As filed with the Securities and Exchange Commission on April 25, 1997
Registration No. 333-23147
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------
SISTERSVILLE BANCORP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 6035 31-1516424
- ---------------------------- --------------------------- ------------------
(State or Other Jurisdiction (Primary Standard Industry (I.R.S. Employer
of Incorporation or Classification Code Identification No.)
Organization) Number)
726 Wells Street, Sistersville, West Virginia 26175
(304) 652-3671
------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Mr. Stanley M. Kiser
President
Sistersville Bancorp, Inc.
726 Wells Street, Sistersville, West Virginia 26175
(304) 652-3671
------------------------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Please send copies of all communications to:
John J. Spidi, Esq.
Lloyd H. Spencer, Esq.
Malizia, Spidi, Sloane & Fisch, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
PROSPECTUS SISTERSVILLE BANCORP, INC.
(Proposed Holding Company for First Federal Savings Bank)
Anticipated Maximum of 690,000 Shares of Common Stock
$10.00 Purchase Price Per Share
Sistersville Bancorp, Inc., a Delaware corporation (the "Company"), is
offering between 510,000 and 690,000 shares (subject to adjustment up to 793,500
shares) of its common stock, par value $0.10 per share (the "Common Stock"), in
a subscription offering in connection with the conversion of First Federal
Savings and Loan Association of Sistersville (the "Association") from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank to be known as First Federal Savings Bank and the issuance of
all of the Association's outstanding capital stock to the Company pursuant to
the Association's Plan of Conversion (the "Plan"). The Company may offer shares
not subscribed for in the subscription offering in a community offering, as
described below. The simultaneous conversion of the Association to stock form,
the issuance of the Association's outstanding common stock to the Company, and
the Company's offer and sale of Common Stock are referred to herein as the
"Conversion." References herein to the Association refer to the Association in
mutual form and in stock form as the context may indicate.
Non-transferable rights to subscribe for the Common Stock have been
granted, in order of priority, to the Association's deposit account holders with
deposits of at least $50 as of August 31, 1995 ("Eligible Account Holders"),
tax-qualified employee plans of the Association, other deposit account holders
with deposits of at least $50 as of March 31, 1997 ("Supplemental Eligible
Account Holders"), and certain other depositors and certain borrowers of the
Association as of the voting record date, __________, 1997, for a special
meeting of members called to vote on the Conversion ("Other Members") in a
subscription offering (the "Subscription Offering"). Pursuant to Office of
Thrift Supervision ("OTS") regulations, these subscription rights are
non-transferable. Persons violating this prohibition against transfer may lose
their right to purchase stock in the Conversion and be subject to other possible
sanctions. Subject to the prior rights of holders of subscription rights and
market conditions during or at the completion of the Subscription Offering, the
Company may also offer the shares of Common Stock for sale on a best efforts
basis in a community offering to selected persons to whom this Prospectus is
delivered with a preference given to natural persons residing in Tyler County,
West Virginia (the "Community Offering"). Shares of Common Stock not subscribed
for in the Subscription and Community Offerings may be offered on a best efforts
basis by a selling group of broker-dealers in a Syndicated Community Offering
(the Subscription Offering, Community Offering and the Syndicated Community
Offering are collectively referred to as the "Offerings"). The Association and
the Company reserve the right, in their absolute discretion, to accept or
reject, in whole or in part, any or all orders in the Community Offering or
Syndicated Community Offering at the time of receipt of an order or as soon as
practicable following completion of the Offerings. See "The Conversion
- -Marketing Arrangements."
(Continued on next page)
-------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS," BEGINNING ON PAGE 1 OF THIS
PROSPECTUS. THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE, OR
OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FOR INFORMATION ABOUT SUBSCRIBING, PLEASE CALL THE STOCK INFORMATION CENTER AT
(___) ________.
=================================================================================================================
Purchase Estimated Underwriting Costs and Other Estimated
Price(1) Expenses(2) Net Proceeds(2)
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Per Share $10.00 $ 0.73(3) $ 9.27(3)
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Total Minimum (1) $5,100,000 $423,440 $4,676,560
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Total Midpoint (1) $6,000,000 $440,000 $5,560,000
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Total Maximum(1) $6,900,000 $456,560 $6,443,440
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Total Maximum, as adjusted (4) $7,935,000 $475,604 $7,459,396
=================================================================================================================
(1) Determined in accordance with an independent appraisal, dated as of
March ^14, 1997 by Ferguson & Company, LLP ("Ferguson"). The estimated
pro forma market value of the Common Stock ranges from $5,100,000 to
$6,900,000 ("Estimated Valuation Range" or "EVR") or between 510,000 and
690,000 shares of Common Stock at the purchase price of $10.00 per share
in the Offerings. See "The Conversion - Stock Pricing."
(2) Includes commissions and expenses to be paid to Trident that are
estimated to be $78,840, $95,400, $111,960, and $131,004, at the
minimum, midpoint, maximum, and maximum as adjusted, respectively, of
the EVR. A portion of such fees and expenses may be deemed to be
underwriting fees and Trident may be deemed to be an underwriter. Also
includes printing, postage, legal, appraisal, accounting, and filing
fees. Actual net proceeds and expenses may vary from estimated amounts.
If shares are sold in the Syndicated Community Offering, the
underwriting commissions and fees will be higher than the estimated
amounts included in the table.
(3) Assumes the sale of the midpoint number of shares. If the minimum,
maximum, or 15% above the maximum number of shares are sold, estimated
expenses per share would be $0.83, $0.66, or $0.60, respectively,
resulting in estimated net proceeds per share of $9.17, $9.34, or $9.40,
respectively.
(4) Gives effect to an increase in the number of shares which could occur
without a resolicitation of subscribers or any right of cancellation due
to an increase in the Estimated Valuation Range of up to 15% above the
maximum of the Estimated Valuation Range (for an issuance of up to
793,500 shares) to reflect changes in market and financial conditions
following commencement of the Offerings or to fill in part or in whole
the order of the ESOP. See "The Conversion - Stock Pricing."
TRIDENT SECURITIES, INC.
The date of this Prospectus is May __, 1997
The Association's Employee Stock Ownership Plan ("ESOP") intends to
subscribe for up to 8% of the total number of shares of Common Stock issued in
the Conversion. However, the ESOP may acquire some or all of its shares in the
open market after the Conversion. Shares sold above the maximum of the Estimated
Valuation Range may be sold to the ESOP to fill its subscription. With the
exception of the ESOP, no person may purchase more than 10,000 shares ($100,000)
of Common Stock and no person, together with associates and persons acting in
concert with such person, may purchase in the aggregate more than 10,000 shares
($100,000) of Common Stock sold in the Conversion. The minimum purchase is 25
shares. However, the Association and the Company in their sole discretion may
increase or decrease the purchase limitation without notice to members or
subscribers. See "The Conversion - Limitations on Purchases of Shares."
Trident Securities, Inc. ("Trident") has been engaged to consult with
and advise the Association and the Company in connection with the Conversion and
the sale of shares of the Common Stock in the Offerings. Trident has agreed to
assist the Company and the Association in the sale of the Common Stock in the
Subscription Offering. In addition, Trident has agreed to manage the Community
Offering and the Syndicated Community Offering, if any. Neither Trident nor any
broker-dealer participating in a Syndicated Community Offering will have any
obligation to purchase or accept any shares of Common Stock in the Conversion.
Trident may be indemnified against certain liabilities, including liabilities
that may arise under the Securities Act of 1933, as amended. See "Pro Forma
Data," "The Conversion - Plan of Distribution" and "- Marketing Arrangements."
To subscribe for shares of Common Stock in the Subscription Offering,
the Company must receive an executed order form and certification form (the
order form and certification form are referred to together as the "Order Form"),
together with full payment of $10.00 per share (or appropriate instructions
authorizing a withdrawal from a deposit account at the Association) for all
shares for which subscription is made, at the Association's office, by 12:00
p.m., Eastern Standard Time, on ___________, 1997, unless the Subscription
Offering is extended, at the discretion of the Board of Directors, up to an
additional 45 days with the approval of the OTS, if necessary, but without
additional notice to subscribers (the "Expiration Date"). Subscriptions paid by
cash, check, bank draft, or money order will be placed in a segregated account
at the Association and will earn interest at the Association's passbook rate
from the date of receipt until completion or termination of the Conversion.
Payments authorized by withdrawal from deposit accounts at the Association will
continue to earn interest at the contractual rate until the Conversion is
completed or terminated; these funds will be otherwise unavailable to the
depositor until such time. Authorized withdrawals from certificate accounts at
the Association for the purchase of Common Stock will be permitted without the
imposition of early withdrawal penalties or loss of interest.
To order Common Stock in the Community Offering, or Syndicated Community
Offering, if any, an executed Order Form and account withdrawal authorization
(if applicable) and certification must be received by Trident prior to the
termination of the Community, or Syndicated Community Offering. The date by
which orders must be received in the Community, or Syndicated Community
Offering, if any, will be set by the Company at the time of such offering
provided that, if the Offerings are extended beyond __________, 1997, each
person who has submitted an order will have the right to modify or rescind his
or her order. In the event of such an extension, funds submitted by persons to
order shares will be returned promptly with interest to each person unless he or
she affirmatively indicates otherwise. See "The Conversion - Community Offering"
and "-Syndicated Community Offering."
Prior to the Offerings there has not been a public market for the Common
Stock, and there can be no assurance that resales of the Common Stock can be
made at or above $10.00 per share (the "Purchase Price"). Given the relatively
small size of the Offerings and the small number of anticipated purchasers,
management does not expect that an active and liquid trading market for the
Common Stock will develop, or if a market develops, that it will continue. See
"Market for the Common Stock."
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SISTERSVILLE
================================================================================
[MAP]
================================================================================
THE CONVERSION IS CONTINGENT UPON THE RECEIPT OF ALL REQUIRED REGULATORY
APPROVALS, APPROVAL OF THE PLAN BY THE MEMBERS OF THE ASSOCIATION, AND THE SALE
OF AT LEAST THE MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN.
- --------------------------------------------------------------------------------
SUMMARY
The following summary does not purport to be complete, and is qualified
in its entirety by more detailed information and the Consolidated Financial
Statements of the Association and the Notes thereto appearing elsewhere in this
Prospectus.
Sistersville Bancorp, Inc.: The Company was organized under Delaware
law in March 1997 at the direction of the
Board of Directors of the Association to
acquire all of the capital stock that the
Association will issue upon its conversion
from the mutual to stock form of ownership.
The Company has not engaged in any
significant business to date.
Management believes that the holding company
structure will provide flexibility for
possible diversification or expansion of
business activities, although there are no
current arrangements, understandings, or
agreements regarding any such opportunities.
Subject to limitations on repurchases, the
holding company structure will also enable
the Company to repurchase its own stock
without adverse tax consequences. See
"Sistersville Bancorp, Inc." and "Business
of the Company."
First Federal Savings and Loan The Association, a federally chartered
Association of Sistersville: mutual savings and loan association,
operates a traditional savings association
business, attracting deposit accounts from
the general public and using those deposits,
together with other funds, primarily to
originate and invest in fixed-rate loans
secured by single-family residential real
estate. At December 31, 1996, the
Association had total assets of $26.26
million, total deposits of $21.20 million,
and equity of $4.75 million. See "First
Federal Savings and Loan Association of
Sistersville" and "Business of the
Association."
The Plan and Approval by Members: The Board of Directors of the Association
unanimously adopted the Plan on December 5,
1996. Pursuant to the Plan, the Association
will convert from a federal mutual savings
and loan association into a federal stock
savings bank to be known as "First Federal
Savings Bank" and will become a wholly owned
subsidiary of the Company which will issue
Common Stock in the Offerings. The Plan must
be approved by the affirmative vote of the
majority of total votes eligible to be cast
by the Association's members. See "The
Conversion."
The Offerings and the Purchase Between 510,000 and 690,000 shares of Common
Price: Stock are being offered at $10.00 per share
in the Offerings. The maximum number of
shares sold in the Offerings may be
increased to up to 793,500 shares without a
resolicitation of subscribers in the event
of an increase in the pro forma market value
of the Association to an amount not more
than 15% above the maximum of the EVR. See
"The Conversion - Stock Pricing" and "-
Number of Shares to be Issued in the
Conversion."
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(i)
- --------------------------------------------------------------------------------
Distribution of Common Stock The shares of Common Stock will first be
and Purchase Priorities: offered in the Subscription Offering
according to the following priorities: (i)
Eligible Account Holders; (ii) the ESOP;
(iii) Supplemental Eligible Account Holders;
and (iv) Other Members. The Company may
offer shares of Common Stock for sale in a
Community Offering or in a Syndicated
Community Offering through selected dealers.
See "The Conversion - Community Offering"
and "-Syndicated Community Offering." Any
shares of Common Stock sold in excess of the
maximum of the EVR may be first sold to the
ESOP prior to satisfying unfilled orders
from Eligible Account Holders. See "The
Conversion - Subscription Rights and the
Subscription Offering."
Transferability of Right to Depositors and certain borrowers may not
Purchase in the Offerings: transfer or enter into an agreement to
transfer the right to subscribe for shares
of Common Stock in the Subscription
Offering. Persons violating this prohibition
against transfer may lose their right to
purchase stock in the Conversion and may be
subject to other possible sanctions. See
"The Conversion - Subscription Rights and
the Subscription Offering - Restrictions on
Transfer of Subscription Rights and Shares."
Purchase Limitations: The purchase limit for a person with
subscription rights is 10,000 shares
($100,000). The maximum number of shares of
Common Stock that may be subscribed for or
purchased in the Offerings by any person (or
persons through a single account) together
with any associate or group of persons
acting in concert may not exceed 10,000
shares ($100,000), except for the ESOP,
which intends to subscribe for up to 8% of
the Common Stock issued. No assurances may
be given that the number of shares purchased
by the ESOP will not change. The Association
may, in its sole discretion, without further
notice to or solicitation of prospective
purchasers, increase such maximum purchase
limitation to up to 5.0% of the total number
of shares offered or decrease the maximum
purchase limitation to as low as 1.0% of the
maximum number of shares offered. No person
may purchase fewer than 25 shares in the
Offering. See "The Conversion - Limitations
on Purchases of Shares."
The Common Stock: Each share of Common Stock will have the
same relative rights as, and will be
identical in all respects with, each other
share of Common Stock in the Offerings. All
of the issued and outstanding voting stock
of the Association will be held by the
Company. The Common Stock of the Company
represents nonwithdrawable capital, is not
an account of an insurable type, and is not
insured by the OTS, the Federal Deposit
Insurance Corporation ("FDIC"), the Savings
Association Insurance Fund ("SAIF"), or any
other government agency or fund. Upon
payment of the Purchase Price for the Common
Stock, all such shares will be fully paid
and nonassessable. See "Description of
Capital Stock."
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(ii)
- --------------------------------------------------------------------------------
Dividends: The Board of Directors of the Company
currently intends to establish a dividend
policy following the Conversion to pay
regular cash dividends at an initial annual
rate of approximately 2.4% of the $10.00 per
share purchase price of a share of Common
Stock in the Conversion ($0.24 per share),
with the first dividend being declared and
paid following the second full quarter after
the Conversion. It is anticipated that
regular cash dividends, if paid, will be
declared semi-annually. If a dividend is
paid in the future, the dividend will be
subject to determination and declaration by
the Board of Directors, which will take into
account a number of factors, including the
financial condition of the Company and
regulatory restrictions on the payment of
dividends by the Association to the Company,
on which dividends the Company eventually
may be primarily dependent. There can be no
assurance that dividends will be paid on the
Common Stock or that, if paid, such
dividends will not be reduced or eliminated
in future periods. See "Dividends."
Expiration Date of Subscription The Subscription Offering will terminate at
Offering: 12:00 noon, Eastern Time, on ___________,
1997 unless the Subscription Offering is
extended, at the discretion of the Board of
Directors, up to an additional 45 days with
the approval of the OTS, if necessary, but
without additional notice to subscribers.
See "The Conversion - Subscription Rights
and the Subscription Offering."
Conditions to Closing of the Consummation of the Offerings is subject to
Offerings: (i) consummation of the Conversion, which is
conditioned on, among other things, approval
of the Plan by the members of the
Association and the OTS, (ii) the receipt by
the OTS of an update to the Association's
appraisal of its pro forma market value and
authorization by the OTS to sell Common
Stock within the range set forth in the
update to that appraisal, and (iii) the sale
of a minimum of 510,000 shares of Common
Stock. See "The Conversion - Conditions and
Termination." There can be no assurances
that all of these conditions will be met.
Use of Proceeds: Net proceeds from the sale of the Common
Stock are estimated to be between
approximately $4.68 million and $6.44
million depending on the number of shares of
Common Stock sold and the estimated expenses
of the Offerings. The Company intends to use
approximately 50% of the net proceeds from
the Offerings to purchase 100% of the to be
outstanding common stock of the Association
and retain the remainder as its initial
capitalization. The portion of the net
proceeds retained by the Company will
initially be invested in U.S. government and
federal agency securities, high- grade,
short term marketable securities, deposits
of, or loans to, the Association, or a
combination thereof and ultimately may be
used to support the future expansion of
operations. Additionally, the Company
intends to fund the ESOP purchases through a
loan to the ESOP from net proceeds retained
by the Company. The portion of the net
proceeds from the Offerings exchanged by the
Company for
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(iii)
- --------------------------------------------------------------------------------
all of the outstanding capital stock of the
Association will be used for general
corporate purposes and will increase the
Association's total capital to support
expanded lending, internal growth and
possible external growth through
acquisitions of branch offices, expansion
into new lending markets, and other
acquisitions. Net proceeds received by the
Association may also be used to make
contributions to repay the ESOP loan and
will initially be invested in high-grade,
short term investment securities. See "Use
of Proceeds."
Management Purchases: Directors, officers, and their associates,
collectively intend to subscribe for
approximately ^33,750 shares of Common Stock
at the Purchase Price. See "The Conversion -
Shares to be Purchased by Management
Pursuant to Subscription Rights."
Potential Management Benefits: ESOP. The ESOP is expected to purchase up to
8% of the shares of Common Stock sold in the
Conversion, which are expected to be awarded
to employees as compensation over a period
of ten years without payment by such persons
of cash consideration. See "Management of
the Association - Other Benefits - Employee
Stock Ownership Plan."
Restricted Stock Plan. Following the
completion of the Conversion, subject to
stockholder and Board of Director approvals
and OTS review, the Association may adopt a
restricted stock plan (the "RSP") which
would acquire an amount of Common Stock
equal to 4.0% of the shares sold in the
Conversion. Assuming a $10.00 per share
grant price and the issuance of Common Stock
at the midpoint of the EVR, the aggregate
value to participants could total
approximately $240,000. Under current OTS
guidelines, plans implemented within one
year following consummation of the
Conversion, must provide that no officer may
receive more than 25%, and directors who are
not employees may not receive more than 5%
individually or 30% in the aggregate, of
shares purchased by the RSP. See "Pro Forma
Data" and "Management of the Association -
Proposed Future Stock Benefit Plans -
Restricted Stock Plan" and "- Restrictions
on Benefit Plans."
Stock Option Plan. Following the completion
of the Conversion, subject to stockholder
and Board of Director approval and OTS
review, the Association may establish a
Stock Option Plan (the "Option Plan"),
whereby options may be granted to purchase
additional authorized but unissued shares of
Common Stock that equal in the aggregate up
to 10% of the stock sold in the Conversion.
Alternatively, such Common Stock may be
purchased in the open market by the Company.
See "Pro Forma Data" and "Management of the
Association - Proposed Future Stock Benefit
Plans - Stock Option Plan."
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(iv)
- --------------------------------------------------------------------------------
Independent Valuation: Ferguson, an independent appraisal firm, has
determined that the estimated pro forma
market value of the Association was within
an EVR from $5,100,000 to $6,900,000 with a
midpoint of $6,000,000 as of March 14, 1997.
The independent valuation will be updated
immediately prior to the consummation of the
Offerings. See "The Conversion - Stock
Pricing" and "- Number of Shares to be
Issued in the Conversion."
Risk Factors: See "Risk Factors" for a discussion of the
following factors which should be considered
by prospective investors: lack of liquidity
for the Common Stock; decreased return on
equity immediately after Conversion;
potential impact of changes in interest
rates; lack of growth in the Association's
market area; decrease in profitability since
1994; anti-takeover provisions; possible
voting control by management and the board
of directors; possible dilutive effect of
RSP and stock options and effect of
purchases by the RSP and ESOP; possible
negative impact caused by regulatory
oversight; and possible adverse income tax
consequences of the distribution of
subscription rights.
Market for Common Stock: Neither the Company nor the Association has
ever issued capital stock. Consequently,
there is no established market for the
Common Stock at this time. Given the
relatively small size of the offering, it is
not expected that an active and liquid
trading market for the Common Stock will
develop or that, if developed, it will
continue. Following the completion of the
Offerings, the Company anticipates that the
Common Stock will be traded on the over-the-
counter market with quotations available
through the OTC "Electronic Bulletin Board,"
under the symbol "_______." Accordingly,
prospective purchasers of the Common Stock
should consider the potentially illiquid
nature of an investment in the Common Stock
and recognize that the absence of an
established market might make it difficult
to buy or sell the Common Stock. See "Risk
Factors -- Lack of Liquidity for the Common
Stock" and "Market for the Common Stock."
