
participation interests from local financial institutions secured by real estate
in its market area.
The Bank periodically purchases participation loans from local
financial institutions and sells participation interest in loans in connection
with commercial real estate loans and construction loans that
41
would otherwise exceed the Bank's loan-to-one-borrower limit. At September 30,
2001, the Bank had approximately $1.5 million, or 3.6% of its total loan
portfolio, in purchase participation loans consisting primarily of commercial
real estate loans in its market area.
Loan Commitments. The Bank gives written commitments to prospective
borrowers on all residential, commercial and speculative construction real
estate loans. Generally, the commitment requires acceptance within thirty days
of the date of the issuance. The total amount of the Bank's commitments to
extend credit for mortgage and consumer loans as of September 30, 2001, was
approximately $276,000, excluding commitments on lines of credit.
Loan Origination and Other Loan Fees. In addition to interest earned on
loans, the Bank sometimes receives loan origination and commitment fees for
originating or purchasing certain loans. Except for construction and commercial
real estate loans, the Bank generally does not charge loan origination fees or
points on loans.
The Bank also receives other fees and charges relating to existing
loans, which include late charges, and fees collected in connection with a
change in borrower or other loan modifications. These fees and charges have not
constituted a material source of income.
Non-Performing Loans and Problem Assets
Collection Procedures. The borrower is notified by mail when a loan is
thirty days delinquent. If the delinquency continues, subsequent efforts are
made to contact the delinquent borrower and a second collection notice is sent.
When a loan is ninety days delinquent, it is referred to an attorney for
repossession and foreclosure. All reasonable attempts are made to collect from
borrowers prior to referral to an attorney for collection. In certain instances,
the Bank may modify the loan or grant a limited moratorium on loan payments to
enable the borrower to reorganize his financial affairs and the Bank attempts to
work with the borrower to establish a repayment schedule to cure the
delinquency.
As to mortgage loans, 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 the Bank 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 ("REO") until it is
sold or otherwise disposed of by the Bank. When REO 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 writedown of the property
is charged to the allowance for loan losses. Adjustments to the carrying value
of the properties that result from subsequent declines in value are charged to
operations in the period in which the declines occur. At September 30, 2001, the
Bank held no real estate owned.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when they are more than ninety days delinquent. Loans may be placed on a
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, 2001, the Bank had approximately
$74,000 of loans that were held on a non-accrual basis.
Non-Performing Assets. The following table provides information
regarding the Bank's non- performing loans and other non-performing assets as of
the end of each of the last two fiscal years. As
42
of each of the dates indicated, the Bank did not have any troubled debt
restructurings within the meaning of Statement of Financial Accounting Standards
("SFAS") 15 and no impaired loans within the meaning of SFAS 114, as amended by
SFAS 118.
At September 30,
------------------------
2001 2000
---------- ----------
Loans accounted for on a non-accrual basis:
First mortgage loans ...................... $ 72,537 $ 67,174
Home equity and second mortgage ........... - 36,495
Consumer loans ............................ 1,542 24,485
---------- ----------
Total ..................................... $ 74,079 $ 128,154
========== ==========
Accruing loans which are contractually past
due 90 days or more:
First mortgage loans ...................... $ - $ -
Home equity and second mortgage ........... - -
Consumer loans ............................ - -
---------- ----------
Total ..................................... $ - $ -
========== ==========
Total non-performing loans ................ $ 74,079 $ 128,154
========== ==========
Real estate owned ......................... $ - $ -
========== ==========
Other non-performing assets ............... $ - $ -
========== ==========
Total non-performing assets ............... $ 74,079 $ 128,154
========== ==========
Total non-performing loans to net loans ... 0.20% 0.36%
========== ==========
Total non-performing loans to total assets 0.17% 0.30%
========== ==========
Total non-performing assets to total assets 0.17% 0.30%
========== ==========
For the year ended September 30, 2001, the amount of interest that
would have been recorded on loans accounted for on a non-accrual basis if those
loans had been current according to the original loan agreements for the entire
period was $6,927. This amount was not included in the Bank's interest income
for the period. The amount of interest income on loans accounted for on a
non-accrual basis that was included in income during the year ended September
30, 2001 was $1,842.
Classified Assets. Management, in compliance with OTS guidelines, has
instituted an internal loan review program, whereby loans are classified as
special mention, substandard, doubtful or loss. When a loan is classified as
substandard or doubtful, management is required to establish a valuation reserve
for loan losses in an amount considered prudent by management. When management
classifies a portion of a loan as loss, a reserve equal to 100% of the loss
amount is required to be established or the loan is to be charged-off.
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 so little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted. Assets which do not currently expose the insured
43
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.
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. At
September 30, 2001, the Bank had approximately $57,000 of loans classified as
"substandard," consisting of a first mortgage loan of approximately $52,000 on a
single family residence, an unsecured consumer loan of approximately $2,000 and
an auto loan of approximately $2,400. None of the loans classified as
substandard are included under non-performing assets, as shown in the table on
page 43. At September 30, 2001, the Bank had approximately $74,000 of loans
classified as "doubtful," consisting of a first mortgage loan of approximately
$23,000 on a single family residence, a first mortgage loan of approximately
$50,000 on a retirement home, and two unsecured consumer loans of approximately
$500 and $1,000. The entire balance of each of the loans classified as doubtful
is included under non- performing assets, as shown in the table on page 43. At
September 30, 2001, the Bank had no loans classified as "loss."
As of September 30, 2001, three of the corporate bonds held in the
Bank's held to maturity portfolio, with an aggregate original value of $550,000
and an aggregate book value at September 30, 2001 of approximately $542,000, had
been downgraded to below investment-grade status. The investment rating of each
has fallen below the "BBB" rating. The Bank considers these three bonds as
classified assets because each bond had a decline in fair value at September 30,
2001. The Bank has classified a portion of each bond, equal to the fair value,
as "substandard." At September 30, 2001, the bonds were written down to their
fair market value since the decline in market values were considered other than
temporary. The Bank recognized an aggregate loss of approximately $132,000 and
the aggregate investment of such bonds after the write down totalled
approximately $410,000 at September 30, 2001. The bond issuers are companies
that are engaged in technology, financing or mineral industries. Due to the
volatility of such industries, these bonds are subject to volatile credit
ratings due to the cyclical nature of these industries, even if the company
performance is satisfactory. The fair value of these securities could further
decline due to the volatility of the cyclical nature of the industries the bond
issuers are engaged in and changes in interest rates. Accordingly, the Bank
could recognize further losses on these securities. See Management's Discussion
and Analysis of Financial Condition and Results of Operations - Comparison of
Operating Results for Year Ended September 30, 2001 to Year Ended September 30,
2000 - Noninterest Expense.
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects the Bank's evaluation of the losses known and inherent in
its loan portfolio that are both probable and reasonable to estimate associated
both with lending activities and particular problem assets. The Bank maintains
the allowance through provisions for loan losses that are charged to income in
the period they are established. The Bank charges losses on loans against the
allowance for loan losses when it believes the collection of loan principal is
unlikely. Recoveries on loans previously charged-off are added back to the
allowance.
The Bank's evaluation of the appropriate amount to provide for loan
losses includes separate review of all loans on which the collectibility of
principal may not be reasonably assured. The Bank evaluates all classified loans
individually and bases its determination of a loss factor on the likelihood of
collectibility of principal including consideration of the value of the
underlying collateral securing the loan. Larger loans, which would generally
include multi-family mortgages, other commercial real estate loans
44
and construction loans, are also generally evaluated for impairment
individually. The Bank also segregates loans by loan category as part of its
allowance evaluation, and evaluates homogenous loans as a group.
Although there may be other factors that also warrant consideration in
maintaining an allowance at a level sufficient to provide for probable and
reasonably estimable losses, the Bank considers the following factors in
connection with its determination of appropriate loss factors and as part of its
overall evaluation of the allowance for loan losses:
o its historical loan loss experience;
o internal analysis of credit quality;
o general levels of non-performing loans and delinquencies;
o changes in loan concentrations by loan category;
o current estimated collateral values;
o peer group information;
o evaluation of credit quality conducted in bank regulatory
examinations; and
o economic and market trends impacting the Bank's lending area.
In recent years, the Bank's charge-offs have been low and,
consequently, additions to the allowance have been more reflective of other
factors.
This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revisions as more information becomes available
or as future events change. Future additions to the allowance for loan losses
may be necessary if economic and other conditions in the future differ
substantially from the current operating environment. In addition, the OTS as an
integral part of its examination process, periodically reviews the Bank's loan
and foreclosed real estate portfolios and the related allowance for loan losses
and valuation allowance for foreclosed real estate. The OTS may require the Bank
to increase the allowance for loan losses or the valuation allowance for
foreclosed real estate based on its review of information available at the time
of the examination, which would negatively affect the Bank's earnings.
It is the Bank's policy to review its loan portfolio, in accordance
with regulatory classification procedures, on at least a quarterly basis.
Additionally, the Bank maintains a program of reviewing loan applications prior
to making the loan and immediately after loans are made in an effort to maintain
loan quality.
45
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At September 30,
-----------------------------
2001 2000
------------ ------------
Allowance balance (at beginning of period) .......... $ 152,895 $ 152,245
------------ ------------
Provision for loan losses ........................... 18,000 18,000
------------ ------------
Charge-offs:
First mortgage .................................... - 9,295
Home equity and second mortgage ................... - -
Consumer .......................................... 4,917 8,055
------------ ------------
Total charge-offs ................................... 4,917 17,350
Recoveries:
First mortgage .................................... 136 -
------------ ------------
Total recoveries .................................... 136 -
------------ ------------
Net (charge-offs) recoveries ........................ (4,781) (17,350)
------------ ------------
Allowance balance (at end of period) ................ $ 166,114 $ 152,895
============ ============
Total loans outstanding ............................. $ 40,569,879 $ 37,772,462
============ ============
Average loans outstanding ........................... $ 38,776,998 $ 36,817,264
============ ============
Allowance for loan losses as a percent of total loans
outstanding ...................................... 0.41% 0.40%
============ ============
Net loans charged off as a percent of average loans
outstanding ...................................... 0.01% 0.05%
============ ============
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by collateral and the
percent of loans in each category to total loans receivable, net, at the dates
indicated. Management determines the allocation of the Bank's allowance for loan
losses based on its assessment of the risk characteristics of each loan
category. The change in allocation of the allowance from period to period also
reflects the relative balances at year end of each loan category. The portion of
the loan loss allowance allocated to each loan category does not represent the
total available for losses which may occur within the loan category since the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio. The allocation is subject to change as management's assessment of the
risk characteristics of each loan category may change from time to time.
At September 30,
------------------------------------------
2001 2000
-------------------- ------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
At end of period allocated to:
First mortgage..................... $144,213 90.05% $ 90,931 89.16%
Home equity and second mortgage.... 14,470 7.76 19,173 8.42
Consumer........................... 7,431 2.20 42,791 2.42
-------- ------ -------- ------
Total allowance.................... $166,114 100.00% $152,895 100.00%
======== ====== ======== ======
46
Investment Activities
General. Federally chartered savings banks have the authority to invest
in various types of liquid assets, including United States Government and
government agency obligations, securities of various federal agencies and
government-sponsored entities (including securities collateralized by
mortgages), certificates of deposits of insured banks and savings institutions,
municipal securities and corporate debt securities.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that securities be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold these securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity."
The Bank does not currently use or maintain a trading account. Debt and
equity securities not classified as "held to maturity" are classified as
"available for sale." These securities are reported at fair value, and
unrealized gains and losses on the securities are excluded from earnings and
reported, net of deferred taxes, as a separate component of equity. The Bank
consults with an outside investment advisor in managing its investment
portfolio.
All of the Bank's securities carry market risk insofar as increases in
market rates of interest may cause a decrease in their market value. Investments
in securities are made based on certain considerations, which include the
interest rate, tax considerations, yield, settlement date and maturity of the
security, the Bank's liquidity position, and anticipated cash needs and sources.
The effect that the proposed security would have on the Bank's credit and
interest rate risk and risk-based capital is also considered. The Bank purchases
securities to provide necessary liquidity for day-to-day operations, and when
investable funds exceed loan demand.
The investment policy of the Bank, which is established by the Board of
Directors, is designed to foster earnings and liquidity within prudent interest
rate risk guidelines, while complementing the Bank's lending activities.
Generally, the Bank's investment policy is to invest funds in various categories
of securities and maturities based upon the Bank's liquidity needs,
asset/liability management policies, investment quality, marketability and
performance objectives. The Board of Directors reviews the Bank's securities
portfolio on a monthly basis.
The Bank's securities classified as held to maturity totaled
approximately $2.4 million at September 30, 2001, and consisted primarily of
approximately $900,000 in municipal obligations, $1.3 million in corporate bond
obligations, and $200,000 of mortgage-backed securities. The Bank's securities
classified as available-for-sale totaled $2.0 million at September 30, 2001,
including approximately $795,000 in municipal obligations. See Notes B, C, D and
E of the notes to the financial statements.
The Bank does not participate in hedging programs, interest rate swaps,
or other activities involving the use of off-balance sheet derivative financial
instruments. Further, the Bank does not invest in securities which are not rated
investment grade.
47
The various obligations held in the Bank's securities portfolio have
varying characteristics as to rate, maturity and call provisions. Callable
securities totaled approximately $2.1 million at September 30, 2001, and the
Bank's investment yield could be reduced if these securities are called prior to
maturity.
Mortgage-backed Securities. Mortgage-backed securities represent a
participation interest in a pool of one- to four-family or multi-family
mortgages, although the Bank focuses its investments on mortgage-backed
securities secured by one- to four-family mortgages.
The mortgage originators use intermediaries (generally United States
Government agencies and government-sponsored enterprises) to pool and repackage
the participation interests in the form of securities, with investors such as
the Bank receiving the principal and interest payments on the mortgages. Such
United States Government agencies and government-sponsored enterprises guarantee
the payment of principal and interest to investors.
Mortgage-backed securities are typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a specific range and have varying
maturities. The life of a mortgage-backed pass-through security thus
approximates the life of the underlying mortgages. The characteristics of the
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. Mortgage-backed
securities are generally referred to as mortgage participation certificates or
pass-through certificates. The Bank's mortgage-backed securities consist
primarily of securities issued by the Government National Mortgage Association
("GNMA" or "Ginnie Mae"), the Federal Home Loan Mortgage Corporation ("FHLMC" or
"Freddie Mac") and the Federal National Mortgage Association ("FNMA" or "Fannie
Mae"). Mortgage-backed securities generally yield less than the mortgage loans
underlying such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk to the security holder.
At September 30, 2001, the Bank's mortgage-backed securities totaled
$540,000. For information regarding the maturities of the Bank's mortgage-backed
securities, see Notes C and E of the notes to the financial statements.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with and without prepayment penalties.
Other Securities. Other securities held by the Bank at September 20,
2001 consist of equity securities including FHLMC/FNMA stock totalling
approximately $380,000, a mortgage securities mutual fund investment totalling
approximately $264,000 and a $312,600 investment in FHLB of Pittsburgh common
stock (this amount is not shown in the securities portfolio). As a member of the
FHLB of Pittsburgh, ownership of FHLB of Pittsburgh common shares is required.
The mortgage securities mutual fund is composed of FHLMC, FNMA and GNMA
mortgage-backed related securities and U.S. Treasury obligations, and is
considered a prudent investment because the underlying mortgages are high
quality, the shares owned are liquid and the income generates a sufficient
return on assets within acceptable risk limitations. The other equity securities
provide diversification and complement the Bank's overall investment strategy.
48
Securities Portfolio
The following table sets forth the carrying value of the Bank's
securities portfolio at the dates indicated.
At September 30,
-----------------------
2001 2000
---------- ----------
Securities Held to Maturity:
- ---------------------------
Mortgage-backed securities ...................... $ 223,531 $ 299,266
Municipal bonds ................................. 907,837 496,694
Corporate bonds ................................. 1,253,618 1,191,706
---------- ----------
Total Securities held to maturity ............. 2,384,986 1,987,666
---------- ----------
Securities available for sale (at fair value):
- ---------------------------------------------
U.S. Government and government agency obligations 200,702 511,895
Mortgage-backed securities ...................... 316,831 380,379
Municipal bonds ................................. 795,209 1,024,653
Mortgage securities mutual fund ................. 264,223 340,478
FHLMC/FNMA stock ................................ 384,818 108,126
---------- ----------
Total securities available for sale ............ 1,961,783 2,365,531
---------- ----------
Total ....................................... $4,346,769 $4,353,197
========== ==========
49
Carrying Values, Yields and Maturities. The following table sets forth
certain information regarding the carrying values, weighted average yields and
maturities of the Bank's investment and mortgage-backed securities portfolio at
September 30, 2001. Average yields on tax exempt obligations have not been
computed on a tax equivalent basis. Securities with no maturity date (mutual
funds and FHLMC/FNMA stock) have not been included in the following table.
At September 30, 2001
------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
------------------ ------------------ ------------------ ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
(Dollars in thousands)
U.S. government
agency
securities........ $ - -% $ - -% $ - -% $ 201 6.57% $ 201 6.57% $ 201
Mortgage-backed
securities........ - - 38 8.40 79 8.97 423 8.00 540 8.17 543
Corporate bonds....... 414 6.81 292 6.28 546 7.84 100 7.00 1,254 7.12 1,256
Municipal bonds....... - - - - 679 4.81 1,024 5.21 1,703 5.05 1,716
Mortgage securities
mutual fund ...... 264 5.85 - - - - - - 264 5.85 264
FHLMC/FNMA Stock...... 385 1.23 - - - - - - 385 1.23 385
-------- -------- ------- ------- -------- -------
Total............... $ 1,063 4.62% $ 330 6.52% $ 1,206 6.33% $ 1,748 6.14% $ 4,347 5.85% $ 4,365
======== ===== ======== ===== ======= ===== ======= ===== ======== ===== =======
50
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition, the Bank derives funds from loan and
mortgage-backed securities principal repayments, and proceeds from the maturity,
call and sale of mortgage-backed securities and investment securities. 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. Borrowings (principally from the FHLB) are also
periodically used to supplement the amount of funds for lending and investment.
At September 30, 2001, the Bank had no borrowings.
Deposits. The Bank's current deposit products include certificates of
deposit accounts ranging in terms from three months to five years as well as
checking, savings, money market, club accounts and individual retirement
accounts ("IRAs"). 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. A majority of deposits are in fixed-term,
market-rate certificate accounts.