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(v)
- --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA
Set forth below are summaries of historical financial and other data
regarding the Association. This information is derived in part from, and should
be read in conjunction with, the Consolidated Financial Statements and Notes to
the Consolidated Financial Statements of the Association presented elsewhere in
this Prospectus. Consolidated historical financial and other data regarding the
Association at or for the six months ended December 31, 1996 and 1995 have been
prepared by the Association without audit and may not be indicative of results
on an annualized basis or any other period. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) that are necessary
for a fair presentation for such periods or dates have been made. The results of
operations for the nine months ended December 31, 1996 are not necessarily
indicative of the results that may be expected for the entire year or any other
period.
Selected Financial Data
The following table sets forth certain information concerning the
financial position of the Association at the dates indicated:
December 31, At March 31,
------------ --------------------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Total assets............... $26,258 $25,967 $26,054 $23,792 $21,283 $20,682
Loans receivable, net..... 21,635 $20,039 17,686 14,205 12,814 13,044
Mortgage-backed securities 342 377 437 502 630 756
Investments(1)............. 3,643 4,859 ^ 7,430 8,620 7,464 6,463
Cash - non-interest bearing 82 98 80 80 78 80
Savings deposits........... 21,199 21,091 19,810 19,797 17,570 17,161
Other borrowings........... -- -- 1,685 -- -- --
Retained Earnings(2)....... 4,747 4,548 4,277 3,836 3,587 3,371
Number of:
Full service offices....... 1 1 1 1 1 1
Real estate loans
outstanding............... 489 482 447 417 395 393
Deposit accounts........... 3,203 3,264 2,972 2,850 2,868 2,974
- -------------------
(1) Includes FHLB stock, FHLMC stock and interest bearing deposits in other
financial institutions.
(2) Includes unrealized gain on securities available for sale, net of
applicable income taxes for March 31, 1995 through December 31, 1996.
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(vi)
- --------------------------------------------------------------------------------
Summary of Operations
The following table summarizes the Association's results of operations
for each of the periods indicated:
Nine Months Ended
December 31, Year Ended March 31,
--------------------- ---------------------------------------
1996 1995 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ -----
(In Thousands)
Interest income.................... $1,531 $1,474 $1,973 $1,878 $1,708 $1,690 $1,842
Interest Expense.................. 736 736 977 841 762 815 1,038
----- ----- ----- -----
Net interest income.............. 795 738 996 1,037 946 875 804
----- ----- ----- ----- --- --- ---
Provision for loan losses.......... 6 6 7 28 10 23 45
------ ------ ------ ------ -- -- --
Net interest income after
provision for loan losses........ 789 732 989 1,009 936 852 759
----- ----- ----- ----- --- --- ---
Non-interest income:
Loan fees and service charges.... 16 15 20 18 16 19 15
Gain (loss) on sale of real estate,
net............................. 4 1 - 4 2 5 3
Gain (loss) on sale of investments,
net............................. - (8) (8) - - - -
Other income..................... 1 2 4 4 2 1 4
------ ------ ------ ------ ---- ----- -----
Total other income............. 21 10 16 26 20 25 22
------ ------ ------ ------ ----- ----- ------
Non-interest expense:
Compensation and employee
benefits........................ 310 291 393 377 419 335 314
Occupancy and equipment.......... 57 37 53 42 32 23 35
Deposit insurance premiums(1).... 163 34 46 45 12 16 22
Real estate owned operations..... - - - - - - -
Other general and administrative. 162 151 203 215 171 167 163
----- ----- ----- ----- ----- --- ---
Total non-interest expense..... 692 513 695 679 634 541 534
----- ----- ----- ----- --- --- ---
Income before income taxes......... 118 229 310 356 322 336 247
Provision for federal income taxes. 32 81 113 126 78 120 101
------ ------ ----- ----- ---- ----- -----
Net income before cumulative effect
of change in accounting principle 86 148 197 230 244 216 146
----- ----- ----- ----- ----- ----- -----
Cumulative effect of change in
accounting ^ principle........... - - - - 4 - -
---- ----- ----- ----- ----- ----- -----
Net income......................... $ 86 $ 148 $ 197 $ 230 $ 248 $ 216 $ 146
===== ===== ===== ===== ===== ==== =====
^---------------
(1) Includes a non-recurring expense of $129,000 for the nine months ended
December 31, 1996 for a one-time deposit premium to recapitalize the
Savings Association Insurance Fund.
- --------------------------------------------------------------------------------
(vii)
- --------------------------------------------------------------------------------
Key Operating Ratios
The table below sets forth certain performance and financial ratios of
the Association for the periods indicated.
At or For the
Nine Months Ended
December 31, At or For the Year Ended March 31,
-------------------- ------------------------------------------------------
1996^(1) 1995(1) 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (net income
divided by average total assets)(2) 0.44% 0.77% 0.77% 0.92% 1.10% 1.04% 0.72%
Return on average equity (net income
divided by average equity)(2)... 2.49 4.51 4.47 5.60 6.74 ^6.25 4.49
^ Net interest rate spread........ 3.37 3.14 3.19 3.59 3.64 3.51 3.07
Net yield on average interest-earning
assets.......................... 4.17 3.93 3.98 4.25 4.29 4.27 4.03
^ Average interest-earning assets to
average interest-bearing liabilities 120.52 120.19 120.24 119.30 118.77 119.02 118.37
Net interest income after provision ^
for possible loan losses, to total
other expenses ^(2)............. 114.00 140.42 140.83 148.53 147.63 157.49 142.13
Non-interest expense to average assets
(2) 3.54 2.72 2.75 2.73 2.82 2.59 2 .62
Efficiency ratio (2)(3)........... 44.65 35.18 35.34 63.97 36.69 31.55 28.65
Capital Ratios:
Average equity to average assets ratio
(average equity divided by average
total assets)................... 17.67 17.10 17.22 16.51 16.38 16.55 15.99
Equity to assets at period end.... 18.08 17.65 17.51 16.42 16.12 16.85 16.30
Asset Quality Ratios:
Non-performing loans to total assets 0.31 0.07 0.06 0.13 0.11 0.16 0.55
Non-performing loans to total loans 0.38 0.09 0.08 0.19 0.18 0.27 0 .87
Allowance for loan losses to total
loans........................... 0.72 0.78 0.75 0.81 0.79 0.86 0.70
Allowance for loan losses to total
non-performing loans............ 197.56 911.76 975.00 441.18 480.00 323.53 79.82
Allowance for loan losses to total
non-performing assets (4)....... 197.56 329.79 346.67 238.10 222.22 174.60 45.73
- -----------------------
(1) Ratios for the nine 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.
(2) Includes a non-recurring expense of $129,000 for the nine months ended
Deecember 31, 1996 for a one-time deposit premium to recapitalize the
Savings Association Insurance Fund.
(3) Operating expenses as a percent of net interest income plus non-interest
income.
(4) Non-performing assets include non-accrual loans, accruing loans more
than 90 days past due and real estate acquired in settlement of loans.
- --------------------------------------------------------------------------------
(viii)
- --------------------------------------------------------------------------------
RECENT SELECTED FINANCIAL AND OTHER DATA
Set forth below are summaries of historical financial and other data
regarding the Association. This information is derived in part from, and should
be read in conjunction with, the Consolidated Financial Statements and Notes
thereto of the Association presented elsewhere in this Prospectus. The
information at March 31, 1997, and for the three month periods ending March 31,
1997 and 1996 are unaudited and, in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the results for the unaudited periods have been made.
Selected Financial Data
The following table sets forth certain information concerning the
financial position of the Association at the dates indicated:
At At
March 31, March 31,
1997 1996
---- ----
(Dollars in Thousands)
Total assets.................................... $26,817 $25,967
Loans receivable, net........................... 21,725 20,039
Mortgage-backed securities...................... 328 377
Investments(1).................................. 4,033 4,859
Cash - non-interest bearing..................... 81 98
Savings deposits................................ 21,700 21,091
Other borrowings................................ -- --
Retained earnings(2)............................ 4,803 4,548
Full service offices............................ 1 1
- -------------------
(1) Includes FHLB stock, FHLMC stock, and interest-bearing deposits in other
financial institutions.
(2) Includes unrealized gain on securities available-for-sale, net of
applicable income taxes.
- --------------------------------------------------------------------------------
(ix)
- --------------------------------------------------------------------------------
Summary of Operations
The following table summarizes the Association's results of operations
for each of the periods indicated:
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------------- ------------------------------
1997 1996 1997 1996
------ ------ ------ -----
(In Thousands)
Interest income................ $513 $499 $2,041 $1,973
Interest expense............... 244 241 980 977
Net interest income.......... 269 258 1,061 996
Provision for loan losses...... 2 2 8 7
Net interest income after
provision for loan losses... 267 256 1,053 989
Non-interest income............ 6 6 26 16
Non-interest expense(1)........ 180 181 869 695
Income before income taxes... 93 81 210 310
Provision for federal income
tax expense................... 31 32 63 113
Net income................. $62 $49 $147 $197
- --------------------
(1) Includes a non-recurring expense of $129,000 for the twelve months ended
March 31, 1997 for a one-time deposit premium to recapitalize the
Savings Association Insurance Fund.
Regulatory Capital Requirements
Set forth below are the Association's regulatory capital ratios at March
31, 1997, as compared to the minimum regulatory capital requirements imposed by
the OTS.
Requirement Actual
Tangible capital......... 1.50% 16.67%
Core capital............. 3.00% 16.67%
Risk-based capital....... 8.00% 35.76%
- --------------------------------------------------------------------------------
(x)
- --------------------------------------------------------------------------------
Key Operating Ratios
The table below sets forth certain ratios of the Association at the
dates or for the periods indicated. Ratios for the three months ended March 31,
1997 and 1996, are annualized, where appropriate.
Three Months Ended Years Ended
March 31, March 31,
1997 1996 1997 1996
---- ---- ---- ----
Net interest rate spread............ 3.36% 3.36% 3.36% 3.19%
Net yield on average
interest-earning assets.......... 4.14% 4.15% 4.15% 3.98%
Average interest-earning
assets to interest-bearing
liabilities...................... 120.75% 120.44% 120.57% 120.23%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT SELECTED DATA
Comparison of Financial Condition at March 31, 1997 and 1996
Total assets increased by $.9 million or 3.3% due primarily to net loan growth
of $1.7 million or 8.4% in residential mortgages and consumer loans. This
increase was offset by decreases in investments of $.8 million due to
maturities.
Deposits increased by $.6 million with nominal changes in all deposit
categories.
Retained earnings increased by $255,000 as a result of earnings for the year
ended March 31, 1997, of $147,000 and unrealized gains on investment securities
available-for-sale net of deferred income taxes of $108,000. Earnings for the
year ended March 31, 1997, were negatively impacted as a result of a one-time
charge of $129,000 recorded in the quarter ended September 30, 1996, for a
deposit premium to recapitalize the SAIF.
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996
Net Income. Net income increased by $13,000 or 26.5% to $62,000 for the
three months ended March 31, 1997, as compared to $49,000 for the three months
ended March 31, 1996. The increase was primarily due to an increase in interest
income on loans as a result of a $1.8 million increase in the average balance of
loans.
Net Interest Income. Net interest income increased $11,000 or 4.2% from
$258,000 for the three months ended March 31, 1996 to $269,000 for the three
months ended March 31, 1997. The increase was primarily due to an increase in
the average balance of loans outstanding of $1.8 million or 9% during the three
months ended March 31, 1997, compared to the three months ended March 31, 1996.
The Association's net interest rate spread remained constant at 3.36% between
the three month periods ended March 31, 1997 and 1996.
- --------------------------------------------------------------------------------
(xi)
- --------------------------------------------------------------------------------
Interest Income. Interest income increased $14,000 for the three months
ended March 31, 1997 compared to the three months ended March 31, 1996. The
increase in interest income was the result of an increase in the average balance
of loans outstanding of $1.8 million to $21.7 million from $19.9 million during
the 1996 period. The increase was partially offset by a decline in the average
annual yield of 8.84% for the three months ended March 31, 1996, to 8.56% for
the three months ended March 31, 1997.
Interest Expense. Total interest expense increased $3,000 from $241,000
for the three months ended March 31, 1996 to $244,000 for the three months ended
March 31, 1997. The increase in interest expense was attributable to an increase
in the average balance of deposits outstanding of $.8 million offset by a
decrease in the cost of funds of 13 basis points.
Provisions for Loan Losses. The provision for loan losses was $2,000 for
the three months ended March 31, 1997 and 1996.
Noninterest Income. Noninterest income remained unchanged for the
periods March 31, 1997, and March 31, 1996. Noninterest income is comprised
primarily of service charges on deposit accounts.
Noninterest Expense. Noninterest expense decreased $1,000 from $181,000
for the three months ended March 31, 1996, to $180,000 for the same period in
1997.
Income Taxes. Income tax expense amounted to $31,000 for the three
months ended March 31, 1997, and $32,000 for the three months ended March 31,
1996.
Comparison of Operating Results for the Year Ended March 31, 1997 and 1996.
Net Income. Net income decreased $50,000 or 25.4% from $197,000 for the
year ended March 31, 1996 to $147,000 for the year ended March 31, 1997. The
decrease was due primarily to an increase in non-interest expenses of $174,000
or 25% during the 1997 period. The increase in non-interest expense in fiscal
1997 was partially offset by a $65,000 increase in net interest income. The
increase in non-interest expense in fiscal 1997 was primarily due to a $129,000
non-recurring special assessment recorded at September 30, 1996 for the
recapitalization of the SAIF.
Net Interest Income. Net interest income increased $65,000 or 6.5% from
$996,000 for the year ended March 31, 1996 to $1,061,000 for the year ended
March 31, 1997. The increase was primarily due to an increase in the average
balance of interest-bearing assets of $.6 million or 2.3% from 1996 to 1997 and
by an increase in the net interest rate spread from 3.19% to 3.36%.
Interest Income. Interest income increased $68,000 for the year ended
March 31, 1997 compared to the year ended March 31, 1996. The increase in
interest income was the result of an increase in the average balance of
interest-earning assets of $.6 million to $25.6 million during the 1997 period
from $25.0 million during the 1996 period.
Interest Expense. Total interest expense increased $3,000 from $977,000
for the year ended March 31, 1996 to $980,000 for the year ended March 31, 1997.
The increase in interest expense was attributable to an increase in the average
balance of deposits outstanding of $.8 million offset by a decrease in the cost
of funds of 6 basis points.
- --------------------------------------------------------------------------------
(xii)
- --------------------------------------------------------------------------------
Provision for Loan Losses. The provision for loan losses was $8,000 for
the year ended March 31, 1997, and $7,000 for the year ended March 31, 1996.
Noninterest Income. Noninterest income increased by $10,000 primarily
due to a gain on the sale of real estate owned of $4,000 in fiscal 1997. In
addition, the Association recorded a loss on sale of investment securities
during 1996.
Noninterest Expense. Noninterest expense increased by $174,000 primarily
as a result of a one-time charge of $129,000 to recapitalize the SAIF.
Additionally, occupancy costs increased by $12,000 resulting from a recent
remodeling project at the Association's facility.
Income Taxes. Income tax expense amounted to $63,000 for the year ended
March 31, 1997, and $113,000 for the year ended March 31, 1996. Income tax
expense declined due to lower income.
- --------------------------------------------------------------------------------
(xiii)
RISK FACTORS
Before investing in shares of the Common Stock offered hereby,
prospective investors should carefully consider the matters presented below in
addition to those discussed elsewhere in this Prospectus.
Lack of Liquidity for the Common Stock
It is unlikely that the Common Stock will be listed on The Nasdaq Stock
Market ("Nasdaq") or that its price will be quoted on a regular basis. Upon the
consummation of the Conversion, the Association will review the eligibility of
the Common Stock for inclusion on Nasdaq. In the event that the Common Stock is
eligible for inclusion on Nasdaq, the Company expects that it will make an
application to have the Common Stock quoted on Nasdaq. There can be no
assurance, however, that any such application will be approved or that the
Common Stock will be quoted on Nasdaq. The Association expects that the Common
Stock will be traded on the over-the-counter market and trades may be reported
on the Pink Sheets of the National Quotation Bureau. It is also expected that
trades in the Common Stock may be quoted on the OTC Bulletin Board of Nasdaq.
The development of a public trading market depends upon the existence of willing
buyers and sellers, the presence of which is not within the control of the
Company, the Association or any market maker. Given the relatively small size of
the offering and the small number of purchasers, management does not anticipate
that an active and liquid trading market for the Common Stock will develop, or
if a market develops, that it will continue. This may affect a stockholder's
ability to obtain timely or accurate quotations. The absence of an active
trading market may make it difficult to sell the Common Stock after the
Conversion. There is no assurance that persons purchasing shares will be able to
sell at a price equal to or above the Purchase Price. See "Market for Common
Stock."
Decreased Return on Equity Immediately After Conversion
As a result of the Conversion, the Company, on a consolidated basis with
the Association, will have equity that is substantially greater than the equity
of the Association prior to the Conversion. Accordingly, the increase in equity
coupled with the limited loan opportunities in the Association's market area are
likely to adversely affect the Company's ability to attain a return on average
equity (net income divided by average equity) at historical levels, absent a
corresponding increase in net income. The Company and the Association initially
intend to invest the net proceeds in short to medium term investments which
generally have lower yields then residential mortgage loans. There can be no
assurance that the Company will be able to increase net income in future periods
in amounts commensurate with the increase in equity resulting from the
Conversion. See, also, "Pro Forma Data."
Potential Impact of Changes in Interest Rates
The Association's profitability, like that of most financial
institutions, is dependent to a large extent upon its net interest income, which
is the difference between its interest income on interest earning assets, such
as loans and securities, and its interest expense on interest bearing
liabilities, such as deposits and other borrowings. Generally, during periods of
increasing interest rates, the Association's interest rate sensitive liabilities
would reprice faster than its interest rate sensitive assets, causing a decline
in the Association's interest rate spread and margin. This would result in an
increase in the Association's cost of funds that would not be immediately offset
by an increase in its yield on interest earning assets. An increase in the cost
of funds without an equivalent increase in the yield on interest earning assets
would tend to reduce net interest income. The Association primarily originates
fixed-rate loans, which do not adjust upward during periods of increasing
interest rates. As a result of the increase in interest rates, the Association's
net interest rate spread decreased between the fiscal years ended March 31, ^
1996 and March 31, ^ 1995 to 3.19% from 3.59%. For additional discussion of this
interest rate risk, see
1
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Net Portfolio Value." For additional information on the
Association's management of its interest bearing liabilities and interest
earning assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset/Liability Management."
Lack of Growth in the Association's Market Area
Economic growth in the Association's market area remains dependent upon
the local economy. The deposit and loan activity of the Association is affected
by economic conditions in its market area. During the early to mid 1980s this
area experienced an economic recession due to significant downsizing in the
steel industry and the population has experienced modest declines during recent
years. See "Business of the Association - Competition" and "- Market Area."
Decrease in Profitability Since 1994
For the fiscal years ended March 31, ^ 1996, 1995, and ^ 1994, the
Association reported net income of ^ $197,000, $230,000 and ^ $248,000,
respectively, and a return on average assets of ^ .77%, .92% and ^ 1.1%,
respectively. These decreases in net income and return on average assets were
partially a result of rising interest rates. Other factors include lower income
tax liability in 1994 due to an over-estimation of 1993 income taxes based in
part on fiscal period effective tax rates, and a loss on the sale of an
investment in fiscal year 1996 of approximately $8,000. During the nine months
ended December 31, 1996 and 1995 ^, the Association reported net income of
$86,000 and $148,000 ^, respectively, and a return on average assets of .44% and
.77% ^, respectively. During the nine months ended December 31, 1996, net income
was negatively impacted by the $129,000 pre-tax one time SAIF assessment. A
.657% assessment on deposits as of March 31, 1995 was levied on all SAIF-insured
savings associations during the 1996 period. See "Regulation - Association
Regulation." These decreases in net income and return on average assets show
that the Association is subject to interest rate risk as well as other factors
that may negatively impact operations. See "--Potential Impact of Changes in
Interest Rates" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and
Bylaws, particularly a provision limiting voting rights, as well as the Delaware
General Corporation Law and certain federal regulations, assist the Company in
maintaining its status as an independent, publicly owned corporation and serve
to render a hostile takeover more difficult. These provisions provide for, among
other things, supermajority voting, staggered terms for the Board of Directors,
noncumulative voting for directors, limits on the calling of special meetings,
and restrictions on certain business combinations. In particular, the Company's
Certificate of Incorporation provides that beneficial owners of more than 10% of
the Company's outstanding Common Stock may not vote the shares owned in excess
of the 10% limit for a period of five years from the completion of the
Conversion of the Association, and no person may, directly or indirectly, offer
to acquire or acquire the beneficial ownership of more than 10% of any class of
any equity security of the Company. The impact of these provisions on a
beneficial holder of more than 10% of the Common Stock is to (1) require
divestiture of the amount of stock held in excess of 10% (if within five years
of the Conversion more than 10% of the Common Stock is beneficially owned by a
person) and (2) at any time, limit the vote on the Common Stock held by the
beneficial owner to 10% or possibly reduce the amount that may be voted below
the 10% level. Unless the grantor of a revocable proxy is an affiliate or an
associate of a 10% holder or there is an arrangement, agreement, or
understanding with such 10% holder, these provisions would not restrict (1) the
ability of a 10% holder of revocable proxies to exercise revocable proxies for
which the 10% holder is neither a beneficial nor record owner, or (2) the
ability of a beneficial owner of less than 10% of the Common Stock to solicit
2
revocable proxies during a public proxy solicitation for a particular meeting of
stockholders and vote such proxies. However, these provisions may discourage
potential proxy contests. Additional restrictions apply after five years from
the completion of the Conversion.
These provisions, although they do not preclude a takeover, may have the
effect of discouraging a future takeover attempt not approved by the Company's
Board of Directors, but pursuant to which stockholders might receive a
substantial premium for their shares over then-current market prices. As a
result, stockholders who might desire to participate in such a transaction might
not have the opportunity to do so. Such provisions will also render the removal
of the Company's Board of Directors and of management more difficult and,
therefore, may serve to perpetuate current management. The Boards of Directors
of the Association and the Company, however, have concluded that the potential
benefits outweigh the possible disadvantages because they believe that such
provisions encourage potential acquirors to negotiate directly with the Boards
of Directors. The Boards of Directors believe that they are in the best position
to act on behalf of all stockholders. Further, the Board of Directors of the
Company has the ability to waive certain restrictions on acquisition, provided
that the acquisition is approved by a majority of the disinterested Board of
Directors in advance. Additionally, the Association has entered into an
employment agreement with its chief executive officer. This agreement could
result in higher expenses for an acquiror, thereby making an acquisition less
attractive to potential acquirors. See "Certain Restrictions on Acquisition of
the Company."
Possible Voting Control by Management and the Board of Directors
The directors and executive officers of the Association intend to
purchase, at the same price per share as the shares sold to other investors in
the Conversion, approximately 33,750 shares or 5.4% of the shares to be sold in
the Conversion (based upon an offering at the midpoint of the EVR). Assuming
that stockholders approve the Option Plan and RSP, that the stock options to be
granted are exercised by recipients, and that the RSP purchases and awards 4% of
the shares sold in the Conversion, the aggregate beneficial ownership of such
directors and officers would increase after the Conversion to 116,250 shares, or
19.4% (based on an offering at the midpoint of the EVR). In addition, such
officers may acquire beneficial ownership of additional shares of Common Stock
through future ESOP allocations, which amounts cannot be determined at this
time. It is expected that certain directors of the Association will serve as the
trustees to the ESOP ("ESOP Trustees") and as members of an ESOP Committee. The
ESOP Trustees must vote all allocated shares held in the ESOP as directed by
participating employees. Unallocated shares (approximately 48,000 shares at the
midpoint of the EVR immediately after Conversion and until allocated) and
allocated shares for which no timely direction is received will be voted by the
ESOP Trustees as directed by the Board of Directors or the ESOP Committee,
subject to the ESOP Trustees' fiduciary duties. In addition, shares sold above
the maximum of the EVR may be sold to the ESOP to fill its subscription (the
ESOP currently intends to purchase up to 8% of the Common Stock) prior to
satisfying unfilled orders of Eligible Account Holders, or the ESOP may purchase
shares in the open market.
The proposed purchases of the Common Stock by the Board of Directors,
management, and the ESOP, as well as the potential acquisition of the Common
Stock through the Option Plan and RSP, could render it difficult to obtain
majority support for stockholder proposals opposed by the Company's Board of
Directors and management. Moreover, such voting control could enable the Board
of Directors of the Company and management to block the approval of transactions
requiring the approval of 80% of the stockholders under the Company's
Certificate of Incorporation. See "Management of the Association Other Benefits"
and "- Proposed Future Stock Benefit Plans," "Description of Capital Stock," and
"Certain Restrictions on Acquisition of the Company."
3
Possible Dilutive Effect of RSP and Stock Options and Effect of Purchases by the
RSP and ESOP
Following the completion of the Conversion, subject to the approval of (1)
the Boards of Directors of the Company and the Association and (2) stockholders
of the Company, the RSP may acquire 4% of the total number of shares sold in the
Offerings through the issuance of authorized but unissued shares or by open
market purchases. The issuance of authorized but unissued shares to the RSP in
an amount equal to 4% of the outstanding shares of Common Stock of the Company
would dilute existing stockholder interests by approximately 3.9%. The RSP and
the ESOP may acquire shares of Common Stock in the open market. In the event the
RSP acquires additional shares of Common Stock in the open market, the funds
available for investment by the Company and the Association will be reduced by
the amount used to acquire such shares. In the event the ESOP acquires shares of
Common Stock in the open market and the purchase price is greater than $10 per
share, the funds available for investment will be affected by the difference
between $10 and the purchase price. See "Pro Forma Data" and "Management of the
Association - Proposed Future Stock Benefit Plans - Restricted Stock Plan." In
addition, the Association may establish a stock option plan after the
Conversion, whereby options may be granted to purchase additional authorized but
unissued shares of Common Stock that equal in the aggregate up to 10% of the
Common Stock sold in the Conversion. Assuming that options for 10% of the shares
sold are granted and exercised and funded through previously authorized but
unissued stock, existing stockholders' interests would be diluted by
approximately 9.1%. See "Management of the Association - Proposed Future Stock
Benefit Plans - Stock Option Plan." Benefit plans such as the RSP and the Option
Plan that are implemented within the first year after the Conversion are subject
to OTS regulation.
Accounting practices require an employer such as the Company to record
compensation expense in an amount equal to the fair value of shares committed to
be released from plans such as the ESOP. If shares of Common Stock appreciate in
price over time, compensation expense related to the ESOP may be materially
increased as a result, although the extent of such an increase in expense cannot
be accurately quantified at this time. See Notes 1 and 2 to "Pro Forma Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Operating Results for the Nine Months Ended December
31, 1996 and December 31, 1995 - Non-interest Expenses."
Possible Negative Impact Caused by Regulatory Oversight
Similar to all federally insured financial institutions, the Association is
subject to extensive regulation, supervision, and examination by the OTS as its
chartering authority and primary federal regulator, and by the FDIC, which
insures its deposits up to applicable limits. The Association is a member of the
FHLB of Pittsburgh and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). As the
savings and loan holding company of the Association, the Company is also subject
to regulation and oversight by the OTS. Such regulation and supervision governs
the activities in which an institution may engage and is intended primarily for
the protection of the FDIC insurance funds and depositors and not for the
protection of stockholders. Regulatory authorities have been granted extensive
discretion in connection with their supervisory and enforcement activities. Any
change in the regulatory structure or the applicable statutes or regulations
could have a material impact on the Company and the Association, their
operations and the Conversion. See "Regulation."
A bill has been introduced to the House Banking Committee that would
consolidate the OTS with the Office of the Comptroller of the Currency ("OCC").
The resulting agency would regulate all federally chartered commercial banks and
thrift institutions. In the event that the OTS is consolidated with the OCC, it
is possible that the thrift charter could be eliminated, requiring thrifts to
convert to commercial bank charters.
4
Bank holding companies are more limited in their investment authority
than are savings and loan holding companies. Under current law and regulation, a
unitary savings and loan holding company, such as the Company, which has only
one thrift subsidiary that meets the qualified thrift lender ("QTL") test, such
as the Association, has essentially unlimited investment authority. See
"Regulation - Company Regulation." Legislation has also been proposed which, if
enacted, would limit the non-banking related activities of savings and loan
holding companies to those activities permitted for bank holding companies.
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Association has received an opinion from Ferguson that subscription
rights granted to Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members have no value. However, this opinion is not binding
on the Internal Revenue Service ("IRS"). If the subscription rights are deemed
to have an ascertainable value, receipt of such rights would be taxable (either
as capital gain or ordinary income) probably only to those who exercise the
subscription rights in an amount equal to such value. Additionally, the
Association could recognize a gain for tax purposes on such distribution.
Whether subscription rights are considered to have ascertainable value is an
inherently factual determination. See "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of the Association - Tax Effects."
SISTERSVILLE BANCORP, INC.
The Company is a Delaware corporation organized in March 1997 at the
direction of the Association to acquire all of the capital stock that the
Association will issue upon its conversion from the mutual to stock form of
ownership. The Company has not engaged in any significant business to date. The
OTS has approved the Company's application to become a savings and loan holding
company and the Company will retain approximately 50% of the net proceeds from
the issuance of Common Stock as its initial capitalization (ranging from
approximately $2.34 million assuming the sale of 510,000 shares at the minimum
of the EVR to $3.22 million assuming the sale of 690,000 shares at the maximum
of the EVR). The Company will use the balance of the net proceeds to purchase
all of the common stock of the Association to be issued upon Conversion. Part of
the proceeds retained by the Company will be used to fund the loan to the ESOP.
Prior to the Conversion, the Company will not transact any material business.
Upon consummation of the Conversion, the Company will have no significant assets
other than that portion of the net proceeds of the Offerings retained by the
Company (less the loan to the ESOP) and the shares of the Association's capital
stock acquired in the Conversion, and will have no significant liabilities. Cash
flow to the Company will be dependent upon earnings from the investment of the
portion of net proceeds retained by it in the Conversion and any dividends
received from the Association. 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 such opportunities, the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial condition, to take advantage of any such acquisition and
expansion opportunities that may arise. However, some of these activities could
be deemed to entail a greater risk than the activities permissible for federally
chartered savings associations such as the Association. The initial activities
of the Company are anticipated to be funded by the portion of the net proceeds
retained by the Company and earnings thereon.
5
The office of the Company is located at 726 Wells Street, Sistersville,
West Virginia 26175 and its telephone number is (304) 652-3671.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SISTERSVILLE
The Association is a federally chartered mutual savings and loan
association headquartered in Sistersville, West Virginia. The Association was
originally chartered by the State of West Virginia in 1933 under the name
Sistersville Building and Loan Association. The Association obtained its current
name in 1934. The Association's deposits have been federally insured since 1934
under the SAIF as administered by the FDIC and its predecessor, the Federal
Savings and Loan Insurance Corporation. The Association became a member of the
FHLB System in 1934. At December 31, 1996, the Association had total assets of
$26.26 million, deposits of $21.20 million, and equity of $4.75 million or 18.1%
of total assets.
The Association is a community oriented savings institution offering
financial services to meet the needs of the communities it serves. The
Association conducts its business from its office located in Sistersville, West
Virginia.
The principal sources of funds for the Association's lending activities
are deposits and the amortization and repayment of loans and sales, maturities,
and calls of securities. The principal source of income is interest on loans and
the principal expense is interest paid on deposits.
The only office of the Association is located at 726 Wells Street,
Sistersville, West Virginia 26175 and the telephone number of that office is
(304) 652-3671.
USE OF PROCEEDS
The Company will purchase all of the capital stock of the Association to
be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings, with the remaining net proceeds to be retained by the Company as
initial capital. The Company has received the approval of the OTS to retain 50%
of the net proceeds. The net proceeds retained by the Company will be initially
invested in loans to the Association, U.S. Government and federal agency
securities, interest earning deposits, high-grade short term marketable
securities, or a combination thereof. The portion of the net proceeds retained
by the Company may ultimately be used to support the future expansion of
operations through acquisitions of other financial service institutions, such as
other savings institutions and commercial banks, acquisitions of branches of
financial service institutions, although no such transactions are currently
contemplated, diversification into other related businesses, or for other
business and investment purposes including the payment of regular and special
dividends on, and repurchase of, the Common Stock. The Company also intends to
make a loan directly to the ESOP to enable the ESOP to purchase Common Stock in
the Conversion. If the Company is not permitted to make the ESOP loan, the ESOP
may borrow funds from an unaffiliated lender with such loan being guaranteed by
the Company. Based upon the issuance of 510,000 shares or 690,000 shares at the
minimum and maximum of the EVR, respectively, the Company would retain $2.34
million or $3.22 million, respectively, of the net proceeds from the Offerings,
out of which the loan to the ESOP to purchase 8% of the Common Stock would be
$408,000 or $552,000, respectively, and the Association would receive additional
capital of $2.34 million or $3.22 million, respectively. The amount of the ESOP
loan would be reflected as a reduction to the capital of both the Company and
the Association, whether such loan is obtained from the Company or instead from
a third party and guaranteed by the Company. See "Pro Forma Data."
6
In the event the ESOP does not purchase Common Stock in the Conversion,
the ESOP may purchase shares of Common Stock in the open market after the
Conversion. In the event the purchase price of the Common Stock is different
than $10.00 per share, the amount of proceeds required for the purchase by the
ESOP and the resulting effect on capital will be affected.
The portion of the net proceeds not retained by the Company will be
added to the Association's general funds to be used for general corporate
purposes, including, but not limited to, investment in mortgage and other loans,
U.S. Government and federal agency securities, state and municipal obligations,
federal funds, certificates of deposit, mortgage-backed securities, and other
investments. The amount of proceeds added to the Association's capital will
further strengthen the Association's capital position. This capital provides an
additional source of funding for longer term assets. Following the Conversion,
the amount of proceeds will be evaluated as part of the Association's ongoing
review of its asset/liability mix and may impact the structure of the assets and
liabilities of the Association and the Company. Neither the Association nor the
Company has any specific plans, arrangements, or understandings regarding any
acquisitions or diversification of activities at this time, nor have criteria
been established to identify potential candidates for acquisition.
Should the Company subsequently adopt a restricted stock plan, a portion
of the proceeds may be used to fund the purchase by the plan of Common Stock in
an amount up to 4% of the shares sold in the Conversion. The actual cost of such
purchase will depend on the number of shares sold in the Conversion and the
market price at the time of purchase. Based upon the midpoint of the EVR and on
a $10.00 per share purchase price, the cost would be approximately $240,000. It
is expected that a restricted stock plan will be adopted by the Board of
Directors within one year of the Conversion.
The net proceeds may vary because total expenses of the Conversion may
be 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 the Association. Payments for shares
made through withdrawals from existing Association deposit accounts will not
result in the receipt of new funds for investment by the Association but will
result in a reduction of the Association's deposits and interest expense as
funds are transferred from interest bearing certificates or other deposit
accounts.
DIVIDENDS
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Company initially expects to pay semi-annual cash
dividends on the Common Stock at a rate of $0.24 per share per annum (2.4% on
the $10.00 per share offering price) commencing the second full calendar quarter
following the completion of the Conversion. If a dividend is paid in the future,
the dividend will be subject to determination and declaration by the Board of
Directors, which will take into account a number of factors, including the
financial condition of the Company and the Association, and regulatory
restrictions on the payment of dividends by the Association to the Company, on
which dividends the Company eventually may be primarily dependent for its source
of income. ^ For a period of one year following the completion of the
Conversion, the Company will not declare a dividend that would be construed as a
tax-free return of capital or take any action towards that end. In addition,
there can be no assurance that dividends will in fact be paid on the Common
Stock or that, if paid, such dividends will not be reduced or eliminated in
future periods. In addition to or in lieu of recurring or regular dividends, the
Company may pay nonrecurring or special dividends. The Company may pay stock
dividends in lieu of, or in addition to, cash dividends.
7
It is anticipated that the principal source of income to the Company
will initially consist of the earnings on the capital retained by the Company in
the Conversion. Future declarations of cash dividends by the Company will depend
in part upon dividend payments by the Association to the Company, which payments
are subject to various restrictions. See "Historical and Pro Forma Capital
Compliance," "The Conversion - Effects of Conversion to Stock Form on Depositors
and Borrowers of the Association Liquidation Account," and "Regulation -
Dividend and Other Capital Distribution Limitations."
Unlike the Association, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders although the source
of such dividends will be, in part, dependent upon dividends from the
Association. The Company is subject, however, to the requirements of Delaware
law, which generally limit dividends to amounts that will not affect the ability
of the Company, after the dividend has been distributed, to pay its debts in the
ordinary course of business.
In addition to the foregoing, earnings of the Association appropriated
for bad debt reserves and deducted for federal income tax purposes cannot be
used by the Association to pay cash dividends to the Company without the payment
of federal income taxes by the Association at the then current income tax rate
on the amount deemed distributed, which would include the amount of any federal
income taxes attributable to the distribution. See "Taxation - Federal Taxation"
and Note 8 to the Consolidated Financial Statements included elsewhere herein.
The Company does not contemplate any voluntary distribution by the Association
that would result in a recapture of the Association's bad debt reserve or create
the above-mentioned federal tax liabilities.
MARKET FOR THE COMMON STOCK
Neither the Company nor the Association has ever issued capital stock.
Consequently, there is no existing market for the Common Stock. Following the
completion of the Offerings, the Company anticipates that the Common Stock will
be traded on the over-the-counter market with quotations available through the
OTC "Electronic Bulletin Board" under the symbol "____." In addition, trades may
be reported on the Pink Sheets of the National Quotation Bureau.
The development of a public market having the desirable characteristics
of depth, liquidity and orderliness depends upon the presence in the marketplace
of a sufficient number of willing buyers and sellers at any given time, over
which neither the Company nor any market maker has any control. Accordingly,
given the relatively small size of the offering and the small number of
anticipated purchasers, the Company does not anticipate that an active and
liquid trading market for the Common Stock will develop, or if a market
develops, that it will continue. Therefore, purchasers of the Common Stock
should have a long-term investment intent and should recognize that the absence
of an active trading market may make it difficult to sell the Common Stock after
the Conversion and there can be no assurance that persons purchasing shares will
be able to sell them promptly or at a price equal to or above the Purchase
Price.
The Company will register its Common Stock under the Exchange Act at the
completion of the Conversion.
8
CAPITALIZATION
The following table presents, as of December 31, 1996, the historical
capitalization of the Association and the pro forma consolidated capitalization
of the Company after giving effect to the Conversion and other assumptions set
forth below and under "Pro Forma Data," based upon the sale of shares at the
minimum, midpoint, maximum, and 15% above the maximum of the EVR at a price of
$10.00 per share:
Pro Forma Consolidated Capitalization
Based on the Sale of
Historical 510,000 600,000 690,000 793,500
Capitalization Shares at Shares at Shares at Shares At
at December 31, $10.00 $10.00 $10.00 $10.00
1996 Per Share Per Share Per Share Per Share
------ --------- --------- --------- ---------
(In Thousands)
Deposits(1) ......................... $21,199 $21,199 $21,199 $21,199 $21,199
Other Borrowings..................... -- -- -- -- --
------ ------ ------ ------ ------
Total deposits and other borrowed funds $21,199 $21,199 $21,199 $21,199 $21,199
====== ====== ====== ====== ======
Shareholders' Equity:
Preferred Stock, $.10 par value per share,
500,000 shares authorized; none to be
issued............................ $ -- $ -- $ -- $ -- $ --
Common Stock, $.10 par value, 2,000,000
shares authorized; total shares to be
issued as reflected............... -- 51 60 69 79
Additional paid in capital(2)........ -- 4,626 5,500 6,374 7,380
Retained earnings, substantially
restricted(4)....................... 4,747 4,747 4,747 4,747 4,747
Less:
Common stock acquired by ESOP(3)..... -- (408) (480) (552) (635)
Common stock acquired by RSP(3)...... -- (204) (240) (276) (317)
------- ------ ------ ------ ------
Total stockholders' equity(4)........ $ 4,747 $ 8,812 $ 9,587 $10,362 $11,254
====== ====== ====== ====== ======
^--------------------
(1) Excludes accrued interest payable on deposits. Withdrawals from savings
accounts for the purchase of stock have not been reflected in these
adjustments. Any withdrawals will reduce pro forma capitalization by the
amount of such withdrawals.
(2) Does not reflect the increase in the number of shares of Common Stock
after the Conversion in the event of implementation of the Option Plan
or RSP. See "Management of the Association - Proposed Future Stock
Benefit Plans - Stock Option Plan" and "- Restricted Stock Plan."
(3) Assumes that 8% and 4% of the shares issued in the Conversion will be
purchased by the ESOP and RSP, respectively. No shares will be purchased
by the RSP in the Conversion. It is assumed on a pro forma basis that
the RSP will be adopted by the Board of Directors, approved by
stockholders of the Company, and reviewed by the OTS. It is assumed that
the RSP will purchase Common Stock in the open market following the
Conversion in order to give an indication of its effect on
capitalization. The pro forma presentation does not show the impact of
(a) results of operations after the Conversion, (b) changing market
prices of shares of Common Stock after the Conversion, or (c) a smaller
than 4% purchase by the RSP. Assumes that the funds used to acquire the
ESOP shares will be borrowed from the Company for a ten year term at the
prime rate as published in The Wall Street Journal. For an estimate of
the impact of the ESOP on earnings, see "Pro Forma Data." The
Association intends to make contributions to the ESOP sufficient to
service and ultimately retire its debt. The amount to be acquired by the
ESOP and RSP is reflected as a reduction of stockholders' equity. The
issuance of authorized but unissued shares for the RSP in an amount
equal to 4% of the outstanding shares of Common Stock will have the
effect of diluting existing stockholders' interests by 3.9%. There can
be no assurance that stockholder approval of the RSP will be obtained.
See "Management of the Association - Proposed Future Stock Benefit Plans
- Restricted Stock Plan."
(4) Includes $398,000 of unrealized gains on available for sale securities,
net of tax. The equity of the Association will be substantially
restricted after the Conversion. See "Dividends," "Regulation -
Dividends and Other Capital Distribution Limitations," "The Conversion -
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association -Liquidation Account" and Note 14 to the Consolidated
Financial Statements.
9
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $4.68 million and $7.46 million at the minimum
and maximum, as adjusted, of the EVR, based upon the following assumptions: (i)
8% of the stock issued in the Conversion will be sold to the ESOP and $750,000
will be sold to officers, directors, employees and members of their immediate
families; (ii) Trident will receive a commission of 2.0% of the Common Stock
sold in the Conversion, excluding the sale of shares to the ESOP, and to
officers, directors and employees and members of their immediate families; (iii)
other Conversion expenses, excluding the commission paid to Trident, will be
approximately $344,600; (iv) no shares will be sold in a Syndicated Community
Offering by selected dealers; and (v) 4% of the shares issued in the Conversion
will be sold to the RSP. Because management of the Association presently intends
to adopt the RSP within the first year following the Conversion, a purchase by
the RSP in the Conversion has been included with the pro forma data to give an
indication of the effect of a 4% purchase by the RSP, at a $10.00 per share
purchase price in the market, even though the RSP does not currently exist and
is prohibited by OTS regulation from purchasing in the Conversion. The pro forma
presentation does not show the effect of (a) results of operations after the
Conversion, (b) changing market prices of shares of Common Stock after the
Conversion, or (c) less than a 4% purchase by the RSP.