Deposits are obtained primarily from residents of Allegheny County. The
Bank uses traditional methods of advertising to attract new customers and
deposits, including print media, direct mail and inserts included with customer
statements. The Bank does not utilize the services of deposit brokers. The Bank
occasionally offers premiums or incentives for opening accounts.
The Bank pays interest on its deposits which are generally competitive
in its market. The determination of interest rates is based upon a number of
factors, including: (1) the Bank's need for funds based on loan demand, current
maturities of deposits and other cash flow needs; (2) a current survey of a
selected group of competitors' rates for similar products; (3) the Bank's
current cost of funds and its yield on assets; and (4) the alternate cost of
funds on a wholesale basis, in particular the cost of advances from the FHLB.
Interest rates are reviewed and set by the President and the Board of Directors
at semi- monthly meetings.
The Bank has a majority percentage of certificates of deposit in its
deposit portfolio (55.8% at September 30, 2001). The Bank's liquidity could be
reduced if a significant amount of certificates of deposit, maturing within a
short period of time, were not renewed. A significant portion of the
certificates of deposit remain with the Bank after they mature and the Bank
believes that this will continue. However, the need to retain these time
deposits could result in an increase in the Bank's cost of funds.
Deposits in the Bank as of September 30, 2001, were represented by
various types of savings programs described below.
51
Balance at Percentage of
Category Interest Rate(1) September 30, 2001 Total Deposits
- -------- ---------------- ------------------ --------------
NOW Accounts (2) 2.21% $ 6,415,613 16.4%
Savings Accounts 3.29 10,846,583 27.8
Certificates of Deposit(3):
3.00-3.99% 3.30 85,418 0.2
4.00-4.99% 4.42 5,947,183 15.2
5.00-5.99% 5.40 5,671,534 14.6
6.00-6.99% 6.22 7,953,139 20.4
7.00-7.99% 7.29 2,118,188 5.4
----------- ------
$39,037,658 100.00%
=========== ======
- ---------------
(1) Weighted average rate as of September 30, 2001.
(2) Includes money market accounts.
(3) Includes jumbo certificates of deposit of $4.6 million. See table of
maturities of certificates of deposit of $100,000 or more.
The following table sets forth the aggregate maturities of certificates
of deposit at September 30, 2001.
2002................ $11,977,015
2003................ 5,942,341
2004................ 1,984,874
2005................ 985,093
2006................ 886,139
-----------
Total $21,775,462
===========
The following table shows the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of September 30,
2001.
Certificates
Maturity Period of Deposit
- --------------- ----------
Within three months............................... $ 905,000
Three through six months.......................... 524,184
Six through twelve months......................... 417,250
Over twelve months................................ 2,722,472
----------
$4,568,906
==========
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank, as the need arises or in order to take advantage of funding opportunities,
borrows funds in the form of advances from the FHLB to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. Advances from the
FHLB are typically secured by the Bank's stock in the FHLB and a portion of the
Bank's residential mortgage loans and may be secured by other assets, mainly
securities which are obligations of or guaranteed by the U.S.
52
Government. The Bank has a line of credit for $4.0 million from the FHLB,
maturing February 27, 2002 with an interest rate of 3.56% at September 30, 2001.
The Bank had draws of $0 and $1,450,000 on this line of credit at September 30,
2001 and 2000, respectively. See Note J of the notes to the financial
statements.
The following table sets forth certain information regarding Bank's
borrowed funds.
Year Ended September 30,
------------------------------
2001 2000
------------- -------------
FHLB Advances:
Average balance outstanding...................... $ 128,000 $2,151,000
Maximum amount outstanding
at any month-end during the period............. 650,000 3,150,000
Balance outstanding at end of period............. - 1,450,000
Weighted average interest rate
during the period.............................. 6.25% 5.95%
Weighted average interest rate
at end of period............................... -% 6.77%
Subsidiary Activity
The Bank is permitted to invest its assets in the capital stock of, or
originate secured or unsecured loans to, subsidiary corporations. The Bank has
one subsidiary, which is not active.
Personnel
As of September 30, 2001, the Bank had nine full-time employees and two
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
satisfactory.
Properties and Equipment
The Bank's main office is located at 2000 Mt. Troy Road, Pittsburgh,
Pennsylvania. The Bank also conducts its business through a full-service branch
office located at 1930 Spring Garden Avenue, Pittsburgh, Pennsylvania. The
Bank's branch office is located inside a Shop'n Save supermarket. The Bank uses
an outside service company for its data processing.
The following table sets forth the location of the Bank's main office
and branch office, the year the offices were opened and the net book value of
each office and its related equipment.
Year Facility Leased or Net Book Value at
Office Location Opened Owned September 30, 2001
- --------------- ------ ----- ------------------
Main Office 1973 Owned $231,000
Branch Office 1976 Leased 12,000
53
Legal Proceedings
The Bank, 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 the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. There were no lawsuits
pending or known to be contemplated against the Bank at September 30, 2001 that
would have a material effect on our operations or income.
REGULATION
Set forth below is a brief description of certain laws that relate to
the regulation of the Bank and Reserve Bancorp, Inc. after the conversion. The
description does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations. The Bank and Reserve Bancorp, Inc.
operate in a highly regulated industry. The U.S. government could adopt
regulations or enact laws which restrict the operations of the Bank and/or
Reserve Bancorp, Inc. or impose burdensome requirements upon one or both of
them. This could reduce the profitability of the Bank and Reserve Bancorp, Inc.
and could impair the value of the Bank's franchise which could hurt the trading
price of Reserve Bancorp, Inc. common stock.
Financial Modernization Legislation
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
(the "GLB Act") repealed the prohibitions against bank affiliations with
securities and insurance firms. The GLB Act authorizes qualifying bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature. The GLB Act defines financial in nature to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities, and activities that the Federal Reserve Board has determined to be
closely related to banking. A qualifying national bank also may engage, subject
to limitations on investment, in activities that are financial in nature, other
than insurance underwriting, insurance company portfolio investment, real estate
development, and real estate investment, through a financial subsidiary of the
bank.
The GLB Act repeals the "unitary savings and loan holding company
exemption" from the restrictions imposed by the Home Owners' Loan Act on the
business activities of savings and loan holding companies. As a result, any
savings and loan holding company formed after May 4, 1999, such as Reserve
Bancorp, Inc., will be subject to statutory and regulatory restrictions on its
business activities. See Regulation - Regulation of Reserve Bancorp, Inc. -
Activities Restrictions.
In addition, the GLB Act imposes significant new financial privacy
obligations and reporting requirements on all financial institutions, including
federal savings banks. Specifically, the statute, among other things, requires
financial institutions (a) to establish privacy policies and disclose them to
customers both at the commencement of a customer relationship and on an annual
basis and (b) to permit customers to opt out of a financial institution's
disclosure of financial information to nonaffiliated third parties. The federal
financial regulators, including the OTS, have promulgated final regulations
implementing these provisions, which became effective July 1, 2001.
Furthermore, the GLB Act also enacts significant changes to the Federal
Home Loan Bank System. The GLB Act expands the permissible uses of Federal Home
Loan Bank advances by community financial institutions (under $500 million in
assets) to include funding loans to small businesses, small farms and
54
small agri- businesses. The GLB Act also makes membership in a regional Federal
Home Loan Bank voluntary for federal savings banks.
Regulation of Reserve Bancorp, Inc.
General. Upon completion of the conversion, Reserve Bancorp, Inc. will
become a savings and loan holding company within the meaning of Section 10(o) of
the Home Owners' Loan Act. Reserve Bancorp, Inc. will be required to register as
a savings and loan holding company and file reports with the OTS and will be
subject to regulation and examination by the OTS. In addition, the OTS will have
enforcement authority over Reserve Bancorp, Inc. and any non-savings institution
subsidiaries. This will permit the OTS to restrict or prohibit activities that
it determines to be a serious risk to the Bank. This regulation is intended
primarily for the protection of the depositors and not for the benefit of you,
as stockholders of Reserve Bancorp, Inc.
Activities Restrictions. As a savings and loan holding company formed
after May 4, 1999, Reserve Bancorp, Inc. will not be a grandfathered unitary
savings and loan holding company under the GLB Act following the conversion. As
a result, Reserve Bancorp, Inc. and its non-savings institution subsidiaries, if
any exist in the future, will be subject to statutory and regulatory
restrictions on their business activities. Under the Home Owners' Loan Act, as
amended by the GLB Act, the nonbanking activities of Reserve Bancorp, Inc. will
be restricted to certain activities specified by OTS regulation, which include
performing services and holding properties used by a savings institution
subsidiary, activities authorized for savings and loan holding companies as of
March 5, 1987, and nonbanking activities permissible for bank holding companies
pursuant to the Bank Holding Company Act of 1956 (the "BHC Act") or authorized
for financial holding companies pursuant to the GLB Act. Furthermore, no company
may acquire control of the Bank unless the acquiring company was a unitary
savings and loan holding company on May 4, 1999 (or became a unitary savings and
loan holding company pursuant to an application pending as of that date) or the
company is only engaged in activities that are permitted for multiple savings
and loan holding companies or for financial holding companies under the BHC Act
as amended by the GLB Act.
Mergers and Acquisitions. Reserve Bancorp, Inc. must obtain approval
from the OTS before acquiring more than 5% of the voting stock of another
savings institution or savings and loan holding company or acquiring such an
institution or holding company by merger, consolidation or purchase of its
assets. In evaluating an application for Reserve Bancorp, Inc. to acquire
control of a savings institution, the OTS would consider the financial and
managerial resources and future prospects of Reserve Bancorp, Inc. and the
target institution, the effect of the acquisition on the risk to the insurance
funds, the convenience and the needs of the community and competitive factors.
Regulation of Mt. Troy Savings Bank
General. As a federally chartered, SAIF-insured savings bank, Mt. Troy
Savings Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with federal statutory and
regulatory requirements. Mt. Troy 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 SAIF 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 the classification of assets and the
level of the allowance for loan losses.
55
The OTS regularly examines Mt. Troy Savings Bank and prepares reports
to Mt. Troy Savings Bank's Board of Directors on deficiencies, if any, found in
its operations. Mt. Troy Savings Bank'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 Mt. Troy Savings
Bank's mortgage documents.
Mt. Troy Savings Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition, and must obtain regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. Any change in applicable statutory
and regulatory requirements, whether by the OTS, the FDIC or the United States
Congress, could have a material adverse impact on Reserve Bancorp, Inc. and Mt.
Troy Savings Bank, and their operations.
Insurance of Deposit Accounts. The FDIC administers two separate
deposit insurance funds. Generally, the Bank Insurance Fund (the "BIF") insures
the deposits of commercial banks and the SAIF ("SAIF") insures the deposits of
savings institutions. The FDIC is authorized to increase deposit insurance
premiums if it determines such increases are appropriate to maintain the
reserves of either the SAIF or BIF or to fund the administration of the FDIC. In
addition, the FDIC is authorized to levy emergency special assessments on BIF
and SAIF members. The FDIC has set the annual deposit insurance assessment rates
for SAIF-member institutions for the first six months of 2000 at 0% of insured
deposits for well-capitalized institutions with the highest supervisory ratings
to .027% of insured deposits for institutions in the worst risk assessment
classification. The assessment rate for most savings institutions, including Mt.
Troy Savings Bank, is currently 0%.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payments on bonds issued by the Financing Corporation
("FICO"), an agency of the Federal government established to recapitalize the
predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) "Tier 1" or "core" capital equal to at
least 4% (3% if the institution has received the highest possible rating on its
most recent examination) of total adjusted assets, and (3) risk-based capital
equal to 8% of total risk-weighted assets. For Mt. Troy Savings Bank's
compliance with these regulatory capital standards, see Historical and Pro Forma
Capital Compliance.
In addition, the OTS may require that a savings institution that has a
risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total
adjusted assets of less than 4% (3% if the institution has received the highest
rating on its most recent examination) take certain action to increase its
capital ratios. If the savings institution's capital is significantly below the
minimum required levels of capital or if it is unsuccessful in increasing its
capital ratios, the OTS may restrict its activities.
For purposes of the OTS capital regulations, tangible capital is
defined as core capital less all intangible assets except for certain mortgage
servicing rights. Tier 1 or core capital is defined as common stockholders'
equity, noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of consolidated subsidiaries, and certain
nonwithdrawable accounts and pledged deposits of mutual savings banks. Mt. Troy
Savings Bank does not have any nonwithdrawable accounts or pledged deposits.
Tier 1 and core capital are reduced by an institution's intangible assets, with
limited exceptions for certain mortgage and nonmortgage servicing rights and
purchased credit card relationships. Both core
56
and tangible capital are further reduced by an amount equal to the savings
institution's debt and equity investments in "nonincludable" subsidiaries
engaged in activities not permissible to national banks other than subsidiaries
engaged in activities undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum 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, the portion of the allowance for loan losses
not designated for specific loan losses and up to 45% of unrealized gains on
equity securities. 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. For purposes of determining total capital, a savings institution's
assets are reduced by the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements and by the amount of the
institution's equity investments (other than those deducted from core and
tangible capital) and its high loan-to-value ratio land loans and
non-residential construction loans.
A savings institution's risk-based capital requirement is measured
against risk-weighted assets, which equal the sum of each on-balance-sheet asset
and the credit-equivalent amount of each off-balance- sheet item after being
multiplied by an assigned risk weight. These risk weights range from 0% for cash
to 100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
OTS rules require a deduction from capital for savings institutions
with certain levels of interest rate risk. The OTS 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 OTS. The amount of the interest rate
risk component, if any, deducted from an institution's total capital is based on
the institution's Thrift Financial Report filed two quarters earlier. The OTS
has indefinitely postponed implementation of the interest rate risk component,
and Mt. Troy Savings Bank has not been required to determine whether it will be
required to deduct an interest rate risk component from capital.
Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective
Action regulations, the OTS is required to take supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's level of capital. Generally, a savings institution that has total
risk-based capital of less than 8.0%, or a leverage ratio or a Tier 1 core
capital ratio that is less than 4.0%, is considered to be undercapitalized. A
savings institution that has total risk-based capital less than 6.0%, a Tier 1
core risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be "significantly undercapitalized." A savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Generally, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within forty-five days of
the date an institution receives notice that it is"undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The OTS may also
take any one of a number of discretionary supervisory actions against
undercapitalized institutions, including the issuance of a capital directive and
the replacement of senior executive officers and directors.
57
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan
holding company, such as Mt. Troy Savings Bank, must file an application or a
notice with the OTS at least thirty days before making a capital distribution. A
savings institution must file an application for prior approval of a capital
distribution if: (i) it is not eligible for expedited treatment under the
applications processing rules of the OTS; (ii) the total amount of all capital
distributions, including the proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings bank's net income for
that year to date plus the institution's retained net income for the preceding
two years; (iii) it would not adequately be capitalized after the capital
distribution; or (iv) the distribution would violate an agreement with the OTS
or applicable regulations.
Mt. Troy Savings Bank will be required to file a capital distribution
notice or application with the OTS before paying any dividend to Reserve
Bancorp, Inc. However, capital distributions by Reserve Bancorp, Inc., as a
savings and loan holding company, will not be subject to the OTS capital
distribution rules.
The OTS may disapprove a notice or deny an application for a capital
distribution if: (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statute, regulation or agreement. In addition, a
federal savings institution cannot distribute regulatory capital that is
required for its liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender ("QTL") test or they become subject to the business
activity restrictions and branching rules applicable to national banks. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code by maintaining at
least 60% of its total assets in specified types of assets, including cash,
certain government securities, loans secured by and other assets related to
residential real property, educational loans and investments in premises of the
institution or (ii) satisfy the statutory QTL test set forth in the Home Owners'
Loan Act by maintaining at least 65% of its "portfolio assets" in certain
"Qualified Thrift Investments" (defined to include residential mortgages and
related equity investments, certain mortgage-related securities, small business
loans, student loans and credit card loans, and 50% of certain community
development loans). For purposes of the statutory QTL test, portfolio assets are
defined as total assets minus intangible assets, property used by the
institution in conducting its business, and liquid assets equal to 20% of total
assets. A savings institution must maintain its status as a QTL on a monthly
basis in at least nine out of every twelve months. Mt. Troy Savings Bank met the
QTL test as of September 30, 2001 and in each of the last twelve months and,
therefore, qualifies as a QTL.
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, certain types of these
transactions are 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 OTS has the discretion
to treat subsidiaries of savings institutions as affiliates on a case-by-case
basis.
58
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every insured depository institution, including Mt. Troy Savings Bank,
has a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the OTS
to assess the depository institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution, such as a merger or the establishment of a
branch by Mt. Troy Savings Bank. An unsatisfactory CRA examination rating may be
used as the basis for the denial of an application by the OTS. Mt. Troy Savings
Bank received a "satisfactory" overall rating in its most recent CRA
examination.
Federal Home Loan Bank System. Mt. Troy Savings Bank is a member of the
FHLB of Pittsburgh, which is one of twelve regional FHLBs. Each FHLB 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 FHLB System. It makes loans to
members pursuant to policies and procedures established by the board of
directors of the FHLB.
As a member, Mt. Troy Savings Bank is required to purchase and maintain
stock in the FHLB of Pittsburgh in an amount equal to the greater of 1% of our
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of FHLB advances. We are in
compliance with this requirement. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate related
collateral to 30% of a member's capital and limiting total advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to 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 FHLB dividends paid and could continue to do so
in the future.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their checking accounts and non-personal certificate accounts.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve System may be used to satisfy the OTS 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.
TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended (the "Code"), in the same general manner as other corporations.
All thrift institutions are now subject to the same provisions as banks
with respect to deductions for bad debts. Thrift institutions that are treated
as "small banks" (the average adjusted bases for all assets of such institution
equals $500 million or less) under the Code may account for bad debts by using
the
59
experience method for determining additions to their bad debt reserve. Thrift
institutions that are not treated as small banks must now use the specific
charge-off method.
Reserve Bancorp, Inc. may exclude from its income 100% of dividends
received from Mt. Troy 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.
Mt. Troy Savings Bank's federal income tax returns have not been
audited by the IRS during the past five years.
State Taxation
Pennsylvania imposes an income tax of approximately 11.5% of net income
as computed under generally accepted accounting principles.
Mt. Troy Savings Bank's state income tax returns have not been audited
during the past five years. For additional information, see Note L of the notes
to the financial statements.
MANAGEMENT
Directors and Officers of the Bank
The Bank's Board of Directors is composed of five members each of whom
serves for a term of three years, with approximately one-third of the directors
elected each year. Reserve Bancorp, Inc.'s proposed articles of incorporation
and bylaws require that directors be divided into four classes, as nearly equal
in number as possible, with approximately one-quarter of the directors elected
each year. Reserve Bancorp, Inc. will have the same directors as the Bank. The
Bank's and Reserve Bancorp, Inc.'s officers are elected annually by the Board
and serve at the Board's discretion.
The following table sets forth information with respect to the
directors and officers of the Bank, all of whom will continue to serve in the
same capacities at the Bank after the conversion.
Age at Current
September 30, Director Term
Name 2001 Position Since Expires (1)
- ----------------------- ---- ------------------------------- -------------- -----------
David P. Butler 63 Chairman 1975 2002
Louis J. Slais 81 Vice Chairman 1976 2003
Richard A. Sinewe(2) 61 President and Director 1996 2004
Fred L. Maitz, Jr. 53 Director 1986 2004
Robert B. Shust(2) 63 Vice Chairman and Secretary 1992 2002
Timothy Schneider 41 Director 2002 2002
Robert B. Kastan (2) 41 Treasurer/Controller N/A N/A
Debra S. Lafferty (3) 42 Vice President - Lending N/A N/A
Diane L. Edgar (3) 40 Assistant Vice President and N/A N/A
Assistant Secretary
Celeste P. Templin (3) 46 Assistant Vice President N/A N/A
60
- -------------------
(1) The terms for directors of Reserve Bancorp, Inc. will be the same as those
of the Bank, except that Mr. Butler's term will expire in 2005 and Mr.
Schneider's term will expire in 2003.
(2) Such individual will also serve as an officer of Reserve Bancorp, Inc.
(3) Such individual will continue as an officer of the Bank but will not be an
officer of Reserve Bancorp, Inc.
The business experience of each director and officer of the Bank is set
forth below. Each has held his or her present position for at least the past
five years, except as otherwise indicated.
David P. Butler has been a director of the Bank since 1975 and has
served as Chairman since 1994. He was a senior engineer with Westinghouse
Electric Corp until his retirement in 1997.
Louis J. Slais has been a director of the Bank since 1976 and serves as
Vice Chairman. He is retired. Prior to his retirement, Mr. Slais was the
president of the Pittsburgh Brewing Company.
Richard A. Sinewe has been President of the Bank since 1994. He has
served as a director of the Bank since 1996. Mr. Sinewe has been employed by the
Bank since 1989.
Fred L. Maitz, Jr. has been a director of the Bank since 1987. He is
the business manager of North Catholic High School in Pittsburgh, Pennsylvania.
Robert B. Shust has been a director of the Bank since 1992 and serves
as Secretary and Vice Chairman of the Bank. He is an attorney with the Tener,
Van Kirk, Wolf & Moore in Pittsburgh, Pennsylvania.
Timothy Schneider has been a director of the Bank since 2002. He is a
certified public accountant and a partner with the accounting firm of Henry
Rossi & Co.
Robert B. Kastan has been the Treasurer/Controller of the Bank since
1997, and has been employed by the Bank since 1995.
Debra S. Lafferty is the Vice President of Lending for the Bank and has
been employed by the Bank since 1978.
Diane L. Edgar has been the Assistant Vice President and Assistant
Secretary of the Bank since 1999, and has been employed by the Bank since 1984.
Celeste P. Templin is the manager of the Bank's branch office. She has
served as an Assistant Vice President of the Bank since 1998, and has been
employed by the Bank since 1990.
Meetings and Committees of the Board of Directors of the Bank
The Board of Directors conducts its business through meetings of the
Board and through activities of its committees. The Board generally meets twice
a month. During the year ended September 30, 2001, the Board of Directors met
twenty-four times. No director attended fewer than 75% of the total meetings of
the Board of Directors and committees on which he served during the year ended
September 30, 2001. The Bank has a standing audit committee, as well an
asset/liability management committee, a personnel committee, a lending
committee, a CRA committee and a compliance committee.
61
Director Compensation
Board Fees. Each director is paid a monthly fee of $775. The Chairman
and Secretary receive additional yearly fees of $700. Directors do not receive
compensation for attending committee meetings. The total fees paid to the
directors for the year ended September 30, 2001 were approximately $40,000.
Directors who also serve as employees of the Bank do not receive compensation as
board members.
Director Retirement Program ("DRP"). We have a DRP which provides
retirement benefits to our directors based upon the number of years of service
to the Board and after they attain the age of 65. Upon retirement, a director
would receive a monthly payment for a period of time or until death. In the
event there is a change in control, all directors would be entitled to receive
benefits as though retirement occurred on the day prior to the change of control
date.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our president for the year ended
September 30, 2001. No officer received a total annual salary and bonus in
excess of $100,000 during the reporting period.
Annual Compensation
----------------------------------
Fiscal Other Annual All Other
Name and Principal Position Year (1) Salary Bonus Compensation Compensation (2)
- --------------------------- -------- ------ ----- ------------ ----------------
Richard A. Sinewe, President 2001 $80,000 $3,300 $1,800(2) $6,677
2000 75,744 3,300 1,800 6,244
1999 71,460 3,300 1,680 5,621
- ------------------
(1) Consists of Bank's contribution under 401(k) Plan.
(2) Consists of payment in lieu of health care benefit.
Change in Control/Employment Agreements. The Board of Directors may
enter into an employment agreement or change in control agreement with the
Bank's president and its treasurer/controller. It is anticipated that such
agreements, if they are entered into, would provide that if Reserve Bancorp,
Inc. or Mt. Troy Savings Bank is acquired and the officer's employment is
terminated, he will receive a cash severance payment. Such severance payment
would in no event exceed 2.999 times the terminated officer's prior five year
average taxable compensation. The actual details of such agreements have not yet
been determined. Under such agreements, if a severance payment had been made as
of September 30, 2001, the payment to the president and to the
treasurer/controller would have been no greater than approximately $229,000 and
$125,000, respectively. The agreements would have a term of not more than three
years and may be renewable annually by the Board of Directors upon a
determination of satisfactory performance within the Board's sole discretion.
The agreements would be terminable by the Bank for "just cause" as defined in
the agreements. Any payments under the agreements would be an expense to us and
would result in reductions to our net income and capital.
Employee Stock Ownership Plan
We have established an employee stock ownership plan for the exclusive
benefit of participating employees of the Bank, to be implemented after the
completion of the conversion. Participating employees are employees who have
completed one year of service with us or our subsidiary and have attained the
age of 21. An application for a letter of determination as to the tax-qualified
status of the employee stock
62
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 the Bank in cash or common stock. Benefits may be paid either in shares of
the common stock or in cash. The plan will borrow funds with which to acquire up
to 8% of the common stock to be issued in the offering. The employee stock
ownership plan intends to borrow funds from Reserve Bancorp, Inc. 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. Presently it is anticipated
that the employee stock ownership plan will purchase up to 8% of the common
stock to be issued in the offering. The loan will be secured by the shares
purchased and earnings of employee stock ownership plan assets. Shares purchased
with loan proceeds will be held in a suspense account for allocation among
participants as the loan is repaid. It is anticipated that all contributions
will be tax-deductible. This loan is expected to be fully repaid in
approximately 10 years.
Shares sold above the maximum of the offering range 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, subject to any required regulatory approval.
Contributions to the employee stock ownership plan and shares released
from the suspense account will be allocated among participants on the basis of
total compensation. All participants must be employed at least 1,000 hours in a
plan year, or have terminated employment following death, disability or
retirement, in order to receive an allocation. Participant benefits become fully
vested in plan allocations following five years of service. Employment before
the adoption of the employee stock ownership plan shall be credited for the
purposes of vesting. Our contributions to the employee stock ownership plan are
discretionary and may cause a reduction in other forms of compensation,
including our 401(k) Savings Plan. As a result, benefits payable under this plan
cannot be estimated.
The Board of Directors has appointed the non-employee directors to a
committee that will administer the plan and to serve as the plan's trustees. The
trustees must vote all allocated shares held in the plan as directed by plan
participants. Unallocated shares and allocated shares for which no timely
direction is received will be voted as directed by the Board of Directors or the
plan's committee, subject to the trustees' fiduciary duties.
401(k) Savings Plan
The Bank sponsors a tax-qualified defined contribution savings plan
("401(k) Plan") for the benefit of its employees. Employees become eligible to
participate under the 401(k) Plan in the first month following their 21st
birthday and completion of twelve months of service to the Bank. Under the
401(k) Plan, employees may voluntarily elect to defer between 0% and 15% of
compensation, not to exceed applicable limits under the Code. In calendar year
2001, employees could defer up to $10,500. In addition, the Bank may contribute
an annual discretionary contribution to all participants under the 401(k) Plan.
In calendar year 2001, such Bank contribution was equal to 50% of the first 6%
of compensation contributed by employees to their accounts and a declared bonus
award. Employee and matching contributions are immediately 100% vested under the
401(k) Plan. The 401(k) Plan will permit voluntary investments of plan assets by
participants in this offering of Reserve Bancorp, Inc. common stock.
Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Additionally, funds under the 401(k) Plan may
be distributed upon application to the plan
63
administrator upon severe financial hardship in accordance with uniform
guidelines which comply with those specified by the Code. It is intended that
the 401(k) Plan operate in compliance with the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the
requirements of Section 401(a) of the Code. Contributions to the 401(k) Plan by
the Bank for employees may be reduced in the future or eliminated as a result of
contributions made to the Employee Stock Ownership Plan. See Management -
Employee Stock Ownership Plan.
Potential Stock Benefit Plans
Stock Option Plans. Following the offering, we intend to adopt a stock
option plan for directors and officers within one year after the conversion. Any
plan adopted will be subject to stockholder approval and applicable laws. Any
plan adopted within one year of the conversion will require the approval of a
majority of our stockholders and will also be subject to various other
regulatory limitations. 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
stock option plan.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers and directors with a
proprietary interest in Reserve Bancorp, Inc. as an incentive to contribute to
our success and reward directors and officers 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: (1) options
to purchase the common stock intended to qualify as incentive stock options
under the Code (incentive stock options); and (2) options that do not so qualify
(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. 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 upon 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 Plan. Following the offering, we also intend to
establish a restricted stock plan to provide our officers and directors with a
proprietary interest in Reserve Bancorp, Inc. The restricted stock plan is
expected to provide for the award of common stock, subject to vesting
restrictions, to eligible officers and directors. Any plan adopted within one
year of the conversion would require the approval of a majority of our
stockholders and will also be subject to various other regulatory limitations.
We expect to contribute funds to stock programs to acquire, in the
aggregate, up to 4% of the shares of common stock sold in the offering. Shares
used to fund the stock programs may be acquired through open market purchases or
provided from authorized but unissued shares. No determinations have been made
as to the specific terms of stock programs.
Restrictions on Stock Benefit Plans. OTS regulations provide that if we
implement stock option or management and/or employee stock benefit plans within
one year from the date of conversion, the plans must comply with the following
restrictions:
o for stock option plans, the total number of shares for which options may be
granted may not exceed 10% of the shares issued in the conversion;
o for restricted stock plans such as the MRP, the shares may not exceed 3% of
the shares issued in the conversion (4% for institutions with 10% or
greater tangible capital);
64
o the aggregate amount of stock purchased by the ESOP in the conversion may
not exceed 10% (8% for well-capitalized institutions utilizing a 4%
management recognition plan);
o no individual employee may receive more than 25% of the available awards
under the option plan or a restricted stock 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 at any duly called meeting of Reserve Bancorp, Inc.'s stockholders
held no earlier than six months following the conversion;
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 for restricted stock plans, no stock issued in a mutual-to-stock conversion
may be used to fund the plan (unless the shares have been repurchased in
the open market); and
o neither stock option awards nor restricted stock awards may vest earlier
than 20% per year commencing one year after stockholder approval, and
vesting may be accelerated only in the case of disability or death, or if
not inconsistent with applicable OTS regulations in effect at the time, in
the event of a change in control.
Transactions with Management and Others
No directors, officers or their immediate family members were engaged
in transactions with the Bank or any subsidiary involving more than $60,000
(other than through a loan) during the year ended September 30, 2001.
Furthermore, the Bank had no "interlocking" relationships in which (1) any
officer is a member of the board of directors of another entity with an officer
who is a member of the Bank's Board of Directors, or where (2) any officer is a
member of the compensation committee of another entity, one of whose officers is
a member of the Bank's Board of Directors.
The 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 and
are also made on substantially the same terms and conditions, other than a 1%
discount on the interest rate paid while the person remains an employee, as
those of comparable transactions prevailing at the time with other persons, and
do not include more than the normal risk of collectibility or present other
unfavorable features. As of September 30, 2001, the aggregate principal balance
of loans outstanding to all directors and officers was approximately $339,000.
The Bank periodically makes loans to Maitz Construction Company. The
Construction Company is owned by the brother of Bank director Fred L. Maitz, Jr.
As of September 30, 2001, the aggregate balance of the final outstanding loan to
Maitz Construction was $436,000. All loans made to Maitz Construction were made
on the same terms and conditions available to the general public.
65
THE CONVERSION
The Board of Directors of Mt. Troy Savings Bank has adopted the plan
authorizing the conversion and the offering, subject to the approval of the OTS
and of the members of the Bank and the satisfaction of certain other conditions.
OTS approval does not constitute a recommendation or endorsement of the plan by
the OTS.
General
On November 7, 2001, the Board of Directors of Mt. Troy Savings Bank
adopted the plan of conversion and stock issuance, pursuant to which the Bank
proposes to reorganize from a federally chartered mutual savings institution to
a federally chartered stock savings institution. The Bank will become a wholly
owned subsidiary of Reserve Bancorp, Inc. Concurrently with the conversion,
Reserve Bancorp, Inc. will sell its common stock in the offering to the Bank's
members and, if necessary, the general public. The Board of Directors
unanimously adopted the Plan after consideration of the advantages and the
disadvantages of the conversion and offering. After we receive all the required
approvals from the government agencies that regulate us, the approval of the
plan by the Bank's members and the satisfaction of all other conditions
precedent to the conversion, the Bank will effect the conversion by exchanging
its federal mutual savings institution charter for a federal stock savings
institution charter and becoming a wholly owned subsidiary of Reserve Bancorp,
Inc., and having the depositors of the Bank receive liquidation interests in the
federal stock savings institution as they have in the Bank before the
conversion. See The Conversion - Description of the Conversion. On the effective
date, Reserve Bancorp, Inc. will commence business as Reserve Bancorp, Inc., a
savings and loan holding company, and the Bank will commence business as a
federally chartered stock savings bank. The conversion will be accomplished in
accordance with the procedures set forth in the plan, the requirements of
applicable laws and regulations, and the policies of the OTS.
For additional information concerning the offering, see The Offering.
Purposes of the Conversion
The Board of Directors of Mt. Troy Savings Bank has determined that the
conversion is in the best interest of the Bank and has several business purposes
for the conversion.
The conversion will structure the Bank in the stock form, which is used
by commercial banks, most major business corporations and an increasing number
of savings institutions. Formation of the Bank as a capital stock savings
institution subsidiary of Reserve Bancorp, Inc. will permit Reserve Bancorp,
Inc. to issue stock, which is a source of capital not available to mutual
savings institutions. The holding company form of organization is expected to
provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
the Bank has no current arrangements, understandings or agreements regarding any
opportunities, Reserve Bancorp, Inc. will be in a position after the conversion
and offering, subject to regulatory limitations and Reserve Bancorp, Inc.'s
financial position, to take advantage of any acquisition, merger or
diversification opportunities that may arise.
Reserve Bancorp, Inc. is offering for sale its common stock in the
offering at an aggregate price based on an independent appraisal. The proceeds
from the sale of common stock of Reserve Bancorp, Inc. will provide the Bank
with new equity capital, which will support future deposit growth and expanded
operations. The ability of Reserve Bancorp, Inc. to sell stock also will enable
Reserve Bancorp, Inc. and
66
the Bank to increase capital in response to the changing capital requirements of
the OTS. While the Bank currently meets or exceeds all regulatory capital
requirements, the sale of stock in connection with the conversion, coupled with
the accumulation of earnings, less dividends or other reductions in capital,
from year to year, represents a means for the orderly preservation and expansion
of the Bank's capital base, and allows flexibility to respond to sudden and
unanticipated capital needs. After the conversion and offering, Reserve Bancorp,
Inc. may repurchase shares of its common stock. The investment of the net
proceeds of the offering also will provide additional income to enhance further
the Bank's future capital position.
The ability of Reserve Bancorp, Inc. to issue stock will enable it in
the future to establish stock benefit plans for management and employees of
Reserve Bancorp, Inc. and the Bank, including incentive stock option plans,
stock award plans, and employee stock ownership plans.
Reserve Bancorp, Inc. will also be able to borrow funds, on a secured
and unsecured basis, and to issue debt to the public or in a private placement.
The proceeds of any borrowings or debt issuance may be contributed to the Bank
as core capital for regulatory capital purposes. Reserve Bancorp, Inc. has not
made a determination to borrow funds or issue debt at the present time.
Description of the Conversion
After receiving all of the required approvals from the government
agencies that regulate us and the ratification of the plan of conversion by the
Bank's members, the conversion will be completed. After the conversion, the
legal existence of the Bank will not terminate, the converted stock bank will be
a continuation of the Bank and all property of the Bank, including its right,
title, and interest in and to all property of any kind and nature, interest and
asset of every conceivable value or benefit then existing or pertaining to the
Bank, or which would inure to the Bank immediately by operation of law and
without the necessity of any conveyance or transfer and without any further act
or deed, will continue to be owned by the Bank. The Bank will possess, hold and
enjoy the same in its right and fully and to the same extent as the same was
possessed, held and enjoyed by the Bank. The Bank will continue to have, succeed
to, and be responsible for all the rights, liabilities, and obligations of the
Bank and will maintain its headquarters operations at the Bank's present
location.
The foregoing description of the conversion is qualified in its
entirety by reference to the plan and the charter and bylaws of the Bank and
Reserve Bancorp, Inc. to be effective after the conversion.