The following table sets forth for the periods and as of the dates
indicated, the historical net earnings and equity of the Association prior to
the Conversion and the pro forma consolidated net earnings and stockholders'
equity of the Company following the Conversion. Unaudited pro forma consolidated
net earnings and stockholders' equity have been calculated for the nine months
ended December 31, 1996 and the fiscal year ended March 31, 1996, as if the
Common Stock to be issued in the Conversion had been sold at April 1, 1996, and
April 1, 1995, respectively, and the estimated net proceeds had been invested by
the Company and the Association at 5.50% for the nine months ended December 31,
1996 and for the fiscal year ended March 31, 1996, which rate is equal to the
one year U.S. Treasury bill rate in effect at year end December 31, 1996. The
one year U.S. Treasury bill rate, 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 initial investment of net proceeds from the Offerings. In
calculating pro forma income, an effective state and federal income tax rate of
36.00% for both the Association and the Company has been assumed for the
respective periods, resulting in an after tax yield of 3.52% for the nine months
ended December 31, 1996 and for the fiscal year ended March 31, 1996.
Withdrawals from deposit accounts for the purchase of the Common Stock are not
reflected in the pro forma adjustments. The computations are based upon the
assumptions that 510,000 shares (minimum of EVR), 600,000 shares (midpoint of
EVR), 690,000 shares (maximum of EVR) or 793,500 shares (maximum, as adjusted,
of the EVR) are sold at a price of $10.00 per share.
As discussed under "Use of Proceeds," the Company expects to retain 50%
of the net Conversion proceeds, part of which will be used to lend money to the
ESOP to purchase the Common Stock issued in the Conversion. The ESOP presently
plans to purchase up to 8% of the Common Stock issued in the Conversion. The
following table assumes that the yield on the net proceeds of the Conversion
retained by the Company will be the same as the yield on the net proceeds of the
Conversion transferred to the Association.
10
Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock. Per share amounts have been computed as if the Common Stock had
been outstanding at the beginning of the periods or at the dates shown. Pro
forma stockholders' equity and pro forma stockholders' equity per share have not
been adjusted to reflect the earnings on the estimated net proceeds.
The stockholders' equity information is not intended to represent the
fair market value of the Common Stock, or the current value of the Association's
assets or liabilities, or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. For additional
information regarding the liquidation account, see "The Conversion - Effects of
the Conversion to Stock Form on Depositors and Borrowers of the Association -
Liquidation Account" and Note 14 to the Consolidated Financial Statements. The
pro forma income derived from the assumptions set forth above should not be
considered indicative of the actual results of operations of the Association or
the Company for any period. Such pro forma data may be materially affected by a
change in the price per share or number of shares to be issued in the Conversion
and by other factors. For information regarding investment of the proceeds see
"Use of Proceeds" and "The Conversion - Stock Pricing" and "- Number of Shares
to be Issued in the Conversion."
The totals in the following tables may not add due to rounding.
11
At or For the Nine Months Ended December 31, 1996
-----------------------------------------------------------------------
510,000 600,000 690,000 793,500
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
Gross proceeds........................................ $5,100 $6,000 $6,900 $7,935
Less offering expenses and commissions................ (423) (440) (457) (476)
----- ----- ----- -----
Estimated net Conversion proceeds................... 4,677 5,560 6,443 7,459
Less Common Stock acquired by ESOP.................. (408) (480) (552) (635)
Less Common Stock acquired by RSP................... (204) (240) (276) (317)
----- ----- ----- -----
Estimated proceeds available for investment......... $4,065 $4,840 $5,615 $6,507
===== ===== ===== =====
Net Income
Historical.......................................... $ 86 $ 86 $ 86 $ 86
Pro Forma adjustments:
Net income from proceeds.......................... 107 128 148 172
ESOP(1)........................................... (20) (23) (26) (30)
RSP(2)............................................ (20) (23) (26) (30)
----- ----- ----- -----
Pro Forma...................................... $ 154 $ 168 $ 181 $ 197
===== ===== ===== =====
Per share
Historical.......................................... $0.18 $0.15 $0.13 $0.12
Pro Forma adjustments:
Net income from proceeds.......................... 0.23 0.23 0.23 0.23
ESOP(1)........................................... (0.04) (0.04) (0.04) (0.04)
RSP(2)............................................ (0.04) (0.04) (0.04) (0.04)
----- ----- ----- -----
Pro Forma...................................... $ 0.33 $ 0.30 $ 0.28 $ 0.27
======= ======= ======= =======
Number of shares used in calculating earnings per share 473,280 556,800 640,320 736,368
======= ======= ======= =======
Stockholders' equity (book value)(3)
Historical......................................... $4,747 $4,747 $4,747 $4,747
Estimated net Conversion proceeds.................. 4,677 5,560 6,443 7,459
Less common stock acquired by:
ESOP(1).......................................... (408) (480) (552) (635)
RSP(2)........................................... (204) (240) (276) (317)
----- ----- ------ ------
Pro Forma..................................... $8,812 $9,587 $10,362 $11,254
===== ===== ====== ======
Per Share(3)
Historical.......................................... $9.31 $7.91 $6.88 $5.98
Estimated net Conversion proceeds..................... 9.17 9.27 9.34 9.40
Less common stock acquired by:
ESOP(1)............................................ (0.80) (0.80) (0.80) (0.80)
RSP(2)............................................. (0.40) (0.40) (0.40) (0.40)
----- ----- ----- -----
Pro Forma....................................... $17.28 $15.98 $15.02 $14.18
===== ===== ===== =====
Pro forma price to book value(4)...................... 57.9% 62.6% 66.6% 70.5%
==== ==== ==== ====
Pro forma price to earnings (P/E ratio)(4)(5)(6)...... 22.7x 25.0x 26.8x 27.8x
==== ==== ==== ====
Number of shares used in calculating equity per share. 510,000 600,000 690,000 793,500
======= ======= ======= =======
^--------------------
(Footnotes follow next table).
12
At or For the Year Ended March 31, 1996
---------------------------------------------------------------------------
510,000 600,000 690,000 793,500
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
Gross proceeds........................................ $5,100 $6,000 $6,900 $7,935
Less offering expenses and commissions................ (423) (440) (457) (476)
----- ----- ----- -----
Estimated net Conversion proceeds................... 4,677 5,560 6,443 7,459
Less Common Stock acquired by ESOP.................. (408) (480) (552) (635)
Less Common Stock acquired by RSP................... (204) (240) (276) (317)
----- ----- ----- -----
Estimated proceeds available for investment......... $4,065 $4,840 $5,615 $6,507
===== ===== ===== =====
Net Income
Historical.......................................... $197 $197 $197 $197
Pro Forma adjustments:
Net income from proceeds.......................... 143 170 198 229
ESOP(1)........................................... (26) (31) (35) (41)
RSP(2)............................................ (26) (31) (35) (41)
--- --- --- ---
Pro Forma...................................... $288 $306 $324 $345
=== === === ===
Per share
Historical.......................................... $0.42 $0.35 $0.31 $0.27
Pro Forma adjustments:
Net income from proceeds.......................... 0.30 0.31 0.31 0.31
ESOP(1)........................................... (0.06) (0.06) (0.06) (0.06)
RSP(2)............................................ (0.06) (0.06) (0.06) (0.06)
----- ----- ----- -----
Pro Forma...................................... $0.61 $0.55 $0.51 $0.47
==== ==== ==== ====
Number of shares used in calculating earnings per share 473,280 556,800 640,320 736,368
======= ======= ======= =======
Stockholders' equity (book value)(3)
Historical......................................... $4,548 $4,548 $4,548 $4,548
Estimated net Conversion proceeds.................. 4,677 5,560 6,443 7,459
Less common stock acquired by:
ESOP(1).......................................... (408) (480) (552) (635)
RSP(2)........................................... (204) (240) (276) (317)
----- ----- ------ ------
Pro Forma..................................... $8,613 $9,388 $10,163 $11,055
===== ===== ====== ======
Per Share(3)
Historical.......................................... $8.92 $7.58 $6.59 $5.73
Estimated net Conversion proceeds.................... 9.17 9.27 9.34 9.40
Less common stock acquired by:
ESOP(1)............................................ (0.80) (0.80) (0.80) (0.80
RSP(2)............................................. (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro Forma....................................... $16.89 $15.65 $14.73 $13.93
===== ===== ===== =====
Pro forma price to book value(4)...................... 59.2% 63.9% 67.9% 71.8%
==== ==== ==== ====
Pro forma price to earnings (P/E ratio)(4)(5)......... 16.4x 18.2x 19.6x 21.3x
==== ==== ==== ====
Number of shares used in calculating equity per share. 510,000 600,000 690,000 793,500
======= ======= ======= =======
^--------------------
^(Footnotes on following page.)
13
(Footnotes from previous page.)
^--------------------
(1) Assumes 8% of the shares sold in the Conversion are purchased by the
ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from the Company. The approximate amount expected to
be borrowed by the ESOP is not reflected as a liability but is reflected
as a reduction of capital. The Association intends to make annual
contributions to the ESOP over a ten year period in an amount at least
equal to the principal and interest requirement of the debt. The pro
forma net income assumes: (i) that 4,080, 4,800, 5,520, and 6,348 shares
at the minimum, mid-point, maximum and maximum, as adjusted of the
Estimated Valuation Range ("EVR"), were committed to be released during
the year ended March 31, 1996 at an average fair value of $10.00 per
share in accordance with Statement of Position ("SOP") 93-6 of the
American Institute of Certified Public Accountants ("AICPA"); (ii) the
effective tax rate was 36% for such period; and (iii) only the ESOP
shares committed to be released were considered outstanding for purposes
of the per share net earnings. The pro forma stockholders' equity per
share calculation assumes all ESOP shares were outstanding, regardless
of whether such shares would have been released. Because the Company
will be providing the ESOP loan, only principal payments on the ESOP
loan are reflected as employee compensation and benefits expense. As a
result, to the extent the value of the Common Stock appreciates over
time, compensation expense related to the ESOP will increase. For
purposes of the preceding tables, it was assumed that a ratable portion
(1/10th) of the ESOP shares purchased in the Conversion were committed
to be released during the periods ended December 31, 1996 and March 31,
1996. See Note 5 below. If it is assumed that all of the ESOP shares
were included in the calculation of earnings per share for the period
ended at December 31, 1996, earnings per share would have been $0.30,
$0.28, $0.26 and $0.25 at December 31, 1996, respectively, based on the
sale of shares at the minimum, midpoint, maximum and the maximum, as
adjusted, of the EVR. If it is assumed that all of the ESOP shares were
included in the calculation of earnings per share for the period ended
March 31, 1996, earnings per share would have been $0.56, $0.51, $0.47
and $0.43 at March 31, 1996, respectively, based on the sale of shares
at the minimum, midpoint, maximum and the maximum, as adjusted, of the
EVR. See "Management of the Association - Other Benefits - Employee
Stock Ownership Plan."
(2) Assumes issuance to the RSP of 20,400, 24,000, 27,600, and 31,740 shares
at the minimum, mid-point, maximum, and maximum, as adjusted of the EVR.
The assumption in the pro forma calculation is that (i) shares were
purchased by the Company following the Conversion, (ii) the purchase
price for the shares purchased by the RSP was equal to the purchase
price of $10 per share and (iii) 20% of the amount contributed was an
amortized expense during such period. Such amount does not reflect
possible increases or decreases in the value of such stock relative to
the Purchase Price. As the Association accrues compensation expense to
reflect the five year vesting period of such shares pursuant to the RSP,
the charge against capital will be reduced accordingly. Implementation
of the RSP within one year of Conversion would require regulatory and
stockholder approval at a meeting of the Company's stockholders to be
held no earlier than six months after the Conversion. For purposes of
this table, it is assumed that the RSP will be adopted by the Boards of
Directors of the Company and the Association, reviewed by the OTS, and
approved the Company's stockholders, and that the RSP will purchase the
shares of Common Stock in the open market within the year following the
Conversion. If the shares to be purchased by the RSP are assumed at
April 1, 1996, to be newly issued shares purchased from the Company by
the RSP at the Purchase Price, at the minimum, midpoint, maximum and
maximum, as adjusted, of the EVR, pro forma stockholders' equity per
share would have been $17.00, $15.75, $14.82, and $14.02 at December 31,
1996, respectively, and pro forma earnings per share would have been
$0.32, $0.30, $0.28, and $0.27 for the nine months ended December 31,
1996, respectively. If the shares to be purchased by the RSP are assumed
at April 1, 1995, to be newly issued shares purchased from the Company
by the RSP at the Purchase Price, at the minimum, midpoint, maximum and
maximum, as adjusted, of the EVR, pro forma stockholders' equity per
share would have been $16.62, $15.43, $14.55, and $13.78 at March 31,
1996, respectively, and pro forma earnings per share would have been
$0.60, $0.54, $0.50, and $0.46 for the
14
year ended March 31, 1996, respectively. As a result of the RSP,
stockholders' ownership interests will be diluted by approximately 3.9%.
See "Management of the Association - Proposed Future Stock Benefit Plans
- Restricted Stock Plan" and "Risk Factors - Possible Dilutive Effect of
RSP and Stock Options and Effect of Purchases by the RSP and ESOP."
(3) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The
calculations are based upon the number of shares issued in the
Conversion, without giving effect to SOP 93-6. The amounts shown do not
reflect the federal income tax consequences of the potential restoration
to income of the tax bad debt reserves for income tax purposes, which
would be required in the event of liquidation. The amounts shown also do
not reflect the amounts required to be distributed in the event of
liquidation to eligible depositors from the liquidation account which
will be established upon the consummation of the Conversion. Pro forma
stockholders' equity information is not intended to represent the fair
market value of the Common Stock, the current value of the Association's
assets or liabilities or the amounts, if any, that would be available
for distribution to stockholders in the event of liquidation. Such pro
forma data may be materially affected by a change in the number of
shares to be sold in the Conversion and by other factors.
(4) Assumes that following the consummation of the Conversion, the Company
will adopt the Option Plan, which if implemented within one year of
Conversion would be subject to regulatory review and Board of Director
and stockholder approval, and that such plan would be considered and
voted upon at a meeting of the Company's stockholders to be held no
earlier than six months after the Conversion. Under the Option Plan,
employees and directors could be granted options to purchase an
aggregate amount of Common Stock equal to 10% of the shares issued in
the Conversion at an exercise price equal to the market price of the
Common Stock on the date of grant. In the event the shares issued under
the Option Plan were awarded, the interests of existing stockholders
would be diluted. At April 1, 1996, at the minimum, midpoint, maximum
and the maximum, as adjusted, of the EVR, if all shares under the Option
Plan were newly issued and the exercise price for the option shares were
equal to the Purchase Price, the number of outstanding shares of Common
Stock would increase to 561,000, 660,000, 759,000, and 872,850,
respectively, pro forma stockholders' equity per share would have been
$16.62, $15,43, $14.56, and $13.80 at December 31, 1996, respectively,
and pro forma earnings per share would have been $0.32, $0.30, $0.28,
and $0.27 at December 31, 1996, respectively. At April 1, 1995, at the
minimum, midpoint, maximum and the maximum, as adjusted, of the EVR, if
all shares under the Option Plan were newly issued and the exercise
price for the option shares were equal to the Purchase Price, the number
of outstanding shares of Common Stock would increase to 561,000,
660,000, 759,000, and 872,850, respectively, pro forma stockholders'
equity per share would have been $16.26, $15.13, $14.30, and $13.57 at
March 31, 1996, respectively, and pro forma earnings per share would
have been $0.58, $0.53, $0.49, and $0.46 at March 31, 1996,
respectively.
(5) Pro forma net income per share calculations include the number of shares
assumed to be sold in the Conversion and, in accordance with SOP 93-6,
exclude ESOP shares which would not have been released during the
period. Accordingly, for the nine months ended December 31, 1996 and for
the year ended March 31, 1996, 36,720, 43,200, 49,680, and 57,132 shares
have been subtracted from the shares assumed to be sold at the minimum,
mid-point, maximum, and maximum, as adjusted, of the EVR, respectively,
and 473,280, 556,800, 640,320, and 736,368 shares are assumed to be
outstanding at the minimum, mid- point, maximum, and maximum, as
adjusted of the EVR. See Note 1 above.
(6) Earnings for the nine months ended December 31, 1996 include a
non-recurring pre-tax expense of $129,000 for a one-time deposit premium
to recapitalize the Savings Association Insurance Fund.
15
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Association's historical and pro forma
capital position relative to its capital requirements as of December 31, 1996.
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 Association, see "Regulation -
Regulatory Capital Requirements."
Pro Forma as of December 31, 1996(1)
----------------------------------------------------------------------------------------
Historical at $5,100,000 $6,000,000 $6,900,000 $7,935,000
December 31, 1996 Offering Offering Offering Offering
-------------------- --------------------------------------------- -------------------- --------------
Percent Percent Percent Percent Percent
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.......... $4,747 18.08% $6,474 22.80% $6,807 23.64% $7,141 24.45% $7,525 25.36%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Tangible Capital:
Actual or Pro Forma... $4,349 16.82% $6,076 21.88% $6,409 22.75% $6,743 23.60% $7,127 24.54%
Required.............. 388 1.50% 417 1.50% 423 1.50% 429 1.50% 436 1.50
----- ---- ----- ---- ----- ----- ----- ----- ----- -----
Excess.............. $3,961 15.32% $5,659 20.38% $5,986 21.25% $6,314 22.10% $6,691 23.04%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Core Capital:(3)
Actual or Pro Forma... $4,349 16.82% $6,076 21.88% $6,409 22.75% $6,743 23.60% $7,127 24.54%
Required.............. 776 3.00% 833 3.00% 845 3.00% 857 3.00% 871 3.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Excess.............. $3,573 13.82% $5,243 18.88% $5,564 19.75% $5,886 20.60% $6,256 21.54%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total Risk-Based
Capital:(4)
Actual or Pro Forma... $4,505 36.09% $6,232 45.99% $6,565 47.73% $6,899 49.43% $7,283 51.32%
Required.............. 999 8.00% 1,084 8.00% 1,100 8.00% 1,117 8.00% 1,135 8.00
----- ----- ----- ----- ----- ---- ----- ----- ----- -----
Excess.............. $3,506 28.09% $5,148 37.99% $5,465 39.73% $5,782 41.43% $6,148 43.32%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
^--------------------
(1) Institutions must value available for sale debt securities at amortized
cost, rather than at fair value, for purposes of calculating regulatory
capital. Institutions are still required to comply with SFAS No. 115 for
financial reporting purposes. The pro forma data has been adjusted to
reflect reductions in capital that would result from an assumed 8%
purchase by the ESOP and 4% purchase by the RSP as of December 31, 1996.
It is assumed that the Company will retain 50% of net conversion
proceeds. See "Use of Proceeds."
(2) GAAP, adjusted, or risk-weighted assets as appropriate.
(3) The unrealized gain on securities available for sale, net of tax, of
$398,000 has been subtracted from GAAP Capital to arrive at Tangible and
Core Capital.
(4) Proposed regulations of the OTS could increase the core capital
requirement to a ratio between 4% and 5%, based upon an association's
regulatory examination rating. See "Regulation - Regulatory Capital
Requirements." Risk-Based Capital includes Tangible Capital plus
$156,000 of the Association's allowance for loan losses. Risk-weighted
assets as of December 31, 1996 totaled approximately $12.5 million. Net
proceeds available for investment by the Association are assumed to be
invested in interest earning assets that have a 20% risk-weighting.
16
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SISTERSVILLE
Consolidated Statements of Operations
Nine Months Ended
December 31, Years Ended March 31,
-------------------------- -------------------------------
1996 1995 1996 1995 1994
------ ------ ------ ------ -----
(Unaudited)
INTEREST AND DIVIDEND INCOME
^ Taxable interest on loans................. $1,341,916 $1,222,536 $1,662,025 $1,434,749 $1,311,820
^ Taxable interest and dividends on investments 188,924 251,668 311,121 443,613 396,225
--------- --------- --------- --------- ---------
Total interest and dividend income....... 1,530,840 1,474,204 1,973,146 1,878,362 1,708,045
--------- --------- --------- --------- ---------
INTEREST EXPENSE
Interest on deposits........................ 735,607 714,689 955,554 818,648 762,048
Borrowed funds.............................. -- 21,185 21,182 21,898 --
------------ ---------- --------- --------- ------------
Total interest expense................. 735,607 735,874 ^ 976,736 840,546 762,048
--------- --------- ----------- --------- ---------
Net interest income...................... 795,233 738,330 996,410 1,037,816 945,997
PROVISION FOR LOAN LOSSES...................... 5,583 5,600 6,800 27,900 10,321
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses.......................... 789,650 732,730 989,610 1,009,916 935,676
--------- --------- --------- --------- ---------
NON-INTEREST INCOME
^ Service charges........................... 15,847 15,400 19,993 18,075 15,619
Gain on sale of real estate, net............ 3,903 1,017 -- 4,114 1,899
Other income................................ 1,537 2,006 ^ 3,876 3,905 2,108
--------- --------- ----------- --------- ---------
Total non-interest income................ 21,287 18,423 ^ 23,869 26,094 19,626
--------- --------- ----------- --------- ---------
NON-INTEREST EXPENSES
^General and administrative expenses:
Salaries and benefits.................... 309,733 291,105 392,987 376,673 419,123
Occupancy expense........................ 30,561 19,428 ^ 28,239 22,728 20,054
Furniture and equipment expense.......... 26,271 17,764 25,245 19,713 12,395
Machine rental and service bureau expense 42,587 39,830 54,307 55,292 34,856
Advertising and public relations......... 16,793 15,927 21,114 23,817 18,981
Supervisory examination, audit and legal. 17,851 18,202 23,452 ^ 19,766 22,834
Federal insurance premium (1)............ 163,302 34,496 46,171 45,246 12,366
Franchise, payroll, and other taxes...... 35,071 35,229 48,363 48,831 39,509
Net realized losses on sales of available-
for-sale securities................... -- 8,340 8,340 -- --
Other operating expenses................. 50,500 41,982 54,826 68,143 ^ 53,637
---------- ---------- ---------- ---------- ------------
Total non-interest expenses........... 692,669 522,303 703,044 680,209 633,755
---------- ---------- ---------- ---------- ----------
Income before income taxes............ 118,268 228,850 310,435 355,801 321,547
^
PROVISION FOR FEDERAL INCOME TAXES............. 32,558 80,841 113,198 125,604 78,329
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle.................. 85,710 148,009 197,237 230,197 243,218
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................... -- -- -- -- 4,679
----------- ----------- ----------- ----------- ----------
Net income.................................. $ 85,710 $ 148,009 $ 197,237 $ 230,197 $ 247,897
========== ========= ======== ========= ========
- --------------------
(1) Includes a non-recurring expense of $129,000 for the nine months ended
December 31, 1996 for a one-time deposit premium to recapitalize the
Savings Association Insurance Fund.
The notes included elsewhere herein ^ are an integral part of the
consolidated financial statements.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly, has no
results of operations at this time. As a result, the following discussion
principally reflects the operations of the Association. The Association's
results of operations are primarily dependent on its net interest income, which
is the difference between the interest income earned on its assets, primarily
loans and investments, and the interest expense on its liabilities, primarily
deposits and borrowings. Net interest income may be affected significantly by
general economic and competitive conditions and policies of regulatory agencies,
particularly those with respect to market interest rates. The results of
operations are also significantly influenced by the level of non-interest
expenses, such as employee salaries and benefits, non-interest income, such as
loan fees and service charges, and the Association's provision for loan losses.
The Association primarily originates fixed-rate loans with terms of up
to 25 years and attempts to maintain sufficient capital and other liquid assets
to manage interest rate risk.
The Association has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services.
Asset/Liability Management
The Association's net interest income is sensitive to changes in
interest rates, as the rates paid on its interest bearing liabilities generally
change faster than the rates earned on its interest earning assets. As a result,
net interest income will frequently decline in periods of rising interest rates
and increase in periods of decreasing interest rates.
To mitigate the impact of changing interest rates on its net interest
income, the Association manages its interest rate sensitivity and
asset/liability products through two committees of the Board, the Loan Committee
and the Interest Committee. The committees meet as necessary to determine the
rates of interest for loans and deposits. Rates on deposits are primarily based
on the Association's need for funds and on a review of rates offered by other
financial institutions in the Association's market areas. Interest rates on
loans are primarily based on the interest rates offered by other financial
institutions in the Association's primary market areas as well as the
Association's cost of funds.
The committees manage the interest rate sensitivity of the Association
through the determination and adjustment of asset/liability composition and
pricing strategies. The committees then monitor the impact of the interest rate
risk and earnings consequences of such strategies for consistency with the
Association's liquidity needs, growth, and capital adequacy. The Association's
principal strategy is to manage the interest rate sensitivity of its interest
earning assets and interest bearing liabilities by maintaining sufficient
capital and other liquid assets in the event of an increase in interest rate
risk, typically because of an increase in market interest rates.
Net Portfolio Value
In order to encourage savings associations to reduce their interest rate
risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. However, this rule is not yet in
effect. The IRR component is a dollar amount that will be deducted from total
capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the
18
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. An institution's IRR is measured
as the estimated change to its NPV as a result of a hypothetical 200 basis point
("bp") change in market interest rates. A resulting change in NPV of more than
2% of the estimated present value of total assets ("PV") in the event of a 200
bp change in market interest rates will require the institution to deduct from
its capital 50% of that excess change. The rules provide that the OTS will
calculate the IRR component quarterly for each institution. The following table
presents the Association's NPV at December 31, 1996, as calculated by the OTS,
based on quarterly information voluntarily provided to the OTS by the
Association.
Percentage Change in
Net Portfolio Value
---------------------------
Change Board
in Market Projected Policy
Interest Rates Change(1) Limit(2)
-------------- --------- --------
+400 bp ^(36)% (45)%
+300 bp ^(27) (35)
+200 bp (18) (25)
+100 bp (8) (15)
0 bp
-100 bp 5 (15)
-200 bp 7 (25)
-300 bp 8 (35)
-400 bp 11 (45)
^--------------------
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(2) Limits are established by the Board of Directors of the Association.
At December 31, 1996, a change in interest rates of a positive 200 basis
points would have resulted in a 288 basis point decrease in NPV as a percentage
of the present value of the Association's total assets.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations were employed in preparing the previous table.
These assumptions related to interest rates, loan prepayment rates, deposit
decay rates, and the market values of certain assets under the various interest
rate scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Association's assets and liabilities would perform
as set forth above.
19
Average Balance Sheet, Interest Rates, and Yield
The following table sets forth certain information relating to the
Association's average balance sheet and reflects the average yield on assets and
average cost of liabilities for or as of the periods indicated. Such yields and
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods presented. Average balances are
derived from monthly balances, however, management does not believe the use of
month-end balances has caused any material difference in the information
presented. There have been no tax equivalent adjustments made to the yields.
Nine Months Ended December 31, (6) Year Ended March 31, At December 31,
--------------------------------------------------- ------------------------------------------------- --------------
1996 1995 1996 1995 1996
-------------------------- ------------------------ ------------------------------------------------- --------------
Average Average Average Average
Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Rate
------- -------- ---- ------- -------- ---- ------- -------- ---- ------- -------- ---- ------- ----
(Dollars in Thousands)
Interest-
earning
assets:
Loans
receivable
(1)......... $20,856 $1,342 8.58% $18,776 $1,222 8.68% $19,037 $1,662 8.73% $16,155 $1,435 8.88% $21,635 8.65%
Investment
securities
(2)......... 4,226 169 5.33% 5,854 229 5.22% 5,574 281 5.04% 7,779 412 5.30% 3,643 5.53%
Mortgage-
backed
securities.. 359 20 7.43% 413 23 7.43% 406 30 7.39% 465 32 6.88% 342 7.02%
------- -------------- ------- ------- ------ ------- ------- ------ ------- -------------- -------------
Total
interest-
earning
assets........ 25,441 1,531 8.02% 25,043 1,474 7.85% 25,017 1,973 7.89% 24,399 1,879 7.70% 25,620 8.19%
----- ----- ----- -----
Non-
interest-
earning
assets........ 663 532 565 468 638
-------- ------ ------ ------ ------
Total assets $26,104 $25,575 $25,582 $24,867 $26,258
====== ====== ====== ====== ======
Interest-
bearing
liabilities:
Regular
savings
deposits.... $ 8,422 $ 254 4.02% $ 8,292 $ 249 4.00% $ 8,252 $ 329 3.99% $10,130 $ 408 4.03% $ 8,507 4.00%
NOW
accounts.... 979 25 3.40% 858 21 3.26% 879 27 3.07% 734 23 3.13% 1,000 3.25%
Money
market
demand...... 1,646 46 3.73% 1,917 53 3.69% 1,856 69 3.72% 2,645 100 3.78% 1,613 3.50%
Time
deposits.... 10,063 411 5.45% 9,264 392 5.64% 9,430 531 5.63% 6,521 288 4.42% 10,079 5.74%
------ ----- ------ ------ ----- ------ ------ ------ ------ ------ ----- ---- ------------
Subtotal
deposits.. 21,110 736 4.65% 20,331 715 4.69% 20,417 956 4.68% 20,030 819 4.09% 21,199 4.75%
------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------------
Short-term
borrowings.. - - -% 506 21 5.53% 390 21 5.38% 421 22 5.23% - -%
------- -------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------------
Total
interest-
bearing
liabilities... $21,110 $ 736 4.65% $20,837 $ 736 4.71% $20,806 $ 977 4.70% $20,451 $ 841 4.11% $21,199 4.75%
====== ===== ====== ====== ===== ====== ====== ===== ====== ====== ===== ====== ============
Non-interest
bearing
liabilities... 382 365 371 310 312
------- ------- ------- ------- -------
Total
Liabilities... $21,492 $21,202 $21,177 $20,761 $21,511
====== ====== ====== ====== ======
Retained
Earnings
(3).......... 4,612 4,373 4,405 4,106 4,747
------ ------ ------ ------ ------
Total
liabilities
and retained
earnings...... $26,104 $25,575 $25,582 $24,867 $26,258
====== ====== ====== ====== ======
Net interest
income........ $ 795 $ 738 $ 996 $1,038
===== ===== ===== =====
Interest rate
spread(4)..... 3.37% 3.14% 3.19% 3.59%
====== ====== ====== ======
^ Net yield on
interest-
earning
assets(5)... 4.17% 3.93% 3.98% 4.25%
====== ====== ====== ======
^ Ratio of
average
interest
earning
assets to
average
interest-
bearing
liabilities. 120.52% 120.19% 120.24% 119.30% 120.85%
====== ====== ====== ==== ======
^--------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions, FHLB
stock and FHCMC stock.
(3) Includes unrealized gain on securities available for sale, net of
applicable deferred income taxes.
(4) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(6) Yields for the periods ended December 31, 1996 and 1995 have been
annualized.
20
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Association for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
Nine Months Ended December 31, Year Ended March 31,
----------------------------------- ---------------------------------------------------------------
1996 vs. 1995 1996 vs. 1995 1995 vs. 1994
Increase (Decrease)(3) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
---------------------------------- --------------------------------- ------------------------------------
Rate/ Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net Volume Rate Volume Net
------ ------ ------ ----- ------ ------ ------ ----- ------ ------ ------ ----
(Dollars in Thousands)
Interest-
earning assets
Loans
receivable(1) ... $ 181 $ (19) $ (2) $ 160 $ 256 $ (25) $ (4) $ 227 $ 270 $(121) $ (25) $ 124
Investment
securities(2) ... (85) 6 (2) (81) (117) (20) 6 (131) (14) 73 (3) 56
Mortgage-backed
securities ...... (4) -- -- (4) (4) 2 -- (2) (7) (2) -- (9)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-
earning assets.. $ 92 $ (13) $ (4) $ 75 $ 135 $ (43) $ 2 $ 94 $ 249 $ (50) $ (28) $ 171
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Interest-bearing
liabilities
Savings deposits .. $ 37 $ (8) $-- $ 29 $ 16 $ 119 $ 2 $ 137 $ 60 $ (2) $-- $ 58
Short-term
borrowings ...... (28) -- -- (28) (2) 1 -- (1) 22 -- -- 22
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-
bearing
liabilities .... $ 9 $ (8) $-- $ 1 $ 14 $ 120 $ 2 $ 136 $ 82 $ (2) $-- $ 80
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Net change in
interest income .. $ 83 $ (5) $ (4) $ 74 $ 121 $(163) $-- $ (42) $ 167 $ (48) $ (28) $ 91
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
^--------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and
FHLB stock, and FHLMC stock.
(3) Annualized.
Financial Condition
Total assets increased by $292,000 or 1.1% to $26.26 million at December
31, 1996 from $25.97 million at March 31, 1996 and decreased by $87,000 or 0.3%
at March 31, 1996 from $26.05 million at March 31, 1995. Between March 31, 1996
and December 31, 1996, loans receivable, net, increased by $1.60 million or
8.0%, from $20.04 million to $21.64 million, while cash, used in part to fund
the increase in loans, decreased by $1.41 million or 58.0%, from $2.42 million
to $1.08 million. Between March 31, 1995 and March 31, 1996, loans receivable,
net increased by $2.35 million or 13.3%, from $17.69 million to $20.04 million,
while investment securities decreased by $4.72 million or 61.9% from $7.63
million to $2.91 million during a period when management used maturing
investment securities to fund the increase in loan demand. Loans increased
primarily due to favorable interest rates and the lack of competition with the
Association's construction lending program coupled with an increase in new home
construction.
Total deposits increased by $108,000 or 0.5% to $21.20 million at
December 31, 1996 and by $1.28 million or 6.5% to $21.09 million at March 31,
1996 from $19.81 million at March 31, 1995. Deposits increased primarily due to
higher rates on certificates of deposit. Through these increases in deposits,
the Association was able to reduce its use of borrowed funds during these
periods so that advances from the Federal Home Loan Bank of Pittsburgh decreased
from $1.68 million at March 31, 1995 to $0 at December 31, 1996.
21
Total equity increased by $199,000 or 4.4% to $4.75 million at December
31, 1996 from $4.55 million at March 31, 1996. The Association's equity
increased $271,000 or 6.3% at March 31, 1996 from $4.28 million at March 31,
1995. The increases were primarily the result of earnings between the periods.
Comparison of Operating Results for the Nine Months Ended December 31, 1996 and
December 31, 1995
Net Income. Net income decreased by $62,000 or 42.1% from $148,000
during the 1995 period to $86,000 during the 1996 period. Net income for the
1996 period was reduced primarily as a result of an increase in non-interest
expenses that more than offset an increase in net interest income. The increase
in non-interest expenses was primarily due to a $129,000 non-recurring special
assessment recorded at September 30, 1996 for the recapitalization of the SAIF.
Excluding the SAIF special assessment, income before income taxes
increased $18,000 or 8.0%, from $229,000 during the 1995 period to $247,000
during the 1996 period. The increase was primarily due to an increase in
interest and dividend income. The increase in interest and dividend income
resulted from a shift in the mix of interest earning assets by means of a
decrease in the average balance of investment securities and an increase in the
average balance of loans, which typically have higher yields than investment
securities.
Net Interest Income. Net interest income increased by approximately
$57,000 or 7.7% to $795,000 for the 1996 period from $738,000 for the 1995
period. The interest rate spread increased to 3.37% for the 1996 period from
3.14% for the 1995 period. The increase in interest rate spread was primarily
the result of (1) a decrease in the cost of funds due to lower market interest
rates paid for deposits and (2) an increase in the average balance of loans
receivable that more than offset a decline in the average rate received. The
increase in interest rate spread was also due to an increase in the interest
rates received on investment securities, although the impact of this rate
increase was limited due to a decrease in the average balance of investment
securities. See "-- Rate/Volume Analysis, and "Business - Analysis of Loan
Portfolio."
Interest and Dividend Income. Interest income on loans increased by
approximately $119,000 to $1.34 million for the 1996 period from $1.22 million
for the 1995 period. The increase for the 1996 period was largely the result of
an increase of $2.08 million in the average balance of loans outstanding during
the 1996 period, to $20.86 million, as compared to the 1995 period despite a
decline in yield from 8.68% during the 1995 period to 8.58% for the 1996 period.
In addition, the average yield on investment securities increased from 5.22% for
the 1995 period to 5.33% for the 1996 period but provided less income due to the
decline in the average balance of investment securities from $5.85 million in
the 1995 period to $4.23 million in the 1996 period.
Interest Expense. Total interest expense remained constant at $736,000
between the two periods. Interest on deposits increased by approximately $21,000
or 2.9% to $736,000 for the 1996 period from $715,000 for the 1995 period. The
increase for the 1996 period was substantially due to an increase in the average
balance of deposits of $800,000 during the 1996 period as well as a decrease in
the average cost of deposits to 4.65% in 1996 from 4.69% in 1995. These average
balances on deposits increased as the Association grew its loan portfolio and
attracted new customer deposits. However, interest expense decreased between the
1995 and 1996 periods because the repayment of FHLB advances resulted in no
interest expense during the 1996 period compared to $21,000 during the 1995
period and this decrease offset the increase in interest expense on deposits
discussed above.
22
Provision for Loan Losses. The provision for loan losses was $6,000 for
each of the 1996 and 1995 periods. See "Business of the Company - Non-Performing
and Problem Assets - Allowance for Loan Losses."
Non-interest Income. Non-interest income increased by $3,000 to $21,000
during the 1996 period from $18,000 for the 1995 period. This increase was
primarily due to a $3,000 increase in gain on the sale of real estate, net from
$1,000 during the 1995 period to $4,000 during the 1996 period.
Non-interest Expenses. Non-interest expenses increased $171,000 to
$693,000 or 32.6% for the 1996 period from $522,000 during the 1995 period. The
increase was primarily due to a $129,000 non-recurring special assessment
recorded at September 30, 1996 for the recapitalization of the SAIF. The
Association expects that its rate of deposit insurance assessment should
significantly decline beginning January 1, 1997 due to the recapitalization of
the SAIF. The Association's new deposit insurance premium is 6.5(cent) per $100
of deposits compared to the former rate of 23(cent) per $100 of deposits. See
"Regulation - Association Regulation." To a lesser extent, salaries and benefits
expense increased by $19,000 or 6.4% to $310,000 for the 1996 period from
$291,000 for the 1995 period due to base salary increases and a new employee.
The Association expects that compensation and benefits expense may increase
following the Conversion in the event of the adoption and implementation of
additional employee and director benefit plans, including the ESOP, as well as
increased costs associated with being a public company. See "Pro Forma Data" and
"Risk Factors - Possible Dilutive Effect of RSP and Stock Options and Effect of
Purchases by the RSP and ESOP."
Income Taxes. Income taxes decreased by $48,000 or 59.7% to $33,000 for
the 1996 period from $81,000 for the 1995 period. The decrease in the 1996
period compared to the 1995 period was primarily the result of the decrease in
net income before taxes.
Comparison of Operating Results for the Years Ended March 31, 1996 and 1995
Net Income. Net income decreased by $33,000 or 14.3% for fiscal 1996 to
$197,000 from $230,000 for fiscal 1995. Net income for fiscal 1996 was reduced
primarily as a result of a decrease of $42,000 in net interest income and an
increase of $23,000 in non-interest expense, partially offset by an decrease in
the provision for loan losses of $21,000 and a decrease of $12,000 in income
taxes.
Net Interest Income. Net interest income decreased by $41,000 or 4.0% to
$996,000 for fiscal 1996 from $1.04 million for fiscal 1995. The interest rate
spread decreased to 3.19% for fiscal 1996 from 3.59% for fiscal 1995. The
decline in interest rate spread was primarily the result of an increase in the
cost of funds due to higher market interest rates for time deposits and an
increase in the average balance of time deposits. Net interest income decreased
between the periods despite an increase in both the average balance of interest
earning assets and the rate received on interest earning assets.
Interest and Dividend Income. Interest income on loans increased by
$227,000 to $1.66 million for fiscal 1996 from $1.43 million for fiscal 1995.
The increase for fiscal 1996 was largely the result of an increase of $2.88
million in the average balance of loans outstanding during fiscal 1996, to
$19.04 million, as compared to fiscal 1995 that more than offset a decrease in
the average yield from 8.88% for fiscal 1995 to 8.73% for fiscal 1996. The
increase in average loans resulted from the increase in the dollar amount of the
loan portfolio primarily due to more favorable interest rates and an increase in
new home construction. See "-- Rate/Volume Analysis" and "Business - Analysis of
Loan Portfolio."
23
Interest Expense. Interest expense on deposits increased by $137,000 or
16.7% to $956,000 for fiscal 1996 from $819,000 for fiscal 1995. The increase
for fiscal 1996 was substantially due to an increase in the average cost of
deposits to 4.68% in fiscal 1996 from 4.09% in fiscal 1995 as well as an
increase in the average balance of deposits to $20.42 million from $20.03
million during this same period. These average costs and balances on deposits
increased as market interest rates increased in fiscal 1996 and the Association
offered higher interest rates to attract and retain primarily time deposits.
Provision for Loan Losses. The provision for loan losses decreased
$21,000 or 75.6% to $7,000 for fiscal 1996 from $28,000 for fiscal 1995. Despite
the increase in average balances of loans receivable between fiscal 1995 and
fiscal 1996, the Association's ratio of non-performing loans to total loans was
.08% and .19% at March 31, 1996 and 1995, respectively. In addition, the
provision was significantly higher in fiscal 1995 due to a $3.5 million increase
in net loans from fiscal 1994.
Non-interest Income. Non-interest income decreased by $2,000 to $24,000
during fiscal 1996 from $26,000 for fiscal 1995.
Non-interest Expenses. Non-interest expenses increased to $703,000 or
3.4% for fiscal 1996 from $680,000 during fiscal 1995. Compensation and benefits
expenses increased by $16,000 or 4.3% to $393,000 for fiscal 1996 from $377,000
for fiscal 1995. This increase more than offset a $13,000 decrease in other
operating expenses. The increase in compensation and benefit expenses in fiscal
1996 was primarily the result of base salary increases and an increase in group
insurance costs.
Income Taxes. Income taxes decreased by approximately $12,000 or 9.9% to
$113,000 for fiscal 1996 from $126,000 for fiscal 1995. The decrease in fiscal
1996 compared to fiscal 1995 was primarily the result of the decrease in net
income before taxes.
Comparison of Operating Results for the Years Ended March 31, 1995 and 1994
Net Income. Net income decreased by $18,000 or 7.1% for fiscal 1995 to
$230,000 from $248,00 for fiscal 1994 primarily as a result of an increase in
income taxes of $47,000 and a $5,000 addition to net income in fiscal 1994 due
to an accounting change that was not repeated in fiscal 1995.