Effects of the Conversion
General. The conversion will not have any effect on the Bank's present
business of accepting deposits and investing its funds in loans and other
investments permitted by law. The conversion will not result in any change in
the existing services provided to depositors and borrowers, or in existing
offices, management, and staff. After the conversion, the Bank will continue to
be subject to regulation, supervision, and examination by the OTS and the FDIC.
Deposits and Loans. Each holder of a deposit account in the Bank at the
time of the conversion will continue as an account holder in the Bank after the
conversion, and the conversion will not affect the deposit balance, interest
rate, or other terms. Each deposit account will be insured by the FDIC to the
same extent as before the conversion. Depositors will continue to hold their
existing certificates, savings records, checkbooks, and other evidence of their
accounts. The conversion will not affect the loans of any borrower from the
Bank. The amount, interest rate, maturity, security for, and obligations under
each loan will remain contractually fixed as they existed prior to the
conversion. See The Conversion - Effects of
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the Conversion - Voting Rights and - Liquidation Rights below for a discussion
of the effects of the conversion on the voting and liquidation rights of the
depositors of the Bank.
Voting Rights. As a federally chartered mutual savings institution, the
Bank has no authority to issue capital stock and thus, no stockholders. Control
of the Bank in its mutual form is vested in the Board of Directors of the Bank.
The Directors are elected by the Bank's members. Holders of qualifying deposits
in the Bank are members of the Bank. In the consideration of all questions
requiring action by members of the Bank, 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. Each borrower as of January 1, 1993 has
one vote for the period of time that such borrowing is in existence. No member
may cast more than 1,000 votes.
After the conversion, all voting rights will be held solely by
stockholders. A stockholder will be entitled to one vote for each share of
common stock owned.
Tax Effects. We have received an opinion from our counsel, Malizia
Spidi & Fisch, PC, on the federal tax consequences of the conversion. The
opinion has been filed as an exhibit to the registration statement of which this
prospectus is a part and covers those federal tax matters that are material to
the transaction. The opinion provides that:
o the conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and no gain or loss will be recognized
by us by reason of the proposed conversion;
o no gain or loss will be recognized by us upon the receipt of
money from Reserve Bancorp, Inc. for our stock, and no gain or
loss will be recognized by Reserve Bancorp, Inc. upon the receipt
of money for the shares;
o no gain or loss will be recognized by the Eligible Account
Holders, Supplemental Eligible Account Holders, and Other Members
upon the issuance to them of withdrawable savings accounts in us
in the stock form in the same dollar amount as their savings
accounts in us in the mutual form plus an interest in the
liquidation account of us in the stock form in exchange for their
savings accounts in us in the mutual form; and
o assuming the absence of both an oversubscription in the
Subscription Offering and an increase in the market price of the
common stock upon commencement of trading following completion of
the conversion, no gain or loss will be recognized by Eligible
Account Holders, Supplemental Eligible Account Holders, and Other
Members under the Plan upon the distribution to them of
nontransferable subscription rights.
In reaching their conclusion in the opinion stated in the last bullet
above, Malizia Spidi & Fisch, PC has noted that the subscription rights will be
granted at no cost to the recipients, will be legally non- transferable and of
short duration, and will provide the recipients with the right only to purchase
shares of common stock at the same price to be paid by members of the general
public in any community offering or public offering. Malizia Spidi & Fisch, PC
has also noted that FinPro, Inc. has issued an opinion to the Boards of
Directors of Reserve Bancorp, Inc. and the Bank, dated December 14, 2001, as
described below, stating that the subscription rights will have no ascertainable
market value. FinPro, Inc. should not be viewed as a tax expert, since its
opinion states it did not undertake any independent investigation of state or
federal law or the position of the Internal Revenue Service. In the absence of
both an oversubscription in the subscription offering and an increase in the
market price of the common stock upon
68
commencement of trading following completion of the conversion, Malizia Spidi &
Fisch, PC believes that it is more likely than not that the nontransferable
subscription rights to purchase common stock have no value.
In the opinion of FinPro, Inc., the subscription rights do not have any
ascertainable market value, based on the fact that such rights:
o are acquired by the recipients without payment;
o are nontransferable;
o are of short duration; and
o afford the recipients the right only to purchase the common stock
at a price equal to the estimated fair market value, which will
be the same price at which shares would be sold in a community
offering of public offering.
Malizia Spidi & Fisch, PC expresses no belief as to whether or not the
subscription rights have value, if both an oversubscription in the subscription
offering occurs and the market price of the common stock increases upon
commencement of trading following completion of the conversion, as the issue of
whether or not the subscription rights have value is dependent upon all of the
facts and circumstances that occur. If the non-transferable subscription rights
to purchase common stock are subsequently found to have an ascertainable market
value greater than zero, income may be recognized by various recipients of the
nontransferable subscription rights (in certain cases, whether or not the rights
are exercised) and we may be taxed on the distribution of the nontransferable
subscription rights under Section 311 of the Internal Revenue Code. In this
event, the nontransferable subscription rights may be taxed partially or
entirely at ordinary income tax rates.
We are also subject to Pennsylvania income taxes and have received an
opinion from Malizia Spidi & Fisch, PC that the conversion will be treated for
Pennsylvania state tax purposes similar to the treatment of the conversion for
federal tax purposes.
Unlike a private letter ruling from the IRS, the opinions of Malizia
Spidi & Fisch, PC have no binding effect or official status, and no assurance
can be given that the conclusions reached in any of those opinions would be
sustained by a court if contested by the IRS or the Pennsylvania tax
authorities. Eligible Account Holders, Supplemental Eligible Account Holders,
and Other Members are encouraged to consult with their own tax advisers as to
the tax consequences in the event the subscription rights are determined to have
any market value.
Liquidation Account. In the unlikely event of our complete liquidation
in our present mutual form, each depositor is entitled to share in a
distribution of our assets, remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of the remaining assets would be in
the same proportion as the value of his deposit accounts was to the total value
of all deposit accounts in us at the time of liquidation.
Upon a complete liquidation after the conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of ours. Except as described below, a depositor's claim
would be solely in the amount of the balance in his deposit account plus accrued
69
interest. A depositor would not have an interest in the residual value of our
assets above that amount, if any.
The Bank's plan of conversion provides for the establishment, upon the
completion of the conversion, of a special "liquidation account" for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders. The
liquidation account will be maintained as a separate account at Mt. Troy Savings
Bank.
Each Eligible Account Holder and Supplemental Eligible Account Holder,
if he continues to maintain his deposit account with us, would be entitled on a
complete liquidation of us after conversion, to an interest in the liquidation
account prior to any payment to stockholders. Each Eligible Account Holder would
have an initial interest in the liquidation account for each deposit account
held in us on the qualifying date, September 30, 2000. Each Supplemental
Eligible Account Holder would have a similar interest as of the qualifying date,
December 31, 2001. The interest as to each deposit account would be in the same
proportion of the total liquidation account as the balance of the deposit
account on the qualifying dates was to the aggregate balance in all the deposit
accounts of Eligible Account Holders and Supplemental Eligible Account Holders
on the qualifying dates. However, if the amount in the deposit account on any
annual closing date of the Bank (September 30) is less than the amount in the
liquidation account on the respective qualifying dates, then the interest in
this special liquidation account would be reduced from time to time by an amount
proportionate to any reduction, and the interest would cease to exist if the
deposit account were closed. Decreases in deposit accounts on any annual closing
date will be reflected by a corresponding decrease in the amount held in the
liquidation account. An individual's interest in and the total amount held in
the liquidation account will never be increased despite any increase in deposit
accounts after the respective qualifying dates.
The Bank's plan of conversion requires the liquidation account to be
established in an amount equal to its net worth as of the latest practicable
date prior to conversion, which will most likely be the net worth disclosed in
the financial statements included in this prospectus. At September 30, 2001,
this amount was approximately $5.2 million.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which the Bank, in its converted form, is not the
surviving institution, shall be considered a complete liquidation. In these
transactions, the liquidation account shall be assumed by the surviving
institution.
Accounting Consequences
The conversion will be accounted for in a manner similar to a
pooling-of-interests under GAAP. This means that the carrying value of the
Bank's assets, liabilities, and capital will be unaffected by the conversion and
will be reflected in Reserve Bancorp, Inc.'s and the Bank's financial statements
based on their historical amounts.
Conditions to the Conversion
Before we can complete the conversion, we must receive all the required
approvals or non- objections from the OTS. The receipt of these approvals or
non-objections from the OTS does not constitute a recommendation or endorsement
of the plan or conversion by the OTS. Completion of the conversion also is
subject to ratification of the plan by a majority of the total votes of
depositors at a special
70
meeting called for the purpose of approving the plan. The Board of Directors may
decide to complete the conversion without forming a holding company.
Amendment or Termination of the Plan of Conversion
If determined to be necessary or desirable by the Board of Directors of
the Bank, the plan may be amended by a two-thirds vote of the Bank's Board of
Directors, with the concurrence of the OTS, at any time prior to or after
submission of the plan to members of the Bank for ratification. The plan may be
terminated by the Board of Directors of the Bank at any time prior to or after
ratification by the members, by a two-thirds vote with the concurrence of the
OTS.
THE OFFERING
General
Concurrently with the conversion, we are offering between a minimum of
501,500 shares and an anticipated maximum of 678,500 shares of common stock in
the offering (subject to adjustment to up to 780,275 shares if our estimated pro
forma market value has increased at the conclusion of the offering), which will
expire at 12:00 noon, eastern time, on March 19, 2002 unless extended. The
minimum purchase is 25 shares of common stock (minimum investment of $250). Our
common stock is being offered at a fixed price of $10.00 per share in the
offering.
Subscription funds may be held by Mt. Troy Savings Bank for up to 45
days after the last day of the subscription offering (as extended) in order to
complete the conversion and offering and thus, unless waived by Mt. Troy Savings
Bank, all orders will be irrevocable until May 23, 2002. In addition, the
conversion and offering may not be completed until Mt. Troy Savings Bank
receives approval from the OTS. Approval by the OTS is not a recommendation of
the conversion or offering. Completion of the conversion and offering will be
delayed, and resolicitation will be required, if the OTS does not issue a letter
of approval within 45 days after the last day of the subscription offering, or
in the event the OTS requires a material change to the offering prior to the
issuance of its approval. If the conversion and offering are not completed by
May 23, 2002, 12:00 noon, eastern time, subscribers will have the right to
modify or rescind their subscriptions and to have their subscription funds
returned with interest at Mt. Troy Savings Bank's regular savings account rate
and all withdrawal authorizations will be canceled.
We may cancel the offering at any time, and if we do, orders for common
stock already submitted would be canceled.
In accordance with Rule 15c2-4 of the Securities Exchange Act of
1934, pending completion or termination of the conversion and offering,
subscription funds received by Mt. Troy Savings Bank will be invested only in
investments permissible under Rule 15c2-4.
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 Eligible Account Holders (depositors at the close of business on September
30, 2000 with deposits of at least $50.00);
71
o the employee stock ownership plan;
o Supplemental Eligible Account Holders (depositors at the close of business
on December 31, 2001 with deposits of at least $50.00); and
o Other Members: depositors as of January 31, 2002 and borrowers as of
January 1, 1993 who continue as borrowers as of the close of business on
January 31, 2002.
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a public offering. The community
offering, if any, may commence simultaneously with, during or subsequent to the
completion of the subscription offering. A public offering, if we conducted one,
would commence just prior to, or as soon as practicable after, the termination
of the subscription offering. In any community offering or public offering, we
must first fill orders for our common stock up to a maximum of 2% of the shares
issued in the conversion in a manner that will achieve a wide distribution of
the stock, and thereafter any remaining shares will be allocated in on equal
number of shares per order basis, until all orders have been filled or the
shares have been exhausted. If an oversubscription occurs in the offering by
Eligible Account Holders, the employee stock ownership plan may, in whole or in
part, fill its order through open market purchases subsequent to the closing of
the offering, subject to any required regulatory approval.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of conversion
to the following persons:
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase up to 10,000 shares, or $100,000, of
common stock offered in the subscription offering; 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 to Eligible Account Holders 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 in the same proportion that each subscriber's qualifying deposit bears
to the total amount of qualifying deposits of all subscribing Eligible Account
Holders, in each case on September 30, 2000, whose subscriptions remain
unfilled. Subscription rights received by officers and directors, based on their
increased deposits in Mt. Troy 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 the Eligibility Record Date.
Priority 2: The Employee Plans. The tax qualified employee plans may be
given the opportunity to purchase in the aggregate up to 10% of the common stock
issued in the subscription offering. It is expected that the employee stock
ownership plan will purchase up to 8% of the common stock issued in the
offering. If an oversubscription occurs in the offering by Eligible Account
Holders, the employee stock ownership plan may, in whole or in part, fill its
order through open market purchases subsequent to the closing of the offering,
subject to any required regulatory approval.
Priority 3: Supplemental Eligible Account Holders. If there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the employee stock ownership plan and
72
other tax-qualified employee stock benefit plans, each Supplemental Eligible
Account Holder shall have the opportunity to purchase up to 10,000 shares, or
$100,000, of common stock offered in the subscription offering, subject to the
overall limitations 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 and other tax- qualified employee
stock benefit plans, if any, 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 first so as to 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 deposits bear
to the total amount of qualifying deposits of all subscribing Supplemental
Eligible Account Holders, in each case on December 31, 2001, whose subscriptions
remain unfilled. To ensure proper allocation of stock each Supplemental Eligible
Account Holder must list on his order form all accounts in which he had an
ownership interest as of the Supplemental Eligibility Record Date.
Priority 4: Other Members. If there are sufficient shares remaining
after satisfaction of all subscriptions by the Eligible Account Holders, the
tax-qualified employee stock benefit plans, and Supplemental Eligible Account
Holders, each Other Member (depositors as of January 31, 2002 and borrowers as
of January 1, 1993 who continue as borrowers as of the close of business on
January 31, 2002) who is not an Eligible or Supplemental Eligible Account Holder
shall have the opportunity to purchase up to 10,000 shares, or $100,000, of
common stock offered in the subscription offering, subject to the overall
limitations 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 Eligible Account Holders, the tax-qualified employee stock
benefit plans and Supplemental Eligible Account Holder, is in excess of the
total number of shares offered in the offering, the subscriptions of Other
Members will be allocated among subscribing Other Members to permit each
subscribing Other Member 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 subscribed for by Other Members. Any shares remaining will be
allocated among the subscribing Other Members whose subscriptions remain
unsatisfied on a 100 shares (or whatever lesser amount is available) per order
basis until all orders have been filled or the remaining shares have been
allocated.
State Securities Laws. We, in our sole discretion, will make reasonable
efforts to comply with the securities laws of any state in the United States in
which Mt. Troy 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, no person will be offered or allowed to purchase any
common stock under the plan if he resides in a foreign country or in a state of
the United States with respect to which:
o a small number of persons otherwise eligible to purchase shares under the
plan reside in that state or foreign country; or
o the offer or sale of shares of common stock to these persons would require
us or Mt. Troy Savings Bank or our employees to register, under the
securities laws of that state or foreign country, as a broker or dealer or
to register or otherwise qualify its securities for sale in that state or
foreign country; or
o registration or qualification would be impracticable for reasons of cost or
otherwise.
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Restrictions on 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 he or she is purchasing shares solely for his or her own account
and that he or she has no agreement or understanding regarding the sale or
transfer of the shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
subscription rights or shares of common stock before the completion of the
offering.
Reserve Bancorp, Inc. and Mt. Troy Savings Bank will pursue any and all
legal and equitable remedies in the event we become aware of the transfer of
subscription rights and will not honor orders which we determine involve the
transfer of subscription rights.
Expiration Date. The subscription offering will expire at 12:00 noon,
eastern time, on March 19, 2002, unless it is extended, up to April 8, 2002, if
necessary, but without additional notice to subscribers (the "expiration date").
Subscription rights will become void if not exercised prior to the expiration
date.
Community Offering and Public Offering
Community Offering. If less than the total number of shares of common
stock to be subscribed for in the offering are sold in the subscription offering
and depending on market conditions at or near the completion of the subscription
offering, shares remaining unsubscribed may be made available for purchase in
the community offering to certain members of the general public. The maximum
amount of common stock that any person (or persons though a single account) may
purchase in the community offering is 10,000 shares, or $100,000. In the
community offering, if any, shares will be available for purchase by the general
public with preference given first to natural persons residing in Allegheny
County, Pennsylvania. We will attempt to issue the shares in a manner that would
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 we determine.
The community offering, if any, may commence simultaneously with,
during or subsequent to the completion of the subscription offering. The
community offering, if any, must be completed within 45 days after the
completion of the subscription offering unless otherwise extended by the OTS.
We, in our absolute discretion, reserve the right to reject any or all
orders in whole or in part which are received in the community offering, at the
time of receipt or as soon as practicable following the completion of the
community offering.
Public Offering. If shares remain available after the subscription
offering, and depending on market conditions at or near the completion of the
subscription offering, we may offer shares to selected persons through a public
offering on a best-efforts basis conducted through Trident Securities in
accordance with such terms, conditions and procedures as may be determined by
the Boards of Directors of Reserve Bancorp, Inc. and Mt. Troy Savings Bank. A
syndicate of broker-dealers (selected dealers)
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may be formed to assist in the public offering. A public offering, if we
conducted one, would commence just prior to, or as soon as practicable after,
the termination of the subscription offering.
Orders received in connection with the public offering, if any, will
receive a lower priority than orders received in the subscription offering and
community offering. Common stock sold in the public offering will be sold at the
same price as all other shares in the subscription offering. A public offering
would be open to the general public beyond the local community, however, we have
the right to reject orders, in whole or in part, in our sole discretion in the
public offering. No person (or persons through a single account) will be
permitted to purchase more than 10,000 shares, or $100,000, of common stock in
the public offering.
The date by which orders must be received in the public offering will
be set by us at the time the public offering commences; but if the public
offering is extended beyond May 23, 2002, each purchaser will have the
opportunity to maintain, modify, or rescind his order. In that event, all funds
received in the public offering will be promptly returned with interest to each
purchaser unless he requests otherwise.
Limitations on Purchases of Stock
The following additional limitations have been imposed on purchases of
shares of common stock:
1. The maximum number of shares which may be purchased in the
offering by any individual (or individuals through a single
account) shall not exceed 10,000 shares, or $100,000. This limits
applies to stock purchases in total in the subscription,
community and public offerings.