Net Interest Income. Net interest income increased to $1.04 million for
fiscal 1995 from $946,000 for fiscal 1994, an increase of 9.7%. The $92,000
increase in net interest income for fiscal 1995 was due to an increase of
$78,000 in interest expense that was more than offset by a $170,000 increase in
interest and dividend income.
Interest and Dividend Income. Interest income on loans increased by
$123,000 or 9.4% to $1.43 million for fiscal 1995 from $1.31 million for fiscal
1995. This increase was due to a $2.8 million or 20.6% increase in the average
balance of loans in fiscal 1995 as compared to fiscal 1994 offset by a 91 basis
point or 9.3% decline in the yield earned on loans between these two periods due
to a decrease in market interest rates. The increase in average loans resulted
from the increase in the dollar amount of the loan portfolio. See "--
Rate/Volume Analysis, "-- Financial Condition" and "Business -- Analysis of Loan
Portfolio."
Interest Expense. Interest expense on deposits increased by
approximately $57,000 or 7.4% for fiscal 1995 from $762,000 for fiscal 1994. The
increase for fiscal 1995 was primarily due to an increase of $1.4 million or
7.8% in the average balance of deposits from $18.6 million in fiscal 1994 to
$20.0 million in fiscal 1995 as well as a decrease in the cost of deposits of
one basis point. Interest on FHLB
24
of Pittsburgh advances increased $22,000 during fiscal 1995 to $22,000 from $0
for fiscal 1994 resulting from the use of borrowings during 1995.
Provision for Loan Losses. The provision for loan losses increased
$18,000 to $28,000 for fiscal 1995 from $10,000 for fiscal 1994 due to an
increase in ^ net loans of $3.5 million.
Non-interest Income. Non-interest income increased $6,000 during fiscal
1995 from $20,000 for fiscal 1994. Loan fees and service charges, gain on sale
of real estate, net, and other income all contributed to the increase.
Non-interest Expenses. Non-interest expenses increased $46,000 or 7.3%
for fiscal 1995 from $634,000 during fiscal 1994. FDIC deposit insurance premium
expense increased $33,000 from $12,000 in fiscal 1994 to $45,000 in fiscal 1995
due primarily to an FDIC assessment credit that was applied to fiscal 1994
insurance premiums. Machine rental and service bureau expense increased $20,000
for fiscal 1994 due to a reclassification of expenses. These increases were
partially offset by a decrease in compensation and benefits expense of $42,000
or 10.1% from fiscal 1994, which was primarily the result of the Association's
former chief executive officer retiring and a decrease in group insurance costs.
Income Taxes. Income taxes increased by approximately $47,000 or 60.4%
to $126,000 for fiscal 1995 from $78,000 for fiscal 1994. The increase in fiscal
1995 compared to fiscal 1994 was primarily the result of lower taxes in 1994 due
to an over-estimation of 1993 income taxes based in part on fiscal period
effective tax rates.
Liquidity and Capital Resources
The Association is required by OTS regulations to maintain, for each
calendar month, a daily average balance of cash and eligible liquid investments
of not less than 5% of the average daily balance of its net withdrawable savings
and borrowings (due in one year or less) during the preceding calendar month.
This liquidity requirement may be changed from time to time by the OTS to any
amount within the range of 4% to 10%. The Association's average liquidity ratio
was 20.51%, 35.38%, and 44.93% at March 31, 1996, 1995, and 1994, respectively.
The Association's sources of liquidity include cash flows from
operations, principal and interest payments and prepayments on loans, maturities
and prepayments of securities, deposit inflows^ and borrowings from the FHLB of
Pittsburgh. During fiscal 1996^ the primary source of funds was cash flows from
^ net deposit growth of $1.3 million and from the maturities and sales of
investment securities of $4.8 million. During fiscal 1996 cash was used
primarily to fund loan growth of $2.4 million, reduce borrowings from the FHLB
of $1.7 million, and invest in office properties and equipment of $250,000.
During fiscal 1995 the primary source of funds was cash flows from the
maturities of investment securities of $1.2 million and net borrowings from the
FHLB of $1.7 million. During fiscal 1995 cash flow was used primarily to fund
loan growth of $3.5 million and for the purchase of investment securities of
$2.0 million. During fiscal 1994 the primary source of funds was cash flows from
net deposit growth of $2.2 million and the maturities of investment securities
of $400,000. In fiscal 1994 cash flow was used primarily to fund loan growth of
$1.4 million and for the purchase of investment securities of $1.9 million.
Funds provided from operating activities for the fiscal years ended March 1996,
1995 and 1994 was approximately $294,000, $282,000 and $236,000, respectively.
During the nine months ended December 31, 1996, cash was used primarily to fund
loan growth ^ of $1.6 million. The Association's primary source of funds was
from sales of investment securities of $400,000 and from net deposit growth of
$108,000. The remaining source for the Association's funding of loan growth was
from excess cash and cash equivalents accumulated in prior periods. The
Association also
25
monitors liquidity based on prepayments and scheduled principal payments on
loans which provide funds for new loan originations and purchases of investment
securities. For the fiscal year ended March 31, 1996, and for the nine months
ended December 31, 1996, loan principal payments totaled $2.1 million and $2.3
million, respectively.
In addition, from time-to-time the Association borrows funds from the
FHLB of Pittsburgh to supplement its cash flows. At December 31, 1996, the
Association had no outstanding borrowings from the FHLB.
Certificates of deposit scheduled to mature during the twelve months
ending December 31, 1997 total $5.7 million. The Association may renew these
certificates, attract new replacement deposits or replace such funds with
borrowings. Management believes, based on past experience, that the Association
will retain much of the deposits or replace them with new deposits.
The Association is subject to federal regulations that impose certain
minimum capital requirements. At December 31, 1996, the Association exceeded
these capital requirements. See "Historical and Pro Forma Capital Compliance."
Liquidity may be adversely affected by but not limited to unexpected
deposit outflows, excessive interest rates paid by competitors, regulatory
changes and similar matters. On September 30, 1996, a one-time assessment of
$129,000 was imposed on the Association to recapitalize the SAIF. This $129,000
expense was recorded during the quarter ended September 30, 1996 and was paid
during the quarter ended December 31, 1996. Management monitors projected
liquidity needs and determines the level desirable, based in part on the
Association's commitments to make loans and management's assessment of the
Association's ability to generate funds.
Recent Accounting Pronouncements
FASB Statement on Earnings Per Share. In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128. The Statement establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement simplifies the standards
for computing earnings per share previously found in APB Opinion No. 15,
Earnings per Share, and makes them comparable to international Earnings Per
Share standards. It replaces the presentation of primary Earnings per Share with
a presentation of basic Earnings per Share. It also requires dual presentation
of basic and diluted Earnings per Share on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and the denominator of the basic Earnings per Share computation to
the numerator and denominator of the diluted Earnings per Share computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. This statement supersedes Opinion 15
and AICPA Accounting Interpretation 1-102 of Opinion 15. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Association has not previously issued
common stock and SFAS No. 128 will be adopted by the Association in the initial
period after December 15, 1997. Management does not believe the adoption of SFAS
No. 128 will have a material impact on the disclosure requirements of the
Association.
26
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129. The Statement incorporates the
disclosure requirements of Accounting Principles Board ("APB") Opinion No. 15,
Earnings per Share, and makes them applicable to all public and nonpublic
entities that have issued securities addressed by the Statement. APB Opinion No.
15 requires disclosure of descriptive information about securities that is not
necessarily related to the computation of earnings per share. This statement
continues the previous requirements to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, Omnibus Opinion - 1966,
and No. 15, Earnings per Share, and FASB Statement No. 47, Disclosure of
Long-Term Obligations, for entities that were subject to the requirements of
those standards. This Statement eliminates the exemption of nonpublic entities
from certain disclosure requirements of Opinion 15 as provided by FASB Statement
No. 21, Suspension of the Reporting of Earnings per Share and Segment
Information by Nonpublic Enterprises. It supersedes specific disclosure
requirements of Opinions 10 and 15 and Statement 47 and consolidates them in
this Statement for ease of retrieval and for greater visibility to nonpublic
entities. The Statement is effective for financial statements for periods ending
after December 15, 1997. The Association has not previously issued any common
stock and SFAS No. 129 will be adopted by the Company in the initial period
after December 15, 1997. Management believes the adoption of SFAS No. 129 will
not have a material impact on the disclosure requirements of the Association.
FASB Statement on Exemption from Certain Required Disclosures about
Financial Instruments for Certain Nonpublic Entities. In December 1996, the ^
FASB issued Statement of Financial Accounting Standards No. 126. The Statement
amends FASB Statement No. 107, Disclosures About Fair Value of Financial
Instruments, to make the disclosures about fair value of financial instruments
prescribed in Statement 107 optional for nonpublic entities with total assets
less than $100 million on the date of the financial statement. The statement
also requires that the entity has not held or issued any derivative financial
instruments, as defined in FASB No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments, other than loan
commitments, during the reporting periods.
FASB Statement on Disclosures About Fair Value of Financial Instruments.
In December 1991, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 107. The Statement requires the
disclosure of the fair value of financial instruments in the footnotes to the
financial statements. The Statement is effective for the Association for fiscal
years ending after December 15, 1995, and was adopted by the Association for
fiscal year ended March 31, 1996.
FASB Statement on Accounting by Creditors for Impairment of a Loan. In
May 1993, FASB issued SFAS No. 114. SFAS No. 114 addresses the accounting by
creditors for impairment of a loan by specifying how allowances for credit
losses related to certain loans should be determined. A loan is considered
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. SFAS No. 114 generally requires creditors to
account for impaired loans, except those loans that are accounted for at fair
value or at the lower of cost or fair value, at the present value of the
expected future cash flows discounted at the loan's effective interest rate. The
Statement also addresses the accounting by creditors for loans that are
restructured in a troubled debt restructuring involving a modification of terms
of a receivable including those involving a receipt of assets in partial
satisfaction of a receivable. This Statement is effective for fiscal years
beginning after December 15, 1994. In October 1994, FASB amended certain
provisions of SFAS No. 114 by the issuance of SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS
No. 118 amends SFAS No. 114 by eliminating provisions describing how a creditor
should report income on an impaired loan and increasing disclosure requirements
as to information on recorded investments in certain impaired loans and how a
creditor recognizes related interest income. The effective date of SFAS No. 118
is the same
27
as for SFAS No. 114. The adoption of SFAS No. 114 and the amendment by SFAS No.
118 did not have a material effect on the Association's financial statements.
FASB Statement on Accounting for the Impairment of Long-Lived Asset and
for Long-Lived Assets to be Disposed of. In March 1995, FASB issued SFAS No.
121, which will become effective for fiscal years beginning after December 15,
1995. This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability is evaluated based upon the estimated
future cash flows expected to result from the use of the asset and its eventual
disposition. If expected cash flows are less than the carrying amount of the
asset, an impairment loss is recognized. Additionally, this Statement requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell.
However, based on existing conditions, and a preliminary review, management
believes that the impact of adopting this Statement will not be material to the
Association's financial statements.
FASB Statement on Accounting for Mortgage Servicing Rights. In May 1995,
FASB issued SFAS No. 122, which became effective, on a prospective basis, for
fiscal years beginning after December 31, 1995. This Statement requires mortgage
banking enterprises to recognize as separate assets rights to service mortgage
loans, however those servicing rights are acquired. When mortgage loans,
acquired either through a purchase transaction or by origination, are sold or
securitized with servicing rights retained, an allocation of the total cost of
the mortgage loans should be made between the mortgage servicing rights and the
loans based on their relative fair values. In subsequent periods, all mortgage
servicing rights capitalized must be periodically evaluated for impairment based
on the fair value of those rights, and any impairments recognized through a
valuation allowance. However, based on existing conditions, and a preliminary
review, management believes that the impact of adopting this Statement will not
be material to the Association's financial statements. Effective January 1,
1997, this Statement was superseded by SFAS No. 125, which is discussed below.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB encouraged all entities to adopt the fair value
based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995. Pro forma disclosures must
include the effects of all awards granted in fiscal years beginning after
December 15, 1994. The Association expects to continue to use the "intrinsic
value based method" as prescribed by APB Opinion No. 25. Accordingly, the impact
of adopting this Statement will not be material to the Association's financial
statements.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends
28
the "available for sale" and "trading" approach of SFAS No. 115 to non-security
financial assets that can be contractually prepaid or otherwise settled in such
a way that the holder of the asset would not recover substantially all of its
recorded investment. In addition, SFAS No. 125 amends SFAS No. 115 to prevent a
security from being classified as held to maturity if the security can be
prepaid or settled in such a manner that the holder of the security would not
recover substantially all of its recorded investment. The extension of the SFAS
No. 115 approach to certain non-security financial assets and the amendment to
SFAS No. 115 are effective for financial assets held on or acquired after
January 1, 1997. Effective January 1, 1997, SFAS No. 125 will supersede SFAS No.
122, which is discussed above. Management has not yet determined the effect, if
any, SFAS No. 125 will have on the Company's financial statements.
In December 1994, the Accounting Standards Division of the American
Institute of Certified Public Accountants ("AICPA") approved SOP 94-6,
Disclosure of Certain Significant Risks and Uncertainties. SOP 94-6 requires
additional disclosure in financial statements about the risk and uncertainties
existing as of the date of those financial statements in the following areas:
nature of operations, use of estimates in the preparation of financial
statements, certain significant estimates and current vulnerability due to
certain concentrations. The standard is effective for financial statements
issued for fiscal years ending after December 15, 1995. Management does not
believe that the adoption of SOP 94-6 will have a material impact on the
financial position of the Association.
In November 1993, the AICPA issued SOP 93-6 Employers' Accounting for
Employee Stock Ownership Plan. SOP 93-6 addresses accounting for shares of stock
issued to employees by an employee stock ownership plan. SOP 93-6 requires that
the employer record compensation expense in an amount equal to the fair value of
shares committed to be released from the ESOP to employees. SOP 93-6 is
effective for fiscal years beginning after December 15, 1993 and relates to
shares purchased by an ESOP after December 31, 1992. Management has determined
that, assuming the Common Stock appreciates over time, the adoption of SOP 93-6
will likely increase compensation expense relative to the ESOP, as compared with
prior guidance that required recognition of compensation expense based on the
cost of the shares acquired by the ESOP. The amount of any such increase,
however, cannot be determined at this time because the expense will be based on
the fair value of the shares committed to be released to employees, which amount
is not determinable.
Effect of Inflation and Changing Prices
The Association's financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. Unlike industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
BUSINESS OF THE COMPANY
The Company is a Delaware corporation organized in March 1997 at the
direction of the Association to acquire all of the capital stock that the
Association will issue upon the Association's conversion from the mutual to
stock form of ownership. The Company is not an operating company and has not
engaged in any significant business to date. Management believes that the
holding company structure and retention of proceeds from the Offerings will,
should it decide to do so, facilitate diversification into other non-banking
activities and possible future acquisitions of other financial
29
institutions such as savings institutions and commercial banks, and thereby
further its expansion into existing and new market areas and also enable the
Company to repurchase its own stock. However, there are no present plans,
arrangements, agreements, or understandings, regarding any such activities.
Upon consummation of the Conversion, the Company will be a unitary
savings and loan holding company which, under existing laws, generally would not
be restricted in the types of business activities in which it may engage,
provided that the Association retains a specified amount of its assets in
housing-related investments. The Company will not initially conduct any active
business. The Company does not intend to employ any persons other than officers,
but will utilize the support staff of the Association from time to time.
BUSINESS OF THE ASSOCIATION
General
The Association attracts deposits from the general public and uses such
deposits primarily to originate loans secured by first mortgages on one- to
four-family residences located in its market area. One-to four-family loans
secured by first mortgages totalled $20.5 million, or 91.5%, of the
Association's total loan portfolio at December 31, 1996. The Association also
originates construction loans which convert to permanent mortgage loans upon
completion of the construction period. Construction loans totalled $758,000 or
3.4% of the total loan portfolio as of December 31, 1996. To a lesser extent,
the Association originates consumer loans which totalled $1.1 million, or 5.0%
of the total loan portfolio at December 31, 1996.
The principal sources of funds for the Association's lending activities
are deposits, the repayment and maturity of loans and sale, maturity, and call
of securities, and FHLB advances. The Association's principal source of income
is interest on loans and the principal expense is interest paid on deposits.
Market Area
The Association operates one office located in Sistersville, Tyler
County, West Virginia. Sistersville is located approximately 45 miles south of
Wheeling, West Virginia and approximately 40 miles northeast of Parkersburg,
West Virginia. The Association's primary market area for lending and deposits
consists of Wood, Pleasants, Tyler, and Wetzel Counties in West Virginia.
The Association's market area is characterized by (1) median household
and per capita income equal to that of West Virginia but below that of the
United States, (2) housing values below those of West Virginia and below the
United States, and (3) an employment rate equal to that of West Virginia and
below the United States. Economic growth in the Association's market area
remains dependent upon the local economy. The deposit and loan activity of the
Association is significantly affected by economic conditions in its market area.
During the early to mid 1980's this area experienced an economic recession due
to significant downsizing in the steel industry and the population has
experienced modest declines during recent years. Major area industries include
the chemical and power industries.
The Association faces competition from two commercial banks of similar
size located in Sistersville, another commercial bank located five miles
northeast of Sistersville, and approximately four additional commercial banks
and a mutual savings bank located approximately 10 miles northeast of
Sistersville in New Martinsville, West Virginia and five credit unions located
within 20 miles of Sistersville.
30
Lending Activities
General. The Association's loan portfolio predominantly consists of
fixed-rate mortgage loans secured by one- to four-family residences. At December
31, 1996, the Association's loan portfolio totalled $22.4 million. Loans secured
by first mortgages on one- to four-family residences totalled $20.5 million, or
91.5%, of the Association's total loan portfolio at December 31, 1996. The
Association has not purchased loans in several years and is primarily a
fixed-rate portfolio lender. At December 31, 1996, adjustable-rate residential
one- to four-family mortgage loans totalled approximately $49,000.
Loan originations are generally obtained from existing customers,
members of the local community, and referrals from real estate brokers, lawyers,
accountants, and current and past customers within the Association's lending
area. The Association also advertises in the local print media and periodically
advertises on radio and television. Mortgage loans originated by the Association
in its portfolio generally include due-on-sale clauses that provide the
Association with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Association's consent.
31
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Association's loan portfolio in dollar amounts
and in percentages of the total loan portfolio as of the dates indicated.
At December 31, At March 31,
------------------------------------------------------
1996 1996 1995
------------------------- --------------------------- ------------------------
$ % $ % $ %
--- --- --- --- --- ---
(Dollars in Thousands)
Type of Loans:
Real Estate Loans:
Construction.............................. $ 758 3.38% $ 359 1.73% $ 346 1.87%
1-4 family................................ 20,525 91.52 19,132 92.22 17,043 92.11
Consumer Loans:
Automobiles............................... 774 3.45 786 3.79 701 3.79
Savings account........................... 312 1.39 405 1.95 345 1.86
Education................................. - - - - - -
Other..................................... 31 0.14 26 0.13 22 0.12
Commercial.................................. 28 0.12 37 0.18 46 0.25
------ -------- ------ -------- ------ --------
Total loans................................. 22,428 100.00% 20,745 100.00% 18,503 100.00%
====== ====== ======
Less:
Loans in process.......................... (549) (467) (598)
Deferred loan origination fees and costs.. (82) (83) (69)
Allowance for possible loan losses........ (162) (156) (150)
------ ------ ------
Total loans, net............................ $21,635 $20,039 $17,686
====== ====== ======
Type of Security:
- ----------------
Real estate loans:
1-4 family.............................. $21,283 93.47% $19,491 92.28% $17,389 91.81%
Savings accounts.......................... 312 1.37 405 1.92 345 1.82
Automobiles............................... 774 3.40 786 3.72 701 3.70
Unsecured................................. 31 0.14 26 0.12 22 0.10
Other..................................... 28 0.12 37 0.18 46 0.24
------ ------- ------ ------- ------ --------
Total loans................................. 22,428 98.50 20,745 98.22 18,503 97.68
Mortgage-backed securities.................. 342 1.50 377 1.78 437 2.32
------ ------- ------ ------- ------ -------
Total loans and mortgage-backed securities.. 22,770 100.00% 21,122 100.00% 18,940 100.00%
====== ====== ======
Less:
Loans in process.......................... (549) (467) (598)
Deferred loan origination fees
and costs............................... (82) (83) (69)
Allowance for loan losses................. (162) (156) (150)
------ ------ ------
Total loans and mortgage-backed
securities, net......................... $21,977 $20,416 $18,123
====== ====== ======
32
Loan Maturity Tables
The following table sets forth the maturity of the Association's loan portfolio
at December 31, 1996. The table does not include prepayments, or scheduled
principal repayments. Prepayments and scheduled principal payments on loans
totalled $2.3 million, and $2.1 million for the nine months ended December 31,
1996 and for the year ended March 31, 1996, respectively. Adjustable-rate
mortgage loans are shown as maturing based on contractual maturities.
1-4 Family
Real Estate
Mortgage Construction Consumer Commercial Total
-------- ------------ -------- ---------- -----
(In Thousands)
Non-performing $ 82 $ - $ - $ - $ 82
Amounts Due:
Within 3 months....... $ 14 - $ 327 $ - $ 341
3 months to 1 Year.... 4 - 24 - 28
After 1 year:
1 to 3 years........ 82 - 317 28 427
3 to 5 years........ 301 - 415 - 716
5 to 10 years....... 1,751 - 34 - 1,785
10 to 20 years...... 11,575 120 - - 11,695
Over 20 years....... 6,716 638 - - 7,354
------ ------ ------- ----- -------
Total amount due...... $20,525 $ 758 $1,117 $ 28 $22,428
====== ====== ===== ===== ======
Less:
Allowance for loan loss $ 130 $ - $ 32 $ - $ 162
Loans in process...... 159 390 - - 549
Deferred loan fees.... 82 - - - 82
------ ------- ------- ---- --------
Loans receivable, net $20,154 $ 368 $1,085 $ 28 $21,635
====== ====== ===== === ======
The following table sets forth the dollar amount of all loans due after
December 31, 1997, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
1-4 family................. ^ $20,458 $ 49 ^ $20,507
Commercial................ 28 - 28
Construction............... 758 - 758
Consumer................... 766 - 766
------ ------ ------
Total.................... ^ $22,010 $ 49 ^ $22,059
====== ====== ======
33
The following table sets for the contractual maturities of the
Association's mortgage-backed securities portfolio as of December 31, 1996.
Contractual Maturities Due in Year(s) Ended March 31,
- ---------------------------------------------------------------------------------------------------
2000 to 2004 to 2011 and
1997 1998 1999 2003 2010 Thereafter
---- ---- ---- ------ ----- ----------
(In Thousands)
$ - $ - $ - $ - $ - $ 342
== == == == == ====
The following table shows the total loan originations, repayments, and
sales activity by the Association for the periods indicated:
Nine Months Ended
December 31, Years Ended March 31,
-------------------------------- --------------------------------------
1996 1995 1996 1995 1994
--------------- --------------- ------------- ----------- --------
(In Thousands)
Total gross loans receivable
at beginning of period..... $20,745 $18,503 $18,503 $15,252 $13,284
====== ====== ====== ====== ======
Loans originated:
1-4 family residential...... $ 2,026 $ 1,736 $ 2,099 $ 2,704 $ 3,018
Construction loans.......... 1,285 1,357 1,540 2,131 1,430
Consumer loans.............. 636 620 734 883 285
Commercial business loans... - - - 50 -
-------- ------- -------- ------- --------
Total loans originated........ $ 3,947 $ 3,713 $ 4,373 $ 5,768 $ 4,733
====== ====== ====== ====== ======
Loan principal repayments..... $(2,263) $(1,457) $(2,131) $(2,517) $(2,765)
Charge-offs................... - - - - -
-------- ------- -------- -------- --------
Net loan activity............. $ 1,684 $ 2,256 $ 2,242 $ 3,251 $ 1,968
====== ====== ====== ====== ======
Total gross loans receivable ^
at end of period........... $22,429 $20,759 $20,745 $18,503 $15,252
====== ====== ====== ====== ======
One- to Four-Family Residential Loans. The Association's primary lending
activity consists of the origination of one- to four-family fixed-rate
residential mortgage loans secured by property located in the Association's
primary market areas. The Association also originates construction permanent
loans on one- to four-family residences. The Association generally originates
owner-occupied one- to four-family residential mortgage loans in amounts up to
80% of the lesser of the appraised value or selling price of the mortgaged
property without requiring mortgage insurance. The Association may originate a
mortgage loan in an amount up to 90% of the lesser of the appraised value or
selling price of a mortgaged property, however, mortgage insurance is required
for the amount in excess of 80% of such value. The Association generally retains
all of the mortgage loans that it originates. Fixed-rate loans can have
maturities of up to 25 years depending on the terms of the loan.
34
Consumer Loans. The Association offers consumer loans in order to
provide a wider range of financial services to its customers. Federal savings
associations are permitted to make secured and unsecured consumer loans up to
35% of their assets. In addition, savings associations have lending authority
above the 35% limitation for certain consumer loans, such as home improvement,
credit card, education, automobile, and savings account or passbook loans.
Secured consumer loans are made at an interest rate that is 2% above the rate
paid on the underlying deposit account. Consumer and other loans totalled $1.1
million, or 5.0% of the Association's total loans, of which loans secured by
automobiles totalled $774,000, or 3.5% of the Association's total loans at
December 31, 1996. The Association originates automobile loans with terms of up
to six years for both new and used automobiles. Most of these automobile loans
are originated directly by the Association.
Commercial Loans. The Association had one commercial loan participation
as of December 31, 1996 in the amount of $28,000. This was a loan made to a
local hospital for working capital purposes.
Construction Lending. The Association makes construction loans primarily
for the construction of single-family dwellings. The Association will permit
owner-built construction loans. The aggregate outstanding balance of such loans
on December 31, 1996 was $758,000, representing 3.4% of the Association's total
loan portfolio. All of these loans were made to persons who are constructing
properties for the purpose of occupying them. Loans made to individual property
owners are "construction-permanent" loans which generally provide for the
payment of interest only during a construction period, after which the loans
convert to a permanent loan at original contractual rates. During the nine
months ended December 31, 1996 and the fiscal year ended March 31, 1996, the
Association originated construction loans totaling $1.3 million, or 33% of total
loan originations, and $1.5 million, or 35% of total loan originations.
Loan Underwriting Risks. While consumer or other loans provide benefits
to the Association's asset/liability management program by reducing the
Association's exposure to interest rate changes, due to their generally shorter
terms, and producing higher yields, such loans may entail significant additional
credit risks compared to owner-occupied residential mortgage lending. However,
the Association believes that the higher yields and shorter terms compensate the
Association for the increased credit risk associated with such loans.
In addition, due to the type and nature of the collateral, and, in some
cases the absence of collateral, consumer lending generally involves more credit
risk when compared with one- to four-family residential lending. Consumer
lending collections are typically dependent on the borrower's continuing
financial stability, and thus, are more likely to be adversely effected by job
loss, divorce, illness, and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted consumer loan will not provide an adequate source of
repayment of the outstanding loan balance. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower and is
usually turned over to a collection agency.
Construction lending is generally considered to involve a higher level
of credit risk than one- to four-family residential lending since the risk of
loss on construction loans is dependent largely upon the accuracy of the initial
estimate of the individual property's value upon completion of the project and
the estimated cost (including interest) of the project. If the cost estimate
proves to be inaccurate, the Association may be required to advance funds beyond
the amount originally committed to permit completion of the project.
Loan Approval Authority and Underwriting. The Association has
established various lending limits for its officers and maintains a Loan
Committee. All mortgage loan applications are reviewed and
35
approved by the Board of Directors, which meets twice per month. The Loan
Committee may approve mortgage loans but such action must be ratified at a
subsequent Board meeting. The President and Vice President of the Association
each have the authority to approve all applications for consumer loans up to
$25,000 for non-real estate secured loans and up to $2,000 for unsecured loans.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered, income and certain other information is
verified and, if necessary, additional financial information is requested. An
appraisal from a licensed fee appraiser of the real estate intended to be used
as security for the proposed loan is obtained. For construction/permanent loans,
funds advanced during the construction phase are held in a loan-in-process
account and disbursed based upon various stages of completion in accordance with
the results of inspection reports that are based upon physical inspection of the
construction by loan personnel. For real estate loans, a title examination is
required to be provided by the borrower's attorney. Borrowers must also obtain
fire and casualty insurance (for loans on property located in a flood zone,
flood insurance is required) prior to the closing of the loan. The Association
is named as mortgagee/loss payee of this insurance.
Loan Commitments. The Association issues written commitments to
prospective borrowers on all approved mortgage loans which generally expire
within 90 days of the date of issuance. The Association charges an application
fee to lock in rates or to secure commitments. In some instances, commitments
may be renewed or extended. At December 31, 1996, the Association had $138,000
of outstanding commitments to originate loans and $549,000 in undisbursed funds
related to construction loans. Management believes that less than 1% of loan
commitments expire.
Loans to One Borrower. Regulations limit loans to one borrower or
affiliated group of borrowers in an amount equal to 15% of unimpaired capital
and unimpaired surplus of the Association. The Association is authorized to lend
up to an additional 10% of unimpaired capital and unimpaired surplus if the loan
is fully secured by readily marketable collateral. At December 31, 1996, the
Association's lending limit for loans to one borrower was approximately
$712,000.
At December 31, 1996, the largest loan of the Association was a $278,000
loan that was secured by the borrower's residence.
Non-Performing and Problem Assets
Loan Delinquencies. The Association's collection procedures provide that
when a mortgage loan is 30 days past due, a delinquent notice is sent to the
borrower. If payment is still delinquent after 90 days, the borrower will
receive a notice of default establishing a date by which the borrower must bring
the account current or foreclosure proceedings will be instituted. If the
delinquency continues, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, the account is turned over to an attorney
for foreclosure. Management meets regularly to determine when foreclosure
proceedings should be initiated and the borrower is notified when foreclosure
has been commenced. At December 31, 1996, nonaccrual loans and loans past due
greater than 90 days totalled $82,000 or .31% of total assets.
Loans are reviewed on a monthly basis and are placed on non-accrual
status when considered doubtful of collection by management. Generally, loans
past due 90 days or more as to principal or interest are placed on non-accrual
status. Interest accrued and unpaid at the time a loan is placed on non-accrual
status is charged against interest income. Subsequent cash payments are
generally applied to interest income unless, in the opinion of management, the
collection of principal and interest is doubtful. In those cases, subsequent
cash payments would be applied to principal.
36
Non-Performing Assets. The following table sets forth the amount and
categories of the Association's non-performing assets at the dates indicated.
The Association did not have any troubled debt restructurings at any of the
dates presented.
At December 31, At March 31,
--------------- ----------------------
1996 1996 1995
---- ---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
1-4 family.......................... $ 16 $ 16 $ 34
Construction........................ - - -
------ ------ ------
Total non-accrual loans............... 16 16 34
------ ------ ------
Accruing loans greater than 90 days past due:
Mortgage loans:
1-4 family.......................... 66 - -
Consumer........................... - - -
----- ----- -----
Total................................. $ 66 $ - $ -
===== ===== =====
Total accruing loans greater than
90 days past due:
Non-mortgage loans:
Commercial.......................... - - -
Consumer............................ - - -
----- ----- -----
Total................................. $ 66 $ - $ -
===== ===== =====
Total non-performing loans............ $ 82 $ 16 $ 34
===== ===== =====
Real estate acquired in settlement of loans $ - $ 29 $ 29
===== ===== =====
Other non-performing assets........... $ - $ - $ -
===== ===== =====
Total non-performing assets........... $ 82 $ 45 $ 63
===== ===== =====
Total non-performing loans to
total loans......................... 0.38% 0.08% 0.19%
==== ==== ====
Total non-performing loans to
total assets........................ 0.31% 0.06% 0.13%
==== ==== ====
Total non-performing assets to total assets 0.31% 0.17% 0.24%
==== ==== ====
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was $1,500 for the
year ended March 31, 1996 and $1,500 was collected and included in the
Association's interest income from non-accrual loans for the year ended March
31, 1996.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current equity and paying capacity of the obligor or of 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 as substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.
37
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Association
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at December 31, 1996, the
Association had classified $10,000 of assets as special mention, $76,000 of
assets as substandard and no assets were classified as doubtful or loss.
Real Estate Acquired in Settlement of Loans. Real estate acquired in
settlement of loans is classified separately on the balance sheet at the lower
of the recorded investment in the property or its fair value minus estimated
costs of sale. Prior to foreclosure, the value of the underlying collateral is
written down by a charge to the allowance for possible loan losses, if
necessary. Any subsequent write-downs are charged against operating expenses.
Operating expenses of such properties, net of related income and losses on their
disposition are included in other expenses. The Association had no real estate
acquired in settlement of loans at December 31, 1996.
Allowance for Loan Losses. Management regularly performs an analysis to
identify the inherent risk of loss in its loan portfolio. This analysis includes
evaluation of concentrations of credit, past loss experience, current economic
conditions, amount and composition of the loan portfolio (including loans being
specifically monitored by management), estimated fair value of underlying
collateral, loan commitments outstanding, delinquencies, and other factors.
The Association will continue to monitor its allowance for loan losses
and make future additions to the allowance through the provision for loan losses
as economic conditions dictate. Although the Association maintains its allowance
for loan losses at a level that it considers to be adequate to provide for the
inherent risk of loss in its loan portfolio, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods. In addition, the
Association's determination as to the amount of its allowance for loan losses is
subject to review by the OTS, as part of its examination process, which may
result in the establishment of an additional allowance based upon the judgment
of the OTS after a review of the information available at the time of the OTS
examination.
38
Analysis of Allowance for Loan Losses
The following table sets forth information with respect to the
Association's allowance for loan losses at the dates indicated:
At December 31, At March 31,
------------------- -------------------------------------
1996 1996 1995 1994
------------------- --------- ---------- ------------
(Dollars in Thousands)
Total gross loans outstanding....... $22,429 $20,745 $18,503 $15,252
====== ====== ====== ======
Average gross loans outstanding(1).. $21,928 $20,002 $17,232 $14,227
====== ====== ====== ======
Allowance balances (at beginning of
period)........................... $ 156 $ 150 $ 121 ^ 110
Provision (credit):
Residential....................... 3 3 15 7
Commercial real estate............ - - - -
Consumer.......................... 3 3 13 ^ 4
Recoveries: - ^- - -
Residential....................... - - - -
Commercial real estate............ - - - -
Consumer.......................... - - 1 -
-------- -------- -------- --------
Allowance balance (at end of period) $ 162 $ 156 $ 150 $ 121
======= ======= ======= =======
Allowance for loan losses as a
percentage of total loans outstanding 0.72% 0.75% 0.81% ^.79%
Allowance for loan losses as a
percentage of non-performing
assets(2)......................... 198% 347% 238% ^ 222%
Net loans charged off as a percentage
of average loans outstanding(1).... -% -% -% -^%
- --------------------
(1) For nine month period ended December 31, 1996 and for the years ended
March 31, 1996 ^, 1995 and 1994.
(2) Non-performing assets include non-accrual loans, accruing loans more
than 90 days past due and real estate acquired in settlement of loans.
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Association. In management's opinion, the
allocation has, at best, a limited utility. It is based on management's
assessment as of a given point in time of the risk characteristics of each of
the component parts of the total loan portfolio and is subject to changes as and
when the risk factors of each such component part change. The allocation is not
indicative of either the specific amounts or the loan
39
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. In addition, by presenting the allocation,
management does not mean to imply that the allocation is exact or that the
allowance has been precisely determined from the allocation. The allocation of
the allowance to each category is not necessarily indicative of future loss in
any particular category and does not restrict the use of the allowance to absorb
losses in any category.
At At
December 31, March 31,
1996 1996 1995 1994
----------------------- ---------------------- --------------------- -------------------------
Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in
Each Each Each Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -------- ------ -----
(Dollars in Thousands)
Mortgages:
One- to four-family........ $130 91.52% $126 92.22% $123 92.11% $109 92.62%
Construction............... - 3.38 - 1.73 - 1.87 - 3.86
Consumer..................... 32 4.98 30 5.87 27 5.77 12 3.52
Commercial................... - .12 - .18 - .25 - -
---- ------- ----- ------- ---- ------- ---- --------
Total................... $162 100.00% $156 100.00% $150 100.00% $121 100.00%
=== ====== === ====== === ====== === ======
Investment Activities
General. The Association is required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short term securities and certain other investments. See "Regulation - Federal
Home Loan Bank System" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." The
Association has maintained a liquidity portfolio in excess of regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of future yield levels, as well as management's projections
as to the short term demand for funds to be used in the Association's loan
origination and other activities. The Association classifies its investments as
securities available for sale or investments securities held to maturity in
accordance with SFAS No. 115. At December 31, 1996, the Association's investment
portfolio policy allowed investments in instruments such as U.S. Treasury
obligations, U.S. federal agency or federally sponsored agency obligations,
municipal obligations, mortgage-backed securities, certificates of deposit
issued by the FHLB or an FDIC insured financial institution, federal funds,
including FHLB overnight and term deposits (up to six months). The Board of
Directors may authorize additional investments.
The Association's securities available for sale and investment
securities held to maturity portfolios at December 31, 1996 did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Association's equity, excluding those issued by the United States Government or
its agencies. As of December 31, 1996, the Association's investment portfolio
was comprised of FHLB stock, FHLMC stock, U.S. Government and agencies
securities and mortgage-backed securities with market value of $2.7 million.
40
Mortgage-Backed Securities. To supplement lending activities, the
Association has invested in residential mortgage-backed securities.
Mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. Mortgage-backed securities represent a
participation interest in a pool of single-family or other type of mortgages,
the principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities, to
investors such as the Association. These quasi-governmental agencies guarantee
the payment of principal and interest to investors.
The Association's mortgage-backed securities were classified as held to
maturity at December 31, 1996 and were all issued by Government National
Mortgage Association ("GNMA"), representing participating interests in direct
pass-through pools of long-term mortgage loans originated and serviced by the
issuers of the securities. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
At December 31, 1996, the Association held mortgage-backed securities in
its investment securities held to maturity portfolio with an amortized cost of
$342,000. The average yield on mortgage-backed securities at December 31, 1996
was 7.02%.
Investment Portfolio. The following table sets forth the carrying value
of the Association's investment securities portfolio, short-term investments,
FHLB stock, and mortgage-backed securities at the dates indicated. At December
31, 1996, March 31, 1996 and 1995, the market value of the Association's
investment securities portfolio and mortgage- backed securities portfolio were
$2.5 million and $2.7 million and 7.3 million, respectively.
At December 31, At March 31,
--------------- -------------------------
1996 1996 1995
---- ---- ----
(In Thousands)
Investment Securities:
U.S. Government Securities.... $1,477 $1,867 $6,691
FHLMC Stock................... 648 482 343
----- ----- -----
Total Investment Securities. 2,125 2,349 7,034
Interest-bearing Deposits..... 1,335 2,327 237
FHLB Stock..................... 183 183 159
Mortgage-backed Securities..... 342 377 437
Mortgage-backed Securities Held
For Sale....................... - - -
------- ------- -------
Total Investments........... $3,985 $5,236 $7,867
===== ===== =====
41
The following table sets forth information regarding the carrying
values, and weighted average yields and maturities of the Association's
investment securities portfolio at December 31, 1996. The following table does
not take into consideration the effects of scheduled repayments or the effects
of possible prepayments.
As of December 31, 1996
-----------------------------------------------------------------------------------------------------------
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)
Investment Securities:
U.S. government
securities
available for sale(2)... $ -- -% $1,477 5.08% $ - -% $ - -% $1,477 5.08% $1,477
FHLMC Stock(2).......... 648 1.23 - - - - - - 648 1.23 648
Interest-bearing
deposits in other
financial
institutions(1)....... 1,335 5.52 - - - - - - 1,335 5.52 1,335
FHLB Stock(1)........... 183 6.28 - - - - - - 183 6.28 183
------- ---- ------ ------ ------ ------ ------ ------ ------ ------- ------
Total................. $2,166 5.53% $1,477 5.08% $ - -% $ - -% $3,643 5.53% $3,643
===== ==== ===== ====== ====== ====== ====== ====== ===== ======= =====
^--------------------
(1) Recorded at cost.
(2) Recorded at market value.
42
Sources of Funds
General. Deposits are the major source of the Association's funds for
lending and other investment purposes. The Association also derives funds from
the amortization and prepayment of loans, sales, maturities, and calls of
securities, and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and market conditions.
The Association may also borrow funds from the FHLB as a source of funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Association's primary market areas through the offering of a
selection of deposit instruments including savings accounts, NOW accounts, money
market accounts, and time deposits or certificate of deposit accounts. Deposit
account terms vary according to the minimum balance required, the time period
the funds must remain on deposit, and the interest rate, among other factors.
The interest rates paid by the Association on deposits are set by the
President and Vice President of Savings. The Association determines the interest
rate to offer the public on new and maturing accounts by reviewing the market
interest rates offered by competitors, and consideration is given to, among
other things, the Association's need for funds, asset/liability management and
the current cost of money. The Association reviews, weekly, the interest rates
being offered by other financial institutions within its market areas.
Savings, money market, and NOW accounts constituted $11.1 million, or
52.4%, of the Association's deposit portfolio at December 31, 1996. The
Association had no non-interest bearing deposits at December 31, 1996.
Certificates of deposit constituted $10.1 million or 47.5% of the deposit
portfolio of which $401,000 or 1.9% of the deposit portfolio were certificates
of deposit with balances of $100,000 or more. As of December 31, 1996, the
Association had no brokered deposits.
43
Deposit Portfolio. Deposits in the Association as of December 31, 1996,
were represented by various types of deposit programs described below.
Minimum Balance as of Percentage of
Category Term Interest Rate(1) Balance Amount December 31, 1996 Total Deposits
- -------- ---- ---------------- -------------- ----------------- --------------
(In Thousands)
Now Accounts None 3.25% $50 $1,000 4.72%
Regular Savings None 4.00% 1 8,507 40.12%
Money Market Accounts None (2) (2) 1,612 7.60%
Certificates of Deposit:
Fixed Term, Fixed Rate 1-3 Months - - - -%
Fixed Term, Fixed Rate 4-6 Months 4.75 % 2,500 980 4.62%
Fixed Term, Fixed Rate 7-12 Months (3) 500 2,940 13.86%
Fixed Term, Fixed Rate 13-24 Months (4) 500 1,711 8.07%
Fixed Term, Fixed Rate 25-36 Months (5) 500 2,282 10.76%
Fixed Term, Fixed Rate 36-48 Months 5.63% 500 264 1.24%
Fixed Term, Fixed Rate 49-120 Months 5 .87% 500 1,903 8.97%
Jumbo Certificates(6) - - - -%
-------- -----
$21,199 99.97%
Accrued interest on deposits 7 0.03%
-------- ------
Total $21,206 100.00%
====== ======
- -------------------------
(1) Interest rate offerings as of December 31, 1996
(2) Under $2,500: 3.50%; over $2,500: 3.75%
(3) 9 month Certificate: 4.9%; other 7-12 month 5.10%
(4) 18 month IRA: 5.25%; other 13-24 month 5.20%
(5) 36 month IRA: 5.50%; other 25-36 month 5.35%
(6) The Association offers no specified rates or terms for Jumbo Certificates
Time Deposits. The following table indicates the amount of the
Association's time deposits of $100,000 or more by time remaining until maturity
as of December 31, 1996.