2. The maximum number of shares that may be purchased by any
individual (or individuals through a single account) together
with any associate or group of persons acting in concert is
15,000 shares. This limit applies to stock purchases in total in
the subscription, community and public offerings. This limit does
not apply to the Bank's employee stock benefit plans, which in
the aggregate may subscribe for up to 10% of the common stock
issued in the offering.
3. The maximum number of shares which may be purchased in all
categories in the offering by officers and directors of Mt. Troy
Savings Bank and their associates in the aggregate shall not
exceed 35% of the total number of shares issued in the offering.
4. The minimum order is 25 shares.
5. If the number of shares otherwise allocable to any person or that
person's associates would be in excess of the maximum number of
shares permitted as set forth above, the number of shares
allocated to that person shall be reduced to the lowest
limitation applicable to that person, and then the number of
shares allocated to each group consisting of a person and that
person's associates shall be reduced so that the aggregate
allocation to that person and his associates complies with the
above maximums, and the maximum number of shares shall be
reallocated among that person and his associates in proportion to
the shares subscribed by each (after first applying the maximums
applicable to each person, separately).
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6. Depending on market or financial conditions, the Board of
Directors of Mt. Troy Savings Bank, without further approval of
the depositors, may decrease or increase the purchase limitations
in the plan, provided that the maximum purchase limitations may
not be increased to a percentage in excess of 5% of the offering.
If Reserve Bancorp, Inc. increases the maximum purchase
limitations, Reserve Bancorp, Inc. is only required to resolicit
persons who subscribed for the maximum purchase amount and may,
in the sole discretion of Reserve Bancorp, Inc., resolicit
certain other large subscribers.
7. If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation
range of up to 15% (the adjusted maximum) the additional shares
will be used in the following order of priority: (a) to fill the
Employee Stock Ownership Plan's subscription up to 8% of the
adjusted maximum; (b) if there is an oversubscription at the
Eligible Account Holder level, to fill unfilled subscriptions of
Eligible Account Holders exclusive of the adjusted maximum; (c)
if there is an oversubscription at the Supplemental Eligible
Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders exclusive of the adjusted
maximum; (d) if there is an oversubscription at the other member
level, to fill unfilled subscriptions of other members exclusive
of the adjusted maximum; (e) to fill orders received in a
community offering exclusive of the adjusted maximum, with
preference given to persons who live in the local community; and
(f) to fill orders received in the public offering exclusive of
the adjusted maximum.
8. No person will be allowed to purchase any stock if that purchase
would be illegal under any federal law or state law or regulation
or would violate regulations or policies of the NASD,
particularly those regarding free riding and withholding. Reserve
Bancorp, Inc. or Mt. Troy Savings Bank and/or its agents may ask
for an acceptable legal opinion from any purchaser regarding the
legality of the purchase and may refuse to honor any purchase
order if that opinion is not timely furnished.
9. The Board of Directors has the right to reject any order
submitted by a person whose representations it believes are
untrue or who it believes is violating, circumventing, or intends
to violate, evade, or circumvent the terms and conditions of the
plan, either alone or acting in concert with others.
10. The above restrictions also apply to purchases by persons acting
in concert under applicable regulations of the OTS. Under
regulations of the OTS, directors of Mt. Troy Savings Bank are
not considered to be affiliates or a group acting in concert with
other directors solely as a result of membership on the Board.
11. In addition, in any community offering or public offering, we
must first fill orders for our common stock up to a maximum of 2%
of the shares issued in the conversion in a manner that will
achieve a wide distribution of the stock, and thereafter any
remaining shares will be allocated in on equal number of shares
per order basis, until all orders have been filled or the shares
have been exhausted.
The term "associate" of a person is defined in the plan to mean:
(1) any corporation or organization other than Mt. Troy Savings Bank
or a majority-owned subsidiary of Mt. Troy Savings Bank of which
a person is an officer or partner or is,
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directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities;
(2) any trust or other estate in which a person has a substantial
beneficial interest or as to which a person serves as trustee or
in a similar fiduciary capacity, excluding tax-qualified employee
stock benefit plans or tax-qualified employee stock benefit plans
in which a person has a substantial beneficial interest or serves
as a trustee or in a similar fiduciary capacity and except that,
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; or
(3) any relative or spouse of a person or any relative of a spouse,
who has the same home as that person or who is a director or
officer of Mt. Troy Savings Bank, or any of its parents or
subsidiaries. For example, a corporation for which a person
serves as an officer would be an associate of that person and all
shares purchased by that corporation would be included with the
number of shares which that person individually could purchase
under the above limitations.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
A person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party, except
that any tax-qualified employee stock benefit plan will not be deemed to be
acting in concert with its trustee or a person who serves in a similar capacity
solely for the purpose of determining whether stock held by the trustee and
stock held by the plan will be aggregated. We will presume that certain persons
are acting in concert based upon various facts, including the fact that persons
have joint account relationships or the fact that such persons have filed joint
Schedules 13D with the Securities and Exchange Commission with respect to other
companies. We reserve the right to make an independent investigation of any
facts or circumstances brought to its attention that indicate that one or more
persons acting independently or as a group acting in concert may be attempting
to violate or circumvent the regulatory prohibition on the transferability of
subscription rights.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." These
determinations are in our sole discretion and may be based on whatever evidence
we believe to be relevant, including joint account relationships or shared
addresses on the Bank's records.
Each person purchasing shares of the common stock in the offering will
be considered to have confirmed that his or her purchase does not conflict with
the maximum purchase limitation. If the purchase limitation is violated by any
person or any associate or group of persons affiliated or otherwise acting in
concert with that person, we will have the right to purchase from that person at
the $10.00 purchase price per share all shares acquired by that person in excess
of that purchase limitation or, if the excess shares
77
have been sold by that person, to receive the difference between the purchase
price per share paid for the excess shares and the price at which the excess
shares were sold by that person. Our right to purchase the excess shares will be
assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by directors and officers of Mt. Troy
Savings Bank. For certain restrictions on the common stock purchased by
directors and officers, see The Offering - Restrictions on Transferability by
Directors and Officers. In addition, under guidelines of the NASD, members of
the NASD and their associates are subject to certain restrictions on the
transfer of securities purchased in accordance with subscription rights and to
certain reporting requirements after the purchase.
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 by mail or in person to Mt. Troy Savings Bank a
properly executed and completed order form, together with full payment of the
purchase price for all shares for which subscription is made; provided, however,
that if the employee plans subscribe for shares during the subscription
offering, the employee plans will not be required to pay for the shares at the
time they subscribe but rather may pay for the shares upon completion of the
conversion. All subscription rights under the plan will expire on the expiration
date, whether or not Mt. Troy Savings Bank has been able to locate each person
entitled to subscription rights. Once tendered, subscription orders cannot be
revoked without the consent of Mt. Troy Savings Bank.
If a stock order form:
o is not delivered and is returned to Mt. Troy Savings Bank by the United
States Postal Service or Mt. Troy Savings Bank is unable to locate the
addressee;
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 required payment for the shares subscribed
for including instances where a savings account or certificate balance from
which withdrawal is authorized is insufficient to fund the required
payment, but excluding subscriptions by the employee plans; or
o is not mailed pursuant to a "no mail" order placed in effect by the account
holder;
then the subscription rights for that person will lapse as though that 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 a date that we may 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 will not accept orders received on photocopies or
facsimile order forms, or for which payment is to be made by wire transfer or
payment from private third parties. 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 OTS.
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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 the expiration date or hand delivered any later than two days
prior to the expiration 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 for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Employee plans subscribing for shares during the subscription
offering may pay for those shares upon completion of the conversion. Payment for
shares of common stock may be made
o in cash, if delivered in person;
o by check or money order made payable to Mt. Troy Savings Bank; or
o for shares subscribed for in the subscription offering, by authorization of
withdrawal from savings accounts maintained with Mt. Troy Savings Bank.
Payment for subscriptions of $25,000 or more must be paid by account
withdrawal, certified or cashier's check, or money order. In accordance with
Rule 15c2-4 of the Securities Exchange Act of 1934, subscribers' checks must be
made payable to Mt. Troy Savings Bank, and checks received by Trident Securities
will be transmitted by noon of the following business day directly to the
segregated deposit account at Mt. Troy Savings Bank established to hold funds
received as payment for shares.
Appropriate means by which account withdrawals may be authorized are
provided on the order form. Once a withdrawal has been authorized, none of the
designated withdrawal amount may be used by a subscriber for any purpose other
than to purchase the common stock for which a subscription has been made 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 or terminated. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares, however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal, without penalty, and the remaining balance will earn
interest at the regular savings account rate subsequent to the withdrawal. In
the case of payments made in cash or by check or money order, funds will be
placed in a segregated account and interest will be paid by Mt. Troy Savings
Bank at the regular savings account rate from the date payment is received until
the offering is completed or terminated. An executed order form, once we receive
it, may not be modified, amended, or rescinded without our consent, unless the
offering is not completed within 45 days after the conclusion of the
subscription offering, in which event subscribers may be given the opportunity
to increase, decrease, or rescind their subscription for a specified period of
time. 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 their IRAs to
purchase shares of common stock in the offerings, provided that their IRAs are
not maintained on deposit at Mt. Troy Savings Bank. Persons with IRAs maintained
at Mt. Troy Savings Bank must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of common stock in the offerings. There
is no early withdrawal or IRS interest penalties for these transfers.
Instructions on how to transfer self-directed IRAs maintained at Mt. Troy
Savings Bank can be obtained from the stock information center. Depositors
interested in using funds in a Mt. Troy Savings Bank IRA to purchase common
stock should contact the
79
stock information center as soon as possible so that the necessary forms may be
forwarded, executed and returned prior to the expiration date.
Federal regulations prohibit Mt. Troy Savings Bank from lending funds
or extending credit to any person to purchase the common stock in the
conversion.
Stock Center. The stock center is located at 2000 Mt. Troy Road,
Pittsburgh, Pennsylvania 15212. Its phone number is (412) 322-6787.
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 completion 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 officers may participate in the solicitation of
offers to purchase common stock in jurisdictions where their participation is
not prohibited. Other employees of Mt. Troy Savings Bank may participate in the
offering in ministerial capacities and 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 officers
of Mt. Troy Savings Bank or registered representatives of Trident Securities. No
officer, director or employee of Mt. Troy Savings Bank will be compensated in
connection with his or her 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.
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, Reserve
Bancorp, Inc. may not repurchase its shares unless it can show extraordinary
circumstances. If extraordinary circumstances exist and if Reserve Bancorp, Inc.
can show a compelling and valid business purpose for the repurchase, the OTS may
approve repurchases of up to 5% of the outstanding stock during the first year
after conversion. After the first year following the conversion, we can
repurchase any amount of stock so long as the repurchase would not cause us to
become undercapitalized. In addition, SEC rules also govern the method, time,
price, and number of shares of common stock that may be repurchased by Reserve
Bancorp, Inc. and affiliated purchasers. If, in the future, the rules and
regulations regarding the repurchase of stock are liberalized, Reserve Bancorp,
Inc. may utilize the rules and regulations then in effect.
Stock Pricing and the Number of Shares to be Offered
FinPro, 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 (the
"Independent Valuation"). This independent valuation will express our pro forma
market value in terms of an aggregate dollar amount. FinPro will receive fees of
$24,000 for its appraisal services, including the independent valuation and any
subsequent update, and assistance in preparation of our business plan, plus up
to $2,400 for reasonable out-of-pocket expenses incurred in connection with the
independent valuation and business plan. Mt. Troy Savings Bank has agreed to
indemnify FinPro under certain circumstances against liabilities and expenses
arising out of or based on any misstatement or untrue
80
statement of a material fact contained in the information supplied by Mt. Troy
Savings Bank to FinPro, except where FinPro is determined to have been negligent
or failed to exercise due diligence in the preparation of the independent
valuation.
Pursuant to the plan, the number of shares of common stock to be
offered in the offering will be based on the estimated pro forma market value of
the common stock and the purchase price of $10.00 per share. FinPro has
determined that as of December 14, 2001, our estimated aggregate pro forma
market value was $5,900,000. Pursuant to regulations, this estimate must be
included within a range with a minimum of $5,015,000 and a maximum of
$6,785,000. We have determined to offer shares of common stock in the offering
at a price of $10.00 per share. We are offering a maximum of 678,500 shares in
the offering, subject to adjustment. In determining the offering range, the
Board of Directors reviewed FinPro's appraisal. The appraisal contains an
analysis of a number of factors, including but not limited to our financial
condition and results of operations as of September 30, 2001, our operating
trends, the competitive environment in which we operate, operating trends of
certain savings institutions and savings and loan holding companies, relevant
economic conditions both nationally and in Pennsylvania which affect the
operations of savings institutions, stock market values of certain institutions,
and stock market conditions for publicly traded savings institutions and savings
and loan holding companies. In addition, FinPro has advised us that it has
considered and will consider the effect of the additional capital raised by the
sale of the common stock on the estimated pro forma market value. The Board also
reviewed the methodology and the assumptions used by FinPro in preparing its
appraisal. The number of shares is subject to change if the independent
valuation changes at the conclusion of the offering.
The number of shares and price per share of common stock was determined
by the Board of Directors based on the independent valuation. The actual number
of shares to be sold in the offering may be increased or decreased before
completion of the offering, subject to approval and conditions that may be
imposed by the OTS, to reflect any change in our estimated pro forma market
value.
Depending on market and financial conditions at the time of the
completion of the offering, Mt. Troy Savings Bank may increase or decrease the
number of shares to be issued in the conversion and offering. No resolicitation
of purchasers will be made and purchasers will not be permitted to modify or
cancel their purchase orders unless the change in the number of shares to be
issued in the offering results in fewer than 501,500 shares or more than 780,275
shares being sold in the offering at the purchase price of $10.00, in which
event Mt. Troy Savings Bank may also elect to terminate the offering. If Mt.
Troy Savings Bank terminates the offering, purchasers will receive a prompt
refund of their purchase orders, together with interest earned thereon from the
date of receipt to the date of termination of the offering. Furthermore, any
account withdrawal authorizations will be terminated. If we receive orders for
less than 501,500 shares, at the discretion of the Board of Directors and
subject to approval of the OTS, we may establish a new offering range and
resolicit purchasers. If we resolicit, purchasers will be allowed to modify or
cancel their purchase orders. Any adjustments in our pro forma market value as a
result of market and financial conditions or a resolicitation of prospective
purchasers must be approved by the OTS.
The independent valuation will be updated at the time of the completion
of the offering, and the number of shares to be issued may increase or decrease
to reflect the changes in market conditions, the results of the offering, or the
estimated pro forma market value of Mt. Troy Savings Bank. If the updated
independent valuation increases, Reserve Bancorp, Inc. may increase the number
of shares sold in the offering to up to 780,275 shares. Subscribers will not be
given the opportunity to change or withdraw their orders unless more than
780,275 shares or fewer than 501,500 shares are sold in the offering. Any
adjustment of shares of common stock sold will have a corresponding effect on
the estimated net proceeds of the offering and the pro forma capitalization and
per share data of Mt. Troy Savings Bank. An increase
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in the total number of shares to be issued in the conversion would decrease a
subscriber's percentage ownership interest and pro forma net worth (book value)
per share and increase the pro forma net income and net worth (book value) on an
aggregate basis. In the event of a reduction in the valuation, Reserve Bancorp,
Inc. may decrease the number of shares to be issued to reflect the reduced
valuation. A decrease in the number of shares to be issued in the conversion
would increase a subscriber's percentage ownership interest and the pro forma
net worth (book value) per share and decrease the pro forma net income and net
worth on an aggregate basis. For a presentation of the possible effects of an
increase or decrease in the number of shares to be issued, see Pro Forma Data.
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, FinPro has relied on and assumed
the accuracy and completeness of financial and statistical information provided
by Mt. Troy Savings Bank. FinPro did not independently verify the financial
statements and other information provided by Mt. Troy Savings Bank, nor did
FinPro value independently the assets and liabilities of Mt. Troy Savings Bank.
The independent valuation considers Mt. Troy Savings Bank only as a going
concern and should not be considered as a indication of the liquidation value of
Mt. Troy Savings Bank. Moreover, because the independent valuation is based on
estimates and projections on a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons purchasing the
common stock will be able to sell their shares at a price equal to or greater
than the purchase price.
A copy of the appraisal report is available for your review at our main
office. In addition, the Board of Directors of Reserve Bancorp, Inc. does not
make any recommendation as to whether or not the stock will be a good investment
for you.
No sale of shares of common stock may be completed unless FinPro
confirms that, to the best of its knowledge, nothing of a material nature has
occurred that, taking into account all relevant factors, would cause FinPro to
conclude that the independent valuation is incompatible with its estimate of our
pro forma market value at the conclusion of the offering. Any change that would
result in an aggregate value that is below $5,015,000 or above $6,785,000 would
be subject to OTS approval. If confirmation from FinPro is not received, Mt.
Troy Savings Bank may extend the offering, reopen or commence a new offering,
request a new Independent Valuation, establish a new offering range and commence
a resolicitation of all purchasers with the approval of the OTS, or take other
action as permitted by the OTS in order to complete the offering.
Plan of Distribution/Marketing Arrangements
The common stock will be offered in the offering principally by the
distribution of this prospectus and through activities conducted at the stock
information center. It is expected that a registered representative employed by
Trident Securities will be working at, and supervising the operation of, the
stock center. Trident Securities will provide assistance in responding to
questions regarding the conversion and the offering and processing order forms.
Mt. Troy Savings Bank and Reserve Bancorp, Inc. have entered into an
agency agreement with Trident Securities under which Trident Securities will
provide financial advisory services and assist, on a best efforts basis, in the
solicitation of subscriptions and purchase orders for the common stock in the
offering. Trident Securities is a division of McDonald Investments, Inc., which
is a broker-dealer registered with the National Association of Securities
Dealers, Inc. Specifically, Trident Securities will assist in the offering in
the following manner:
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o assisting in the collection of proxies from depositors for use at the
Special Meeting;
o keeping records of subscriptions and orders for common stock;
o training and educating Mt. Troy Savings Bank's employees regarding the
mechanics and regulatory requirements of the stock conversion process;
o assisting in the design and implementation of a marketing strategy for the
offering;
o assisting Mt. Troy Savings Bank's management in scheduling and preparing
for meetings, if any, with potential investors and broker-dealers; and
o providing other general advice and assistance as may be requested to
promote the successful completion of the offering.