Maturity Period Time Deposits
--------------- -------------
(In Thousands)
Within three months................. $ 100
More than three through six months.. --
More than six through nine months... 200
Over nine months.................... 101
-----
Total.......................... $ 401
=====
44
Time Deposits by Rate
The following table sets forth the time deposits in the Association
classified by interest rate as of the dates indicated.
At December 31, As of March 31,
----------------------------
1996 1996 1995
------------------- ------------------- -----------
(In Thousands)
Interest Rate
4.00% or less...................... $ - $ 30 $ 797
4.01-6.00%......................... 7,800 7,555 5,448
6.01-8.00%......................... 2,279 2,504 1,691
8.01-10.00%........................ - - -
--------- --------- -------
Total............................. 10,079 10,089 7,936
Accrued interest on certificate
accounts........................... 7 9 7
-------- -------- ------
Total............................ $10,086 $10,098 $7,943
====== ====== =====
Savings Deposit Activity
The following table sets forth the savings activities of the Association
for the periods indicated:
Nine Months Ended Year Ended
December 31, March 31,
------------------------------- ------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- -------- -------- ----------
(In Thousands)
Net increase (decrease)
before interest credited.... $(496) $164 $ 525 $ (635) ^$1,629
Interest credited............. 604 573 755 648 599
---- --- ------ ------ ------
Net increase (decrease) in
savings deposits............ $ 108 $737 $1,280 $ 13 $2,228
==== === ===== ===== =====
45
Time Deposits Maturity Schedule
The following table sets forth the amount and maturities of time
deposits at December 31, 1996.
Amount Due
------------------------------------------------------------------------------------
After
December 31, December 31, December 31, December 31,
Interest Rate 1997 1998 1999 1999 Total
- ------------- ------ ------ ------ ------ ------
(In Thousands)
4.00% or less............... $ - $ - $ - $ - $ -
4.01-6.00%.................. 5,189 1,035 863 713 7,800
6.01-8.00%.................. 497 1,164 171 447 2,279
8.01-10.00%................. - - - - -
------- ------- ------- ------- ---------
Total.................. 5,686 2,199 1,034 1,160 10,079
Accrued Interest on
Certificate Accounts........ 7
--------
Total $10,086
=======
Borrowings
The Association may obtain advances from the FHLB of Pittsburgh to
supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh
are typically secured by a pledge of the Association's stock in the FHLB of
Pittsburgh and a portion of the Association's first mortgage loans. Each FHLB
borrowing has its own interest rate, which may be fixed or variable, and range
of maturities. The Association, if the need arises, may also access the Federal
Reserve Bank discount window to supplement its supply of lendable funds and to
meet deposit withdrawal requirements. At December 31, 1996, the Association had
no borrowings outstanding from the FHLB of Pittsburgh.
The following table sets forth information concerning FHLB advances
during the periods indicated (includes both short- and long-term advances).
Nine Months Year Ended March 31,
^Ended -------------------------------------
December 31, 1996 1996 1995 1994
----------------- ----------- ------------ --------
(Dollars In Thousands)
FHLB advances:
Average balance outstanding.......... $ - $ 390 $ 421 --
Maximum amount outstanding at
any month-end during the period.... - 1,620 1,685 --
Weighted average interest rate
during the period.................. -% 5.38% 5.23% --%
Total FHLB advances at end of period.... $ - $ - $1,685 --
46
Competition
The Association has been able to maintain its position in mortgage loan
originations, market share, and deposit accounts throughout its market areas by
virtue of its local presence, competitive pricing, and referrals from existing
customers. The Association is one of many financial institutions serving its
market areas. The deposit base of the Association's market areas is sought by
many of these financial institutions.
The competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Association's market areas. Competition for
funds also includes a number of insurance products sold by local agents and
investment products such as mutual funds and other securities sold by local and
regional brokers. Loan competition varies depending upon market conditions and
comes from other insured financial institutions such as commercial banks, thrift
institutions, credit unions, multi-state regional banks, and mortgage bankers,
many of whom have far greater resources then the Association.
Subsidiary Activity
The Association is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. At December 31, 1996, the
Association had one wholly-owned subsidiary, First Service Corporation ("Service
Corporation"). The Service Corporation was formed in 1973 to execute deeds of
trust on behalf of the Association. The Association's investment in its
subsidiary totalled $1,000 at December 31, 1996. As of December 31, 1996, the
Service Corporation had not conducted any operations other than to act as
trustee on deeds of trust. The Association has decided it no longer needs the
Service Corporation to act in this manner and, subsequent to December 31, 1996,
^ approved the liquidation of the Service Corporation during 1997.
Properties
The Association operates from its only office located at 726 Wells
Street, Sistersville, West Virginia. The Association's total net investment in
office property and equipment was $373,000 at December 31, 1996. The Association
owns the building and a parking lot located in the same block.
Personnel
At December 31, 1996, the Association had 11 full-time and 2 part-time
employees. None of the Association's employees are represented by a collective
bargaining group. The Association believes that its relationship with its
employees is good.
Legal Proceedings
The Association, 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 Association holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Association. There were no lawsuits
pending or known to be contemplated against the Association or the Company at
December 31, 1996 that would have a material effect on the operations or income
of the Association or the Company.
47
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Association and the Company. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Company Regulation
General. After the Conversion, the Company will be a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such, the
Company is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS will have
enforcement authority over the Company and its non-savings association
subsidiaries, should such subsidiaries be formed, which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Association and not for
the benefit of stockholders of the Company. The Company will also be required to
file certain reports with, and otherwise comply with, the rules and regulations
of the OTS and the Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the Company
generally will not be subject to activity restrictions, provided the Association
satisfies the QTL test. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-insured savings
association) would become subject to restrictions applicable to bank holding
companies and those activities specified by the OTS as permissible for a
multiple savings and loan holding company, unless such other associations each
also qualify as a QTL or were acquired in a supervised acquisition. See "-
Qualified Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
Federal Securities Law. The Company has filed with the SEC a
registration statement under the Securities Act for the registration of the
Common Stock to be issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock will be registered with the SEC under the
Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restriction, and other requirements under the
Exchange Act.
Association Regulation
General. As a federally chartered, SAIF-insured savings association, the
Association is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply
48
with various federal and state statutory and regulatory requirements. The
Association is also subject to certain reserve requirements promulgated by the
Board of Governors of the Federal Reserve System ("Federal Reserve System").
The OTS, in conjunction with the FDIC, regularly examines the
Association and prepares reports for the consideration of the Association's
Board of Directors on any deficiencies that they find in the Association's
operations. The Association's relationship with its depositors and borrowers is
also regulated to a great extent by federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of the
Association's mortgage documents.
The Association must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This 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.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
United States Congress could have a material adverse impact on the Company and
the Association and their operations.
Insurance of Deposit Accounts. The Association's deposit accounts are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). If an institution has no tangible capital, the FDIC has
the authority, should it initiate proceedings to terminate an institution's
deposit insurance, to suspend the insurance of any such institution. However, if
a savings association has positive capital when it includes qualifying
intangible assets, the FDIC cannot suspend deposit insurance unless capital
declines materially, the institution fails to enter into and remain in
compliance with an approved capital plan, or the institution is operating in an
unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The FDIC
may also prohibit an insured depository institution from engaging in any
activity the FDIC determines to pose a serious threat to the SAIF. The
management of the Association is unaware of any practice, condition, or
violation that might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup assignment.
In addition, the FDIC is authorized to increase such deposit insurance rates on
a semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to September 30, 1996, members of the BIF were required to pay
substantially lower, or virtually no, federal deposit insurance premiums.
49
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Association of
approximately .657% of deposits held on March 31, 1995. The Association recorded
a $129,000 pre-tax expense for this assessment at September 30, 1996. Beginning
January 1, 1997, deposit insurance assessments for SAIF members were reduced to
approximately .064% of deposits on an annual basis; this rate may continue
through the end of 1999. During this same period, BIF members are expected to be
assessed approximately .013% of deposits. Thereafter, assessments for BIF and
SAIF members should be the same and the SAIF and BIF may be merged. It is
expected that these continuing assessments for both SAIF and BIF members will be
used to repay outstanding Financing Corporation bond obligations. As a result of
these changes, beginning January 1, 1997, the rate of deposit insurance assessed
the Association declined by approximately 70% from rates in effect prior to
September 30, 1996.
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) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets.
^
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
As of December 31, 1996, the Association had tangible, core and
risk-based capital of $4.3 million, $4.3 million and $4.5 million, respectively,
which amounts significantly exceed all applicable regulatory capital
requirements of the OTS. See Note 7 of Notes to Consolidated Financial
Statements and "Historical and Pro Forma Capital Compliance."
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Association to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Association may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Association below the amount required for the liquidation account to be
established pursuant to the Association's Plan. See "The Conversion -Effects of
Conversion to Stock Form on Depositors and Borrowers of the Association
- -Liquidation Account."
50
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of
December 31, 1996, the Association was a Tier 1 institution.
In the event the Association's capital fell below its fully phased-in
requirement or the OTS notified it that it was in need of more than normal
supervision, the Association would become a Tier 2 or Tier 3 institution and as
a result, its ability to make capital distributions could be restricted. Tier 2
institutions, which are institutions that before and after the proposed
distribution meet their current minimum capital requirements, may only make
capital distributions of up to 75% of net income over the most recent four
quarter period. Tier 3 institutions, which are institutions that do not meet
current minimum capital requirements and propose to make any capital
distribution, and Tier 2 institutions that propose to make a capital
distribution in excess of the noted safe harbor level, must obtain OTS approval
prior to making such distribution. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. The OTS has proposed rules relaxing
certain approval and notice requirements for well-capitalized institutions.
A savings association is prohibited from making a capital distribution
if, after making the distribution, the savings association would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements). Further, a savings association cannot distribute regulatory
capital that is needed for the liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a qualified
thrift lender ("QTL") test. If the Association maintains an appropriate level of
qualified thrift investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualifies as a QTL, it will continue to enjoy full borrowing
privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65%
of portfolio assets (defined as all assets minus intangible assets, property
used by the institution in conducting its business and liquid assets equal to
10% of total assets). Certain assets are subject to a percentage limitation of
20% of portfolio assets. In addition, savings associations may include shares of
stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is
determined on a monthly basis in nine out of every 12 months. As of December 31,
1996, the Association was in compliance with its QTL requirement with
approximately 94.63% of its assets invested in QTIs.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Association as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Association's
capital and collateral in specified amounts must usually be provided by
affiliates in order to receive loans from the Association. Affiliates of the
51
Association include the Company and any company which would be under common
control with the Association. In addition, a savings association 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 associations as
affiliates on a case-by-case basis.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1996, the Association's
required liquid asset ratio was 5%. Monetary penalties may be imposed upon
associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Association is a member of the FHLB
of Pittsburgh, which is one of 12 regional FHLBs that administer the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At December 31, 1996, the Association
had $183,000 in FHLB stock, at cost, which was 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 associations 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. For the fiscal year ended March 31, 1996, dividends paid by the
FHLB of Pittsburgh to the Association totalled $10,600.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS.
Savings associations have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings associations to exhaust all other sources before borrowing from the
Federal Reserve System. The Association had no borrowings from the Federal
Reserve System at December 31, 1996.
52
TAXATION
Federal Taxation
Savings associations are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), in the same general manner as
other corporations. However, prior to August 1996, savings associations such as
the Association, which met certain definitional tests and other conditions
prescribed by the Code could benefit from certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. The amount of the bad debt deduction that a qualifying savings
institution could claim with respect to additions to its reserve for bad debts
was subject to certain limitations. The Association reviewed the most favorable
way to calculate the deduction attributable to an addition to its bad debt
reserve on an annual basis.
In August 1996, the Code was revised to equalize the taxation of thrifts
and banks. Thrifts, such as the Association, no longer have a choice between the
percentage of taxable income method and the experience method in determining
additions to bad debt reserves. Thrifts with $500 million of assets or less may
still use the experience method, which is generally available to small banks
currently. Larger thrifts must use the specific charge off method regarding bad
debts. Any reserve amounts added after 1987 will be taxed over a six year period
beginning in 1996; however, bad debt reserves set aside through 1987 are
generally not taxed. An institution may delay recapturing into income its
post-1987 bad debt reserves for an additional two years if it meets a
residential-lending test. This law is not expected to have a material impact on
the Association. At December 31, 1996, the Association had less than $1,000 of
post 1987 bad-debt reserves.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method was
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year did not exceed
6% of such loans outstanding at such time. The Association did not use the
percentage of taxable income method for the tax years ended December 31, 1996
and 1995.
Under the experience method, the bad debt deduction may be based on (i)
a six-year moving average of actual losses on qualifying and non-qualifying
loans, or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of December 31, 1987. The Association
used the experience method for the tax year ended December 31, 1996. See Note 8
to the Consolidated Financial Statements.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage of taxable income bad debt deduction thus computed was reduced by the
amount permitted as a deduction for non-qualifying loans under the experience
method. The availability of the percentage of taxable income method permitted
qualifying savings associations to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally (approximately 31.3%
assuming the maximum percentage bad debt deduction).
If an association's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets,
53
the association may not deduct any addition to a bad debt reserve and generally
must include existing reserves in income over a four year period, which is
immediately accruable for financial reporting purposes. As of December 31, 1996,
at least 60% of the Association's assets were qualifying assets as defined in
the Code. No assurance can be given that the Association will meet the 60% test
for subsequent taxable years.
Earnings appropriated to the Association's bad debt reserve and claimed
as a tax deduction including the Association's supplemental reserves for losses
will not be available for the payment of cash dividends or for distribution to
stockholders (including distributions made on dissolution or liquidation),
unless the Association includes the amount in income, along with the amount
deemed necessary to pay the resulting federal income tax. As of December 31,
1996, the Association had approximately $700,000 of accumulated earnings,
representing its base year tax reserve, for which federal income taxes have not
been provided. If such amount is used for any purpose other than bad debt
losses, including a dividend distribution or a distribution in liquidation, it
will be subject to federal income tax at the then current rate.
Generally, for taxable years beginning after 1986, the Code also
requires most corporations, including savings associations, to utilize the
accrual method of accounting for tax purposes. However, the Association meets
the requirements to use the cash method under the Code. Further, for taxable
years ending after 1986, the Code disallows 100% of a savings association's
interest expense deemed allocated to certain tax-exempt obligations acquired
after August 7, 1986. Interest expense allocable to (i) tax-exempt obligations
acquired after August 7, 1986 which are not subject to this rule, and (ii)
tax-exempt obligations issued after 1982 but before August 8, 1986, are subject
to the rule which applied prior to the Code disallowing the deductibility of 20%
of the interest expense.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which the Association currently has none. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Association's AMTI is increased by an amount equal to 75% of the
amount by which the Association's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). In addition, for taxable years beginning after December 31,
1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of
AMTI (with certain modifications) over $2 million is imposed on corporations,
including the Association, whether or not an AMT is paid. Under pending
legislation, the AMT rate would be reduced to zero for taxable years beginning
after December 31, 1994, but this rate reduction would be suspended for taxable
years beginning in 1995 and 1996 and the suspended amounts would be refunded as
tax credits in subsequent years.
The Company may exclude from its income 100% of dividends received from
the Association 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, except
that an 80% dividends received deduction applies if the Company and the
Association own more than 20% of the stock of a corporation paying a dividend.
The above exclusion amounts, with the exception of the affiliated group figure,
were reduced in years in which the Association availed itself of the percentage
of taxable income bad debt deduction method.
The Association's federal income tax return was last examined by the IRS
for the year ended December 31, 1993.
54
State Taxation
West Virginia Taxation. The State of West Virginia has a corporate
income tax which subjects the Association's West Virginia taxable income to tax
at a 9.00% rate. West Virginia taxable income is computed by applying certain
modifications to federal taxable income. The primary modification consists of an
allowance factor calculated by dividing the average amount of Federal
obligations and securities, West Virginia obligations, and loans secured by
residential real property located within the State of West Virginia by the
Association's average total assets for the year.
The State of West Virginia also has a business franchise tax payable on
the average amount of unappropriated retained earnings of the Association
reduced by an allowance factor, as discussed above. The adjusted retained
earnings amount is subject to tax at a 0.75% rate. Due to allowable credits for
property taxes paid on the Association's capital, the Association has not
incurred a business franchise tax liability.
The Association also files personal and real property tax returns with
the County Assessor's Office in Tyler County, West Virginia.
Delaware Taxation. As a Delaware corporation with no operations in the
State of Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual fee to the State of
Delaware. The Company is also subject to an annual franchise tax imposed by the
State of Delaware.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of those persons who
currently serve as Directors of the Association. The Board of Directors is
divided into three classes, each of which contains approximately one-third of
the Board. The directors are elected by the stockholders of the Company for
staggered three-year terms, or until their successors are elected and qualified.
One class of directors, consisting of Ellen E. Thistle, David W. Miller and
Margaret A. Peters, has a term of office expiring at the first annual meeting
following the Conversion. A second class, consisting of Lester C. Doak, Gary L.
Ward and Dorsey R. Ash, has a term of office expiring at the annual meeting to
be held one year thereafter. A third class, consisting of Guy L. Nichols,
Charles P. LaRue, James E. Willison and Stanley M. Kiser, has a term of office
expiring at the annual meeting to be held two years thereafter.
The following individuals hold the executive offices in the Company set
forth below opposite their names.
Name Age (1) Positions Held With the Company
- ---- ------- -------------------------------
Stanley M. Kiser 42 President, Chief Executive Officer, and Director
Cynthia R. Carson 46 Vice President and Corporate Secretary
- ------------------
(1) At December 31, 1996.
55
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation, or removal by the Board of Directors. Additional
information concerning the business experience and compensation of the directors
and executive officers of the Company is set forth under "Management of the
Association - Biographical Information."
MANAGEMENT OF THE ASSOCIATION
Directors and Executive Officers
The Board of Directors of the Association is composed of ten members
each of whom serves for a term of three years. The Association's proposed
Charter and Bylaws require that directors be divided into three classes, as
nearly equal in number as possible, each class to serve for a three-year period,
with approximately one-third of the directors elected each year. Executive
officers are elected annually by the Board of Directors and serve at the Board's
discretion.
Stanley M. Kiser, the President and Chief Executive Officer, joined the
Association in 1993. In addition, Cynthia R. Carson, who has been employed by
the Association for 20 years, was promoted to Vice President in charge of
lending in February 1997.
The following table sets forth information with respect to the directors
and executive officers of the Association, all of whom will continue to serve in
the same capacities after the Conversion.
Current
Director Term
Name Age (1) Position Since Expires
- ---- ------- -------- ----- -------
Ellen E. Thistle 82 Director 1961 1998
Lester C. Doak 77 Chairman of the Board 1966 1999
David W. Miller 64 Director 1967 1998
Guy L. Nichols 85 Director 1972 2000
Gary L. Ward 61 Director 1972 1999
Dorsey R. Ash 65 Director 1977 1999
Charles P. LaRue 64 Director 1977 2000
Margaret A. Peters 68 Director 1977 1998
James E. Willison 71 Director 1977 2000
Stanley M. Kiser 42 President, Chief Executive 1994 2000
Officer and Director
Cynthia R. Carson 46 Vice President and N/A N/A
Corporate Secretary
- --------------
(1) At December 31, 1996.
Biographical Information
The business experience of each director and executive officer of the
Association is set forth below. All directors and executive officers have held
their present positions for a minimum of five years unless otherwise stated.
56
Ellen E. Thistle has been a member of the Board of Directors since 1961
and served as Corporate Secretary from 1947 through 1982. Ms. Thistle was
employed by the Association from 1936 to 1982. Ms. Thistle has been retired for
more than five years. Ms. Thistle serves as a trustee for St. Paul's Episcopal
Church.
Lester C. Doak has served as a director since 1966 and is the chairman
of the Board of Directors. Formerly a partner of the Doaks IGA Foodliner in
Middlebourne, West Virginia, Mr. Doak has been retired for more than five years.
He was the first president of the Paden City Foundation, Inc. and is associated
with the Paden City Development Committee, Paden City Lions' Club and the Home
Town Hero, a West Virginia Scholarship Committee.
David W. Miller, a pharmacist, is the president of Miller Pharmacy,
located in Sistersville. A director of the Association since 1967, Mr. Miller is
also involved with the Lions' Club, Sistersville Country Club, Veterans of
Foreign Wars, BOPE, the American Legion and the Sistersville Board of Education.
Guy L. Nichols, a director of the Association since 1972, is a member of
the Board of Directors of the Paden City Library and is affiliated with the
Paden City Foundation, Inc., the River Front Senior Citizens of Sistersville,
the Paden City Post Office Advisory Committee. Also a bible school teacher, Mr.
Nichols has been retired for more than five years.
Gary L. Ward has been employed by the Association since 1962. Mr. Ward
retired as Vice President and Treasurer of the Association, a position he held
for more than five years, in March, 1997. Mr. Ward has served as a member of the
Board of Directors since 1972.
Dorsey R. Ash managed and owned the Dorsey R. Ash Insurance Agency in
Clarksburg, West Virginia until the enterprise was sold in January 1996. Mr. Ash