Trident Securities will receive, as compensation, a management fee of
$15,000, which was paid when Trident Securities was retained. Trident Securities
will also receive a fee equal to 2% of the total amount of stock sold in the
subscription, community and public offerings, excluding purchases by the ESOP,
directors, officers and their associates and not to exceed $105,000 payable at
closing. For stock sold by other NASD member firms under a selected dealer
agreement if a syndicate of broker-dealers (selected dealers) is formed to
assist in the public offering, the commission paid to those firms shall not
exceed an amount to be agreed upon jointly by Trident Securities and the Bank
which will reflect market requirements at the time a syndicate is formed.
Trident Securities will also be reimbursed up to $45,000 for its
out-of-pocket expenses, including the fees and expenses of its legal counsel.
Mt. Troy Savings Bank has agreed to indemnify Trident Securities, to the extent
allowed by law, for reasonable costs and expenses in connection with certain
claims or liabilities, including certain 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 officers of Mt.
Troy Savings Bank cannot be sold for a period of one year following completion
of the conversion, except for a disposition of shares after the death of a
stockholder. To ensure this restriction is upheld, shares of the common stock
issued to directors and officers will bear a legend restricting their sale. Any
shares issued to directors and officers as a stock dividend, stock split, or
otherwise with respect to restricted stock will be subject to the same
restriction.
For a period of three years following the conversion, no director or
officer of Mt. Troy Savings Bank or their associates may, without the prior
approval of the OTS, purchase our common stock except from a broker or dealer
registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made for
tax qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual officers or directors.
83
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the conversion 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 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 there is no agreement or understanding regarding the sale or
transfer of their shares. We intend to pursue any and all legal and equitable
remedies after we become aware of any agreement or understanding, and will not
honor orders we reasonably believe to involve an agreement or understanding
regarding the sale or transfer of shares.
Conditions to the Offering
Completion of the offering is subject to:
1. completion of the conversion, which requires approvals from certain
government agencies, the ratification of Mt. Troy Savings Bank's voting
depositor members, and the receipt of rulings and/or opinions of counsel as
to the tax consequences of the conversion;
2. the receipt of all the required approvals for the issuance of common stock
in the offering, including the approval of the OTS; and
3. the sale of a minimum of 501,500 shares of common stock.
If conditions 1 and 2 are not met before we complete the offering, all
funds received will be promptly returned with interest at Mt. Troy Savings
Bank's regular savings account rate and all withdrawal authorizations will be
canceled. The stock purchases of the officers and directors of Reserve Bancorp,
Inc. and Mt. Troy Savings Bank will be counted for purposes of meeting the
minimum number of shares required by condition 3.
RESTRICTIONS ON ACQUISITION OF RESERVE BANCORP, INC.
General
The following discussion is a summary of statutory and regulatory
restrictions on the acquisition of our common stock. In addition, the following
discussion summarizes provisions of our articles of incorporation and bylaws and
regulatory provisions that have an anti-takeover effect.
Statutory and Regulatory Restrictions on Acquisition
Regulatory Restrictions Applicable for Three Years. For three years
following a savings bank's conversion to stock form, OTS regulations prohibit
any person, without the prior approval of the OTS, from acquiring or making an
offer to acquire more than 10% of the stock of the converted institution or of
its holding company if such person is, or after completion of such acquisition
would be, the beneficial owner of more than 10% of such stock. In the event that
any person, directly or indirectly, violates this regulation, the shares
beneficially owned by such person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matter submitted to a vote of stockholders.
84
In the recent past, it has been the OTS's general policy to approve
acquisitions in excess of 10% of the stock of converted savings banks or their
holding companies after the passage of one year from the conversion, especially
when such acquisitions are negotiated with the target company. However, the OTS
has recently stated its intention to impose more stringent restrictions on the
approval of acquisitions of greater than 10% in the three years after a
conversion and has stated that it intends to approve only those acquisitions of
control within three years that comply strictly with the regulatory criteria. If
this new policy is enforced as announced, it may prevent any acquisition of
control of us, whether "friendly" or hostile, for at least three years after the
completion of the conversion.
In addition, the OTS has recently begun imposing as a condition of its
approval of a mutual-to- stock conversion the requirement that the converted
stock bank maintain its federal stock savings bank charter for a minimum period
of three years following conversion. This condition to the OTS's approval of a
conversion may effectively prevent any acquisition of control of us for at least
three years after the completion of the conversion by requiring any potential
acquiror to maintain the Bank as a separate subsidiary.
Statutory and Regulatory Change in Control Restrictions. 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 bank unless the
OTS has been given 60 days prior written notice. Federal law provides that no
company may acquire control of a savings bank or a savings and loan holding
company without the prior approval of the OTS. Any company that acquires control
becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS. Pursuant to federal regulations, control
is considered to have been acquired when an entity, among other things, has
acquired more than 25% 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, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings institution, where certain
enumerated control factors are also present in the acquisition. The OTS may
prohibit an acquisition of control if: (1) it would result in a monopoly or
substantially lessen competition; (2) the financial condition of the acquiring
person might jeopardize the financial stability of the institution; or (3) 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 that 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% of any class of our equity securities.
Reserve Bancorp, Inc.'s Articles of Incorporation and Bylaws
General. Our articles of incorporation and bylaws are available at our
administrative office or by writing or calling us, 2000 Mt. Troy Road,
Pittsburgh, Pennsylvania 15212. Our telephone number is (412) 322-6107.
Classified Board of Directors and Related Provisions. Our Board of
Directors is divided into four classes which are as nearly equal in number as
possible. Directors serve for terms of four years. As a result, each year, only
one-quarter of the directors are to be elected and it could take up to three
years to elect a majority of our directors. A director may be removed only for
cause by a vote of the holders of a majority of the shares.
Restrictions on Voting and Acquisition of Securities. Our articles of
incorporation provide that any shares of common stock beneficially owned
directly or indirectly in excess of 10% by any person will
85
not be counted as shares entitled to vote, shall not be voted by any person or
counted as voting shares, and will 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. The purpose of this provision is to
reduce the chance that large stockholders could challenge our management.
In addition to the voting limitation, our articles of incorporation
also provide that for a period of five years from the completion of the
conversion of Mt. Troy Savings Bank from mutual to stock form, no person shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of our common stock.
Prohibition Against Cumulative Voting. Our articles of incorporation
prohibit cumulative voting by stockholders in the election of directors. The
absence of cumulative voting means that the holders of a majority of the shares
voted may, if they so choose, elect all of the directors elected at the meeting,
thus preventing a minority stockholder from obtaining representation on our
Board of Directors unless the minority stockholder is able to obtain the support
of a majority.
Procedures for Certain Business Combinations. Our articles of
incorporation require the affirmative vote of at least 80% of the shares in
order for us to enter into any merger, consolidation, sale, liquidation, or
dissolution of Reserve Bancorp, Inc. with any "interested shareholder." If the
proposed transaction has been approved in advance by two-thirds of our Board of
Directors who were directors prior to the time the interested shareholder became
an interested shareholder, the transaction would only require the affirmative
vote of a majority of the shareholders. An interested shareholder is any person
who, directly or indirectly, has the right to vote or to sell 20% or more of the
outstanding shares. Affiliates and associates of an interested shareholder are
also considered to be interested shareholders. Any amendment to this provision
requires the vote of at least 80% of the shares.
In addition to the interested shareholder restrictions, our articles of
incorporation also require the affirmative vote of at least 80% of the shares in
order for us to enter into any merger, consolidation, sale, liquidation, or
dissolution of Reserve Bancorp, Inc., unless the transaction is approved by
two-thirds of our Board of Directors. If the transaction is approved by
two-thirds of our Board, the affirmative vote of only a majority would be
required.
Amendment to Articles of Incorporation and Bylaws. Amendments to our
articles of incorporation must be approved by our Board of Directors and also by
the holders of a majority of the shares. Approval by at least 80% of the shares
is required to amend provisions relating to restrictions on the acquisition and
voting of more than 10% of the common stock; number, election and removal of
directors; vote required to amend bylaws; call of special stockholder meetings;
director liability; approval of certain business combinations; and
indemnification of officers and directors.
Our bylaws may be amended by a majority vote of our Board of Directors
or by the holders of at least 80% of the shares.
Additional Anti-Takeover Provisions. The provisions described above are
not the only provisions of our articles of incorporation and bylaws which have
an anti-takeover effect. For example, our articles of incorporation authorize
the issuance of up to two million 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 (our articles of
incorporation authorize the issuance of up to eight million shares of common
stock), also could represent additional capital required to be purchased by the
acquiror.
86
Furthermore, for a period of five years after the conversion, the stock
charter of the Bank provides that no person can directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
securities of the Bank. In the event shares are acquired in violation of this
prohibition, all shares beneficially owned by any person in excess of 10% shall
be considered "excess shares" and shall not be counted as shares entitled to
vote and shall not be voted by any person or counted as voting shares in
connection with any matters submitted to the stockholders for a vote.
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 the removal of our management
more difficult.
DESCRIPTION OF CAPITAL STOCK
Reserve Bancorp, Inc. is authorized to issue 8,000,000 shares of common
stock, par value $0.10 per share and 2,000,000 shares of serial preferred stock,
par value $0.10 per share. We currently expect to issue between 501,500 and
678,500 shares of common stock in the conversion, subject to an increase to
780,275 shares. See Capitalization. Upon 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
insurable type and will not be insured by the FDIC or any other governmental
agency. See also Dividend Policy.
Voting Rights
The holders of common stock will possess exclusive voting rights in
Reserve Bancorp, Inc. The holder of shares of common stock will be entitled to
one vote for each share held on all matters subject to stockholder vote. See
also The Conversion - Effects of the Conversion - Voting Rights.
Liquidation Rights
In the event of any liquidation, dissolution, or winding-up of Reserve
Bancorp, Inc., the holders of the common stock generally would be entitled to
receive, after payment of all debts and liabilities of Reserve Bancorp, Inc.
(including all debts and liabilities of the Bank), all assets of Reserve
Bancorp, Inc. available for distribution. See also The Conversion - Effects of
the Conversion - Liquidation Rights.
Preemptive Rights; Redemption
Because the holders of the common stock do not have any preemptive
rights with respect to any shares we may issue, the Board of Directors may sell
shares of capital stock of Reserve Bancorp, Inc. without first offering such
shares to existing stockholders of Reserve Bancorp, Inc. The common stock will
not be subject to any redemption provisions.
Preferred Stock
We are authorized to issue up to 2,000,000 shares of serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of preferred stock 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 convertible into common stock and may rank prior to the common stock as to
dividends rights, liquidation preferences, or both, and may have
87
full or limited voting rights. 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.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the conversion and federal and state taxation will
be passed upon for us by Malizia Spidi & Fisch, PC, Washington, D.C. Certain
legal matters will be passed upon for Trident Securities, a Division of McDonald
Investments, Inc. by Muldoon Murphy & Faucette LLP, Washington, D.C.
EXPERTS
The financial statements of Mt. Troy Savings Bank at September 30, 2001
and 2000 and for each of the years in the two year period ended September 30,
2001 have been included in this prospectus in reliance upon the report of Stokes
& Hinds, LLC, Pittsburgh, Pennsylvania, appearing elsewhere in this prospectus,
and upon the authority of said firm as experts in accounting and auditing.
FinPro, Inc. has consented to the publication in this document of a
summary of its letter to Mt. Troy Savings Bank setting forth its conclusion as
to the estimated pro forma market value of the common stock upon the conversion
and stock offering and its conclusion as to the value of subscription rights and
has also consented 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 (the "Exchange Act"). 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 Exchange Act. We may not deregister the common stock under the Exchange Act
for a period of at least three years following the conversion.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act
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. This information 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 the registration materials can be obtained from the
SEC at prescribed rates. You may obtain information on the operation of the
Public
88
Reference Room by calling 1-800-SEC-0330. The SEC also maintains an internet
address ("Web site") that contains reports, proxy and information statements and
other information regarding registrants, including Reserve Bancorp, Inc., that
file electronically with the SEC. The address for this Web site is
"http://www.sec.gov." The statements contained in this document as to the
contents of any contract or other document filed as an exhibit to the Form SB-2
are, of necessity, brief descriptions, and each statement is qualified by
reference to the complete contract or document.
A copy of our articles of incorporation and bylaws, as well as those of
the Bank, are available without charge from Mt. Troy Savings Bank. Copies of the
plan of conversion are also available without charge.
The Bank has filed an application for conversion with the OTS. This
prospectus omits certain information contained in that application. That
information can be examined without charge at the public reference facilities of
the OTS located at 1700 G Street, N.W., Washington, D.C. 20552.
89
INDEX TO FINANCIAL STATEMENTS
Mt. Troy Savings Bank
Independent Auditor's Report F-1
Statements of Financial Condition F-2
Statements of Income F-3
Statements of Changes in Retained Earnings F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-7
Other schedules are omitted as they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
Financial statements of Reserve Bancorp, Inc. have not been provided
because it has conducted no operations.
90
[LOGO]
Stokes & Hinds, LLC
Certified Public Accountants
& Business Advisors
Members:
American and Pennsylvania Institutes
of Certified Public Accountants
Division for CPA Firms:
SEC Practice Section
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Mt. Troy Savings Bank, FSB
We have audited the accompanying statements of financial condition of Mt. Troy
Savings Bank, FSB (the "Bank") at September 30, 2001 and 2000, and the related
statements of income, changes in retained earnings and cash flows for the years
then ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mt. Troy Savings Bank, FSB at
September 30, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note V to the financial statements, in fiscal 2000 the Bank
changed from an unacceptable method of accounting for interest-bearing deposits
in banks to an acceptable method. The change in accounting principle has been
accounted for as a correction of an error and prior years' financial statements
have been restated.
As more fully described in Note W, subsequent to the issuance of the Bank's
fiscal 2001 financial statements and our report therein dated October 26, 2001,
we became aware that those financial statements did not reflect an impairment
loss on certain securities held-to-maturity. In our original report we expressed
an unqualified opinion on the fiscal 2001 financial statements, and our opinion
on the revised statements as expressed herein, remains unqualified.
/s/Stokes & Hinds, LLC
October 26, 2001
(except for Notes V and W, as to which the date is February 8, 2002)
Pittsburgh, Pennsylvania
9401 McKnight Road
Pittsburgh, Pennsylvania
15237-6000
Phone 412-364-0590
Voice Mail 412-364-6070
Fax 412-364-6176
(F-1)
MT. TROY SAVINGS BANK, FSB
STATEMENTS OF FINANCIAL CONDITION
September 30, 2001 and 2000
(As Restated)
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents
Interest bearing $ 796,703 $ 703,391
Non-interest bearing 263,253 285,217
Interest-bearing deposits in other banks 400,000 597,000
Securities held-to-maturity (estimated fair value of
$2,177,533 and $1,609,050) 2,161,455 1,688,400
Mortgage-backed securities held-to-maturity (estimated
fair value of $225,337 and $295,259) 223,531 299,266
Securities available-for-sale, at fair value 1,644,952 1,985,152
Mortgage-backed securities available-for-sale, at fair value 316,831 380,379
Loans, net 37,731,075 35,684,651
Federal Home Loan Bank stock, at cost 312,600 307,300
Accrued interest receivable 296,496 279,904
Premises and equipment, net 243,760 274,341
Prepaid expenses 44,136 32,355
Deferred income taxes 119,450 68,766
------------ ------------
TOTAL ASSETS $ 44,554,242 $ 42,586,122
============ ============
LIABILITIES AND RETAINED EARNINGS
Deposits $ 39,037,658 $ 36,010,585
Federal Home Loan Bank advances - 1,450,000
Advances from borrowers for taxes and insurance 83,372 79,553
Accrued interest payable 179,177 174,489
Other liabilities 90,127 94,100
------------ ------------
TOTAL LIABILITIES 39,390,334 37,808,727
------------ ------------
Commitments and contingencies
Retained earnings 5,150,151 4,809,748
Accumulated other comprehensive income, net of
applicable income taxes of $9,796 and $(23,036) 13,757 (32,353)
------------ ------------
TOTAL RETAINED EARNINGS 5,163,908 4,777,395
------------ ------------
TOTAL LIABILITIES AND RETAINED EARNINGS $ 44,554,242 $ 42,586,122
============ ============
See accompanying notes.
F-2
MT. TROY SAVINGS BANK, FSB
STATEMENTS OF INCOME
Years Ended September 30, 2001 and 2000
(As Restated)
2001 2000
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $2,766,761 $2,718,303
Investments 282,038 279,811
Mortgaged-backed securities 47,535 57,157
FHLB stock 18,685 22,715
Interest-earning demand deposits 45,708 43,136
---------- ----------
3,160,727 3,121,122
---------- ----------
INTEREST EXPENSE
Deposits 1,687,719 1,516,512
Advances from Federal Home Loan Bank 7,920 127,644
---------- ----------
1,695,639 1,644,156
---------- ----------
NET INTEREST INCOME 1,465,088 1,476,966
PROVISION FOR LOAN LOSSES 18,000 18,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,447,088 1,458,966
---------- ----------
NONINTEREST INCOME
Service charges and other fees 102,912 84,571
Income from real estate rental 4,475 4,800
Gain on sale of real estate 7,437 -
Gain on sale of investments 30,782 8,543
---------- ----------
145,606 97,914
---------- ----------
NONINTEREST EXPENSE
Compensation and benefits 458,694 418,792
Occupancy and equipment expense 115,163 115,978
Federal insurance premiums 18,840 24,936
Service bureau expense 100,784 97,621
Loss on impairment of securities 132,256 -
Other 271,659 248,196
---------- ----------
1,097,396 905,523
---------- ----------
INCOME BEFORE INCOME TAX 495,298 651,357
INCOME TAX EXPENSE 154,895 227,280
---------- ----------
NET INCOME $ 340,403 $ 424,077
========== ==========
See accompanying notes.
F-3
MT. TROY SAVINGS BANK, FSB
STATEMENTS OF CHANGES IN RETAINED EARNINGS
Years Ended September 30, 2001 and 2000
(As Restated)
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
----------- ------------- -----------
BALANCE, AS PREVIOUSLY REPORTED, AT
SEPTEMBER 30, 1999 $ 4,385,671 $ (30,176) $ 4,355,495
Prior period adjustment - 1,203 1,203
----------- ----------- -----------
BALANCE, AS RESTATED, AT SEPTEMBER 30, 1999 4,385,671 (28,973) 4,356,698
COMPREHENSIVE INCOME
Net income 424,077 - 424,077
Change in unrealized gain (loss)
on securities available-for-sale,
net of applicable income taxes
of $(2,407) - (3,380) (3,380)
-----------
TOTAL COMPREHENSIVE INCOME 420,697
----------- ----------- -----------
BALANCE, AS RESTATED, AT SEPTEMBER 30, 2000 4,809,748 (32,353) 4,777,395
COMPREHENSIVE INCOME
Net income 340,403 - 340,403
Change in unrealized gain (loss)
on securities available-for-sale,
net of applicable income taxes
of $32,832 - 46,110 46,110
-----------
TOTAL COMPREHENSIVE INCOME 386,513
----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2001 $ 5,150,151 $ 13,757 $ 5,163,908
=========== =========== ===========
See accompanying notes.
F-4
MT. TROY SAVINGS BANK, FSB
STATEMENTS OF CASH FLOWS
Years Ended September 30, 2001 and 2000
(As Restated)
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net income $ 340,403 $ 424,077
Adjustments to reconcile change in net income to
net cash provided by operating activities
Amortization of:
Deferred loan origination fees (59,678) (52,588)
Premiums and discounts on investment securities 2,947 1,640
Provision for loan losses 18,000 18,000
Depreciation and amortization of premises and equipment 49,915 50,558
Net gain on sales of securities available-for-sale (30,782) (8,543)
Gain on sale of real estate owned (7,437) -
Loss on impairment of securities 132,256 -
(Increase) decrease in:
Accrued interest receivable (16,592) (14,913)
Prepaid expenses (11,781) 8,078
Deferred income taxes (83,516) (23,480)
Increase (decrease) in:
Accrued interest payable 4,688 43,424
Other liabilities (3,973) 4,462
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 334,450 450,715
----------- -----------
INVESTING ACTIVITIES
Purchases of interest-bearing deposits in other banks (200,000) -
Proceeds from maturities of interest-bearing deposits
in other banks 397,000 397,000
Proceeds from maturities and calls of
securities held-to-maturity 1,050,000 -
Proceeds from principal repayments of
mortgage-backed securities held-to-maturity 73,949 75,543
Purchases of securities held-to-maturity (1,660,000) -
Proceeds from sales of securities available-for-sale 453,824 126,856
Proceeds from maturities and calls of
securities available-for-sale 600,000 -
Proceeds from principal repayments of
mortgage-backed securities available-for-sale 71,426 63,560
Purchases of securities available-for-sale (608,250) (100,375)
Purchases of premises and equipment (19,334) (24,114)
Purchases of Federal Home Loan Bank stock (5,300) (34,900)
Proceeds from sale of real estate owned 86,700 -
Net loan originations and principal repayments on loans (2,084,009) (855,749)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (1,843,994) (352,179)
----------- -----------
See accompanying notes.
F-5
MT. TROY SAVINGS BANK, FSB
STATEMENTS OF CASH FLOWS
Years Ended September 30, 2001 and 2000
(As Restated)
2001 2000
----------- -----------
FINANCING ACTIVITIES
Net decrease in FHLB advances (1,450,000) (1,700,000)
Net increase in deposits 3,027,073 1,879,503
Net increase (decrease) in advances from borrowers
for taxes and insurance 3,819 (12,693)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,580,892 166,810
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 71,348 265,346
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 988,608 723,262
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,059,956 988,608
=========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest on deposits, advances, and other borrowings $ 1,690,951 1,600,772
=========== ===========
Income taxes $ 274,041 227,500
=========== ===========
Loans transferred to foreclosed real estate owned $ 65,867 -
=========== ===========
Total increase in unrealized gain (loss) on
securities available-for-sale $ 78,942 (5,787)
Deferred income tax benefit (expense) (32,832) 2,407
----------- -----------
Net increase in unrealized gain (loss) on
securities available-for-sale $ 46,110 (3,380)
=========== ===========
See accompanying notes.
F-6
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Mt. Troy Savings Bank, FSB (the "Bank")
and the methods of applying those policies conform with accounting principles
generally accepted in the United States of America. The accounting and reporting
policies and the methods of applying those policies which significantly affect
the determination of financial position, results of operations, and cash flows
are summarized below.
Nature of Operations
Mt. Troy Savings Bank, FSB is a federally chartered, Savings Association
Insurance Fund (SAIF) insured mutual savings bank conducting its business from
its two locations, Reserve Township and the City of Pittsburgh. The Bank's
principal sources of revenue emanate from its portfolio of residential real
estate mortgage loans and investment securities.
The Bank is subject to regulation and supervision by the Federal Deposit
Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS).
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In connection with
the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.
A majority of the Bank's loan portfolio consists of single-family residential
loans in the Pittsburgh area. The regional economy is currently stable and
consists of various types of industry. Real estate prices in this market are
also stable, however, the ultimate collectibility of a substantial portion of
the Bank's loan portfolio are susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, further reductions in the carrying amounts of loans and
foreclosed assets 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 and
foreclosed real estate. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans and foreclosed real estate may
change materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
(F-7)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
For purposes of reporting cash flows, the Bank considers cash and deposits in
other financial institutions with original maturities of three months or less to
be cash and cash equivalents.
Interest-bearing Deposits in Other Banks
Interest-bearing deposits in other banks are carried at cost.
Investment and Mortgage-Backed Securities
The Bank follows the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, management determines the appropriate classification of securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. Debt securities are classified as held-to-maturity when the Bank has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Debt securities not
classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of retained
earnings.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security, which are computed using the interest method..
Such amortization is included in interest income from investments. Interest and
dividends are included in interest income from investments. Realized gains and
losses, and declines in value judged to be other-than-temporary are included in
gain (loss) on sale of investments. The cost of securities sold is based on the
specific identification method.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the contractual
lives of the related loans using the interest method. Amortization of deferred
loan fees is discontinued when a loan is place on nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other impaired loans is recognized only to the extent of interest payments
received.
(F-8)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by- case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for all loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Real Estate Owned
Real estate acquired by foreclosure or voluntary deed in lieu of foreclosure is
initially carried at the lower of fair value minus estimated disposal costs or
the balance of the loan on the property at the date of acquisition. Any
write-downs based on the asset's fair value at date of acquisition are charged
to the allowance for loan losses. Subsequent costs directly related to the
development or improvement of real estate are capitalized.
Federal Home Loan Bank Stock
Investment in stock of a Federal Home Loan Bank is required by law of every
federally insured savings and loan or savings bank. The investment is carried at
cost. No ready market exists for the stock, and it has no quoted market value.
(F-9)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premises and Equipment
Land is carried at cost. Buildings, building improvements, leasehold
improvements, and furniture, fixtures, and equipment are carried at cost, less
accumulated depreciation and amortization. Buildings, building improvements,
leasehold improvements, and furniture, fixtures, and equipment are depreciated
using the straight-line and accelerated methods over the estimated useful lives
of the assets, which are as follows:
Building 50 years
Building improvements 5 - 32 years
Leasehold improvements 15 years
Furniture, fixtures, and equipment 2 - 10 years
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, accrued interest on certificates, loan
origination fees and accumulated depreciation for financial reporting and income
tax. The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred tax assets
and liabilities are reflected at 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.
Comprehensive Income
The Bank is required to present comprehensive income and its components in a
full set of general purpose financial statements for all periods presented.
Other comprehensive income is comprised exclusively of net unrealized holding
gains (losses) on its available for sale securities portfolio. The Bank has
elected to report the effects of its other comprehensive income as part of the
Statement of Changes in Retained Earnings.
(F-10)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Business Combinations, effective for
all business combinations initiated after June 30, 2001, as well as all business
combinations accounted for by the purchase method that are completed after June
30, 2001. The new statement requires that the purchase method of accounting be
used for all business combinations and prohibits the use of the
pooling-of-interests method. The adoption of Statement No. 141 is not expected
to have a material effect on the Bank's financial position or results of
operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. The new statement changes the accounting for goodwill
from an amortization method to an impairment-only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this Statement. The adoption of Statement No. 142 is not
expected to have a material effect on the Bank's financial position or results
of operations.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations, effective for fiscal years beginning after June 15, 2002. The
Statement requires entities to record the fair value of a liability for an asset
retirement obligation (ARO) in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The adoption of Statement No. 143 is not
expected to have a material effect on the Bank's financial position or results
of operations.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment of Long-Lived Assets, effective for fiscal years beginning after
December 15, 2001. The Statement replaces FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
The primary objectives of this project were to develop one accounting model for
long-lived assets to be disposed of by sale and to address significant
implementation issues using the framework established in SFAS No. 121. The
adoption of Statement No. 144 is not expected to have a material effect on the
Bank's financial position or results of operations.
(F-11)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE B - SECURITIES HELD-TO-MATURITY
The amortized cost and estimated fair values of the Bank's investments in
securities held-to-maturity at September 30, are summarized as follows:
2001
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- -------- ----------
Municipal bonds 907,837 13,633 - 921,470
Corporate bonds 1,253,618 14,083 (11,638) 1,256,063
---------- ------- -------- ----------
$2,161,455 $27,716 $(11,638) $2,177,533
========== ======= ======== ==========
2000
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- -------- ----------
Municipal bonds 496,694 6,740 - 503,434
Corporate bonds 1,191,706 - (86,090) 1,105,616
---------- ------- -------- ----------
$1,688,400 $6,740 $(86,090) $1,609,050
========== ====== ======== ==========
The amortized cost and estimated fair values of securities held-to-maturity at
September 30, 2001, by contractual maturity are shown below.
AMORTIZED FAIR
COST VALUE
---------- ----------
Due within one year $ 414,000 $ 414,000
Due from one year to five years 291,845 303,050
Due from five years to ten years 698,005 687,863
Due after ten years 757,605 772,620
---------- ----------
$2,161,455 $2,177,533
========== ==========
(F-12)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE C - MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
The amortized cost and estimated fair values of the Bank's investments in
mortgage-backed securities held-to- maturity at September 30, are summarized as
follows:
2001
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- -------- ----------
Government National
Mortgage Association $213,405 $3,194 $(1,891) $214,708
Federal Home Loan Mortgage
Corporation 6,515 338 - 6,853
Federal National Mortgage
Association 3,611 165 - 3,776
-------- ------ ------- --------
$223,531 $3,697 $(1,891) $225,337
======== ====== ======= ========
2000
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- -------- ----------
Government National
Mortgage Association $284,793 $1,043 $(5,424) $280,412
Federal Home Loan Mortgage
Corporation 9,971 217 (13) 10,175
Federal National Mortgage
Association 4,502 170 - 4,672
-------- ------ ------- --------
$299,266 $1,430 $(5,437) $295,259
======== ====== ======= ========
The amortized cost and estimated fair values of mortgage-backed securities
held-to-maturity at September 30, 2001, by contractual maturity are shown below.
AMORTIZED FAIR
COST VALUE
--------- --------
Due within one year $ - $ -
Due from one year to five years 38,581 38,124
Due from five years to ten years 47,504 46,936
Due after ten years 137,446 140,277
-------- --------
$223,531 $225,337
======== ========
(F-13)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE D - SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair values of the Bank's investments in
securities available-for-sale at September 30, are summarized as follows:
2001
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
U.S. Government and
government agency obligations $ 200,000 $ 702 $ - $ 200,702
Municipal bonds 775,175 20,034 - 795,209
---------- ------- -------- ----------
Total debt securities 975,175 20,736 - 995,911
---------- ------- -------- ----------
FHLMC/FNMA stock 381,250 4,758 (1,190) 384,818
Mortgage securities mutual fund 281,474 - (17,251) 264,223
---------- ------- -------- ----------
Total equity securities 662,724 4,758 (18,441) 649,041
---------- ------- -------- ----------
$1,637,899 $25,494 $(18,441) $1,644,952
========== ======= ======== ==========
2000
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
U.S. Government and
government agency obligations $ 549,803 $ - $(37,908) $ 511,895
Municipal bonds 1,021,543 12,144 (9,034) 1,024,653
---------- ------- -------- ----------
Total debt securities 1,571,346 12,144 (46,942) 1,536,548
---------- ------- -------- ----------
FHLMC/FNMA stock 103,876 5,375 (1,125) 108,126
Mortgage securities mutual fund 373,642 - (33,164) 340,478
---------- ------- -------- ----------
Total equity securities 477,518 5,375 (34,289) 448,604
---------- ------- -------- ----------
$2,048,864 $17,519 $(81,231) $1,985,152
========== ======= ======== ==========
(F-14)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE D - SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The amortized cost and estimated fair values of securities available-for-sale at
September 30, 2001 by contractual maturity are shown below. Mutual fund shares
and stocks have no maturity date.
AMORTIZED FAIR
COST VALUE
--------- --------
Due within one year $ - $ -
Due from one year to five years - -
Due from five years to ten years 424,111 429,013
Due after ten years 551,064 566,898
-------- --------
$975,175 $995,911
======== ========
NOTE E - MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair values of the Bank's investments in
mortgage-backed securities available-for-sale at September 30, are summarized as
follows:
2001
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Federal Home Loan Mortgage Corporation $112,055 $3,998 $ - $116,053
Government National Mortgage Corporation 188,276 12,502 - 200,778
-------- ------- -------- --------
$300,331 $16,500 $( -) $316,831
======== ======= ======== ========
2000
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Federal Home Loan Mortgage Corporation $136,820 $ 1,421 $ - $138,241
Government National Mortgage Corporation 235,236 9,706 (2,804) 242,138
-------- ------- ------- --------
$372,056 $11,127 $(2,804) $380,379
======== ======= ======= ========
(F-15)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE E - MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The amortized cost and estimated fair values of mortgage-backed securities
available-for-sale at September 30, 2001, by contractual maturity are shown
below.
AMORTIZED FAIR
COST VALUE
--------- --------
Due within one year $ - $ -
Due from one year to five years - -
Due from five years to ten years 29,985 31,102
Due after ten years 270,346 285,729
-------- --------
$300,331 $316,831
======== ========
NOTE F - LOANS
Loans at September 30 are summarized as follows:
2001 2000
----------- -----------
First mortgage loans:
One to four family $27,843,101 $27,179,935
Multi-family 538,826 656,320
Construction loans 6,156,355 4,122,600
Commercial real estate 1,993,146 1,719,254
Home equity and second mortgage 2,700,781 3,044,028
Consumer loans:
Secured 490,187 595,498
Unsecured 244,930 150,331
Share loans 156,416 168,524
Commercial business loans 446,137 135,972
----------- -----------
40,569,879 37,772,462
Less: Undisbursed portion of construction loans 2,567,972 1,832,816
Allowance for loan losses 166,114 152,895
Net deferred loan origination fees 104,718 102,100
----------- -----------
$37,731,075 $35,684,651
=========== ===========
The Bank conducts its business through two offices located in Reserve Township
and the City of Pittsburgh. As of September 30, 2001, the majority of the Bank's
loan portfolio was secured by properties located in western Pennsylvania. The
Bank evaluates each customer's credit worthiness on a case-by-case basis.
Collateral held includes mortgages on residential and income-producing
properties. The Bank does not believe it has significant concentration of credit
risk to any one group of borrowers given its underwriting and collateral
requirements.
(F-16)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE F - LOANS (CONTINUED)
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, no loans in non- homogenous groups were determined to be impaired for the
year ended or as of September 30, 2001. Commercial real estate, multi-family
residential, construction, and commercial business loans are included in the
non-homogenous group.
First mortgage loans which are contractually past due ninety days or more total
approximately $72,537 at September 30, 2001.
An analysis of the allowance for loan losses is as follows:
2001 2000
-------- --------
Beginning balance $152,895 $152,245
Provision for loan losses 18,000 18,000
Charge-offs (4,917) (17,350)
Recoveries 136 -
-------- --------
Ending balance $166,114 $152,895
======== ========
In the ordinary course of business, the Bank has and expects to continue to have
transactions, including borrowings, with its officers, directors, and their
affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time of comparable transactions with other persons and did not
involve more than a normal risk of collectibility or present any other
unfavorable features to the Bank.
NOTE G - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
2001 2000
-------- --------
Loans receivable $240,732 $221,534
Investment securities 63,611 64,150
-------- --------
304,343 285,684
Allowance for uncollectible interest (7,847) (5,780)
-------- --------
$296,496 $279,904
======== ========
(F-17)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE H - PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
2001 2000
-------- ---------
Land $ 10,000 $ 10,000
Buildings and improvements 377,043 373,318
Furniture, fixtures, and equipment 475,005 459,396
--------- ---------
862,048 842,714
Accumulated depreciation (618,288) (568,373)
--------- ---------
$ 243,760 $ 274,341
========= =========
NOTE I - DEPOSITS
Deposits at September 30, are summarized as follows:
2001 2000
---------------------------------------- ---------------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
INTEREST OF INTEREST OF
RATE AMOUNT PORTFOLIO RATE AMOUNT PORTFOLIO
-------- ------------ --------- -------- ------------ ---------
NOW account 2.21% $ 6,415,613 16.4% 2.24% $ 5,842,788 16.2%
Passbook savings 3.29% 10,846,583 27.8 3.29% 10,839,350 30.1
----------- ----- ----------- -----
2.89% 17,262,196 44.2 2.92% 16,682,138 46.3
----------- ----- ----------- -----
Certificates of deposit:
3.00% to 3.99% 3.30% 85,418 0.2 3.76% 76,524 0.2
4.00% to 4.99% 4.42% 5,947,183 15.2 4.56% 1,366,277 3.8
5.00% to 5.99% 5.40% 5,671,534 14.6 5.51% 7,914,745 22.0
6.00% to 6.99% 6.22% 7,953,139 20.4 6.20% 8,174,9702 22.7
7.00% to 7.99% 7.29% 2,118,188 5.4 7.29% 1,795,931 5.0
----------- ----- ----------- -----
5.61% 21,775,462 55.8 5.89% 19,328,447 53.7
----------- ----- ----------- -----
4.40% $39,037,658 100.0% 4.52% $36,010,585 100.0%
=========== ===== =========== =====
At September 30, 2001, the aggregate maturities of certificates of deposit are
as follows:
2002 $11,977,015
2003 5,942,341
2004 1,984,874
2005 985,093
2006 886,139
-----------
$21,775,462
===========
(F-18)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE I - DEPOSITS (CONTINUED)
Deposits in excess of $100,000 are not insured by the SAIF. The aggregate amount
of certificates of deposit in denominations of $100,000 or more totaled
$4,568,906.
At September 30, 2001, the Bank had deposits from its officers and directors
totaling $255,482.
Interest expense by deposit category for the years ended September 30, are as
follows:
2001 2000
---------- ----------
NOW accounts $ 138,903 $ 132,524
Passbook savings 348,410 329,717
Certificates of deposit 1,200,406 1,054,271
---------- ----------
Total $1,687,719 $1,516,512
========== ==========
NOTE J - ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank has a line of credit of $4,000,000 from the Federal Home Loan Bank
(FHLB), maturing February 27, 2002 with an interest rate of 3.56% at September
30, 2001. The Bank had draws of $0 and $1,450,000 on this line of credit at
September 30, 2001 and 2000, respectively
Although no specific collateral is required to be pledged, FHLB advances are
secured by a blanket security agreement that includes the Bank's FHLB stock,
investment and mortgage-backed securities held in safekeeping at the FHLB, and
certain qualifying first mortgage loans.
NOTE K - FINANCIAL INSTITUTIONS THRIFT PLAN
The Bank participates in the Financial Institutions Thrift Plan. The Plan
permits employees to contribute various percentages of their salary as a
contribution to the Plan. The Bank also contributes 50% of the member's
contribution to a maximum of 6% of the employees eligible compensation. Thrift
plan expense for the year ended September 30, 2001 and 2000 amounted to $24,501
and $22,605, respectively.
(F-19)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE L - INCOME TAXES
Income tax expense (benefit) for the years ended September 30, is summarized as
follows:
2001 2000
-------- --------
Federal:
Current $204,154 $160,783
Deferred (83,516) 23,480
-------- --------
$120,638 $184,263
======== ========
State:
Current $ 34,257 $ 43,017
======== ========
Totals:
Current $238,411 $203,800
Deferred (83,516) 23,480
-------- --------
$154,895 $227,280
======== ========
The differences between actual income tax expense and the amount computed by
applying the federal statutory income tax rate of 34% to income before income
taxes for the years ended September 30, are reconciled as follows:
2001 2000
-------- --------
Computed income tax expense $168,401 $221,461
Increase (decrease) resulting from:
Federal tax-exempt income (18,747) (21,861)
State taxes (net of federal benefit) 22,610 28,391
Other, net (17,369) (711)
-------- --------
Actual income tax expense $154,895 $227,280
======== ========
Effective tax rate 31.3% 34.9%
======== ========
The components of net deferred tax assets and liabilities at September 30, are
as follows:
2001 2000
-------- -------
Deferred tax assets:
Loan origination fees, net 10,915 $12,824
Allowance for loan losses 60,533 43,643
Accrued interest payable 12,216 19,583
Premises and equipment 2,126 -
Directors retirement plan 5,028 -
Impairment loss on securities held-to-maturity 48,195 -
Unrealized loss on securities available-for-sale - 23,036
-------- -------
139,013 99,086
-------- -------
(F-20)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE L - INCOME TAXES (CONTINUED)
Deferred tax liabilities:
Premises and equipment - (15,017)
Unrealized gain on securities available for sale (9,796) -
Excess tax bad debt reserves (9,767) (15,303)
-------- -------
(19,563) (30,320)
-------- -------
Net deferred asset $119,450 $68,766
======== =======
The Bank's annual addition to its reserve for bad debts allowed under the
Internal Revenue Code may differ significantly from the bad debt expense used
for financial statement purposes. Such bad debt deductions for income tax
purposes are included in taxable income of later years only if the bad debt
reserves are used for purposes other than to absorb bad debt losses. Since the
Bank does not intend to use the reserve for purposes other than to absorb
losses, no deferred income taxes have been provided on the amount of bad debt
reserves for tax purposes that arose in tax years beginning before December 31,
1987, in accordance with SFAS No. 109. Therefore, retained earnings at September
30, 2001 and 2000, includes approximately $175,000, representing such bad debt
deductions for which no deferred income taxes have been provided.
The use of the reserve method of accounting for thrift bad debt reserves was
repealed for the tax year beginning after September 30, 1996. The law provides
that all thrifts must recapture into taxable income their post-1987 excess
reserves over a six-year period. At September 30, 1996, the Bank had $160,829 in
excess reserves of which $134,025 has been recaptured through September 30,
2001, and the remaining balance of $26,804 has been reflected in deferred income
taxes.
NOTE M - OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the years ended
September 30, 2001 and 2000:
2001 2000
-------- --------
FHLB bank account expense $ 23,361 $ 23,807
Advertising and promotion 28,403 26,860
Loan expenses 5,070 2,586
Professional and supervisory fees 48,737 37,188
Printing, stationery, and supplies 20,201 22,816
Telephone and postage 23,589 20,765
Seminars and training 19,727 19,998
Other insurance 15,430 10,014
Cash (over) and short 2,815 8,698
Bank transportation service 6,858 6,640
NOW expenses 35,144 28,777
ATM and internet banking 32,584 30,700
Other operating expenses 8,148 6,743
Non-operating expenses 1,592 2,604
-------- --------
$271,659 $248,196
======== ========
(F-21)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE N - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary regulator, The Office of Thrift Supervision (OTS). 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 classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 2001, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2001, the most recent notification from the OTS 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 total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) $5,302,582 20.4% $2,076,080 8.0% $2,595,100 10.0%
Tier I Capital
(to Risk-Weighted Assets) 5,136,468 19.8% 1,038,040 4.0% 1,557,060 6.0%
Tier I Capital
(to Adjusted Total Assets) 5,136,468 11.5% 1,782,170 4.0% 2,227,712 5.0%
Tangible Capital
(to Adjusted Total Assets) 5,136,468 11.5% 668,314 1.5% 2,227,712 5.0%
(F-22)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE N - REGULATORY MATTERS (CONTINUED)
The following is a reconciliation of GAAP capital to regulatory capital:
GAAP equity $5,163,908
Plus (Less):
Accumulated other comprehensive income (13,757)
Net unrealized losses on equity securities (13,683)
----------
Tangible capital 5,136,468
Plus:
Allowance for loan losses 166,114
----------
Total Risk-Based Capital $5,302,582
==========
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) $4,933,729 21.0% $1,879,920 8.0% $2,349,900 10.0%
Tier I Capital
(to Risk-Weighted Assets) 4,780,834 20.3% 939,960 4.0% 1,409,940 6.0%
Tier I Capital
(to Adjusted Total Assets) 4,780,834 11.2% 1,702,429 4.0% 2,128,036 5.0%
Tangible Capital
(to Adjusted Total Assets) 4,780,834 11.2% 638,411 1.5% 2,128,036 5.0%
The following is a reconciliation of GAAP capital to regulatory capital:
GAAP equity $4,777,395
Plus (Less):
Accumulated other comprehensive income 32,353
Net unrealized losses on equity securities (28,914)
----------
Tangible capital 4,780,834
Plus:
Allowance for loan losses 152,895
----------
Total Risk-Based Capital $4,933,729
==========
(F-23)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE O - BRANCH OFFICE LEASE
The Bank leases its branch office facility under an operating lease which
expired in August of 2001. The lease for the branch office facility is currently
operating on a year by year basis. Rent expense was $11,280 and $11,060 for the
years ended September 30, 2001 and 2000, respectively.
The minimum lease payments required under the operating lease for the year ended
September 30, 2002 is $11,280.
NOTE P - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying financial
statements. The financial commitments of the Bank are as follows:
The Bank has outstanding commitments to originate loans as follows:
2001 2000
-------- --------
Fixed:
First mortgage loans $236,500 $162,000
Second mortgage loans 39,000 17,000
Variable:
Home equity lines of credit 660,924 783,742
Commercial business loans 225,027 249,134
The range of interest rates on fixed rate first and second mortgage loan
commitments were 7.75% to 8.25% at September 30, 2001.
NOTE Q - RELATED PARTY TRANSACTIONS
Some of the Bank's directors, principal officers, and their related interests
had transactions with the Bank in the ordinary course of business during the
fiscal year 2001. All loans and commitments to loans in such transactions were
made on substantially the same terms, including collateral and interest rates,
as those prevailing at the time for comparable transactions. In the opinion of
management, these transactions do not involve more than normal risk of
collectibility or present other unfavorable features. It is anticipated that
further such extensions of credit will be made in the future.
The aggregate amount of credit extended to these directors and principal
officers was $338,796 and $373,510 at September 30, 2001 and 2000, respectively.
The following is an analysis of loans to these parties during the fiscal year
2001:
Balances at October 1, 2000 $373,510
Advances -
Repayments (34,714)
--------
Balances at September 30, 2001 $338,796
========
(F-24)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE R - DIRECTORS' RETIREMENT PLAN
Effective January 1, 2001, the Bank established a non-qualified defined benefit
retirement plan which provides benefits to its board of directors upon their
retirement from the board. The compensation cost is recognized on the projected
unit credit method over the remaining service lives of the individual directors.
The Bank recorded expense related to the plan totaling $21,549 during the year
ended September 30, 2001. The following table sets forth the plan's funded
status amounts recognized in the Bank's statement of financial position at
September 30, 2001.
2001
---------
Change in benefit obligation
Benefit obligation at beginning of year $ -
Service cost 4,398
Interest cost 6,405
Actuarial gain -
Assumption changes 129,858
Benefits paid (7,750)
---------
Benefit obligation at end of year $ 132,911
=========
Change in plan assets
Fair value of plan assets at beginning of year $ -
Actual return on plan assets -
Employer contribution 7,750
Benefits paid (7,750)
---------
Fair value of plan assets at end of year $ -
=========
Funded status $(132,911)
Unrecognized net actuarial loss 74
Unrecognized net transition obligation 119,038
---------
Prepaid (accrued) benefit cost $ (13,799)
=========
Weighted-average assumptions as of September 30
Discount rate 7%
Expected return on plan assets 7%
Rate of compensation increase 5%
Components of net periodic benefit cost
Service cost $ 4,398
Interest cost 6,405
Expected return on plan assets (74)
Amortization of prior service cost 10,820
---------
Net periodic benefit cost $ 21,549
=========
(F-25)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE S - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments (See Note
N). The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Bank upon extension of credit, varies and
is based on management's credit evaluation of the counterparty.
NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at September 30, are as follows:
2001 2000
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
FINANCIAL ASSETS
Cash and cash equivalents $ 1,059,956 $ 1,059,956 $ 988,608 $ 988,608
Interest-bearing deposits in other banks 400,000 400,000 597,000 597,000
Investment and mortgage backed securities 4,346,769 4,364,653 4,353,197 4,269,840
Net loans receivable 37,731,075 38,225,293 35,684,651 34,293,799
FHLB stock 312,600 312,600 307,300 307,300
Accrued interest receivable 296,496 296,496 279,904 279,904
----------- ----------- ----------- -----------
Total financial assets $44,146,896 $44,658,998 $42,210,660 $40,736,451
=========== =========== =========== ===========
FINANCIAL LIABILITIES
Deposits $39,037,658 $39,618,093 $36,010,585 $35,979,178
Advances from borrowers for taxes
and insurance 83,372 83,372 79,553 79,553
FHLB advances - - 1,450,000 1,450,000
Accrued interest payable 179,177 179,177 174,489 174,489
----------- ----------- ----------- -----------
Total financial liabilities $39,300,207 $39,880,642 $37,714,627 $37,683,220
=========== =========== =========== ===========
(F-26)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from or to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future estimated
losses and other factors, as determined through various option pricing formulas
or simulation modeling. As many of these assumptions result from judgments made
by management based upon estimates which are inherently uncertain, the resulting
estimated values may not be indicative of the amount realizable in the sale of a
particular financial instrument. In addition, changes in the assumptions on
which the estimated values are based may have a significant impact on the
resulting estimated values.
As certain assets and liabilities, such as deferred tax assets, premises and
equipment, and many other operational elements of the Bank are not considered
financial instruments, but have value, this estimated fair value of financial
instruments would not represent the full market value of the Bank.
Estimated fair values have been determined by the Bank using the best available
data, as generally provided in internal Bank reports and regulatory reports,
using an estimation methodology suitable for each category of financial
instruments. The estimation methodologies used are as follows:
Cash and Cash Equivalents, Interest-bearing Deposits in Other Banks, Accrued
Interest Receivable and Payable, and Advances from Borrowers for Taxes and
Insurance
The fair value approximate the current book value.
Investment Securities, Mortgage-backed Securities, and FHLB Stock
The fair value of investment and mortgage-backed securities is equal to the
available quoted market price. If no quoted market price is available, fair
value is estimated using the quoted market price for similar securities. Since
the FHLB stock is not actively traded on a secondary market and held exclusively
by member financial institutions, the estimated fair market value approximates
the carrying amount.
Loans
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying amounts. The fair values for
other loans are estimated using discounted cash flow analysis, based on interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Loan fair value estimates include judgments regarding
future expected loss experience and risk characteristics. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
(F-27)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposits
The fair values disclosed for demand deposits are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). The carrying amounts of variable-rate, fixed-term money- market
accounts and certificates of deposit approximate their fair values. Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.
FHLB Advances
The carrying amounts of short-term borrowings and notes payable approximate
their fair values.
Commitments to Extend Credit
These financial instruments are generally not subject to sale and estimated fair
values are not readily available. The carrying value, represented by the net
deferred fee arising from the unrecognized commitment, and the fair value
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note N to these financial
statements.
NOTE U - PLAN OF CONVERSION
On November 7, 2001, the Board of Directors of the Bank, subject to regulatory
approval, ratified a Plan of Conversion (the "plan") to convert from a federally
chartered mutual savings institution to a federally chartered stock savings
institution. The Bank will become a wholly owned subsidiary of a concurrently
formed holding company. The plan provides that the holding company will offer
nontransferable subscription rights to purchase common stock of the holding
company. The rights will be offered first to eligible account holders, the
tax-qualified employee stock benefit plans, supplemental eligible account
holders and other members. Any shares remaining may then be offered to the
general public.
The Plan provides for the establishment, upon completion of the conversion, of a
special "liquidation account" in an amount equal to the Bank's net worth as of
the latest practicable date prior to the conversion. This account is for the
benefit of eligible account holders and supplemental eligible account holders in
the event of liquidation of the Bank. The interest as to each deposit account
will be in the same proportion of the total liquidation account as the balance
of the deposit account on the qualifying dates was to the aggregate balance of
all deposit accounts of eligible account holders and supplemental account
holders on the qualifying dates. The liquidation account will be reduced in a
proportionate amount if the amount in any deposit account on any annual closing
date is less than it was on the respective qualifying dates. The liquidation
account will not be increased despite any increase in a deposit account after
the respective qualifying dates.
The regulations of the OTS prohibit the Bank from declaring or paying a cash
dividend if the effect thereof would cause the Bank's regulatory capital to be
reduced below either the amount required for the liquidation account or the
federal regulatory capital requirement in section 567.2 of the Rules and
Regulations of the OTS.
(F-28)
MT. TROY SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
September 30, 2001 and 2000
(As Restated)
NOTE U - PLAN OF CONVERSION (CONTINUED)
Costs associated with the conversion will be deferred and deducted from the
proceeds of the stock offering. If, for any reason, the offering is not
successful, the deferred costs will be charged to operations. As of September
30, 2001 there were no costs associated with the conversion that have been
deferred and presented as other assets.
NOTE V - RESTATEMENT OF FINANCIAL STATEMENTS - SEPTEMBER 30, 2000
The accompanying financial statements for fiscal 2000 have been restated to
correct an error in accounting for interest-bearing deposits in other banks made
prior to fiscal 2000. The effect of the restatement was to increase
comprehensive income for the year ended September 30, 2000 by $805, net of tax.
The restatement has no effect on net income for the year ended September 30,
2000. Retained earnings at the beginning of fiscal 2000 has been adjusted for
the effects of the restatement on prior years.
NOTE W - RESTATEMENT OF FINANCIAL STATEMENTS - SEPTEMBER 30, 2001
Subsequent to the issuance of the Bank's financial statements, management became
aware that the fair value of certain securities held-to-maturity was less than
their carrying amount, and the decline in fair value was other than temporary,
resulting in an impairment loss of $132,256 which was not included in the
September 30, 2001 financial statements. The inclusion of this loss in the
revised financial statements has the effect of decreasing assets by $68,194 at
September 30, 2001 and decreasing net income for fiscal 2001 by $68,194.
(F-29)
================================================================================ ==================================================
You should rely only on the information contained in this document. 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 the offer or solicitation would be unlawful. The affairs of Mt. Troy Up to 678,500 Shares
Savings Bank or Reserve Bancorp, Inc. may change after the date of this
prospectus. Delivery of this document and the sales of shares made hereunder
does not mean otherwise.
Reserve Bancorp, Inc.
TABLE OF CONTENTS
Page Holding Company for Mt. Troy Bank
Summary.......................................................................1
Risk Factors..................................................................7
Mt. Troy Savings Bank .......................................................11
Reserve Bancorp, Inc.........................................................11
Proposed Stock Purchases by Management.......................................12
Use of Proceeds..............................................................12
Dividend Policy..............................................................13
Market for the Stock.........................................................14 PROSPECTUS
Capitalization...............................................................15
Pro Forma Data...............................................................16
Historical and Pro Forma Capital Compliance..................................19
Recent Developments..........................................................20
Selected Financial and Other Data............................................25
Management's Discussion and Analysis of TRIDENT SECURITIES A Division of
Financial Condition and Results of Operations...............................26 McDonald Investments, Inc.
Business of Reserve Bancorp, Inc.............................................36
Business of Mt. Troy Savings Bank ...........................................37
Regulation...................................................................54
Taxation.....................................................................59 February 12, 2002
Management...................................................................60
The Conversion...............................................................66
The Offering.................................................................71
Restrictions on Acquisition of Reserve Bancorp, Inc..........................84
Description of Capital Stock.................................................87
Legal and Tax Opinions.......................................................88
Experts......................................................................88
Registration Requirements....................................................88
Where You Can Find Additional Information....................................88
Index to Financial Statements................................................90
Until the later of May 13, 2002, or 90 days after commencement of the offering, THESE SECURITIES ARE NOT DEPOSITS OR
all dealers effecting transactions in these securities, whether or not SAVINGS ACCOUNTS AND ARE NOT FEDERALLY
participating in this offering, may be required to deliver a prospectus. This is INSURED OR GUARANTEED.
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
================================================================================ ==================================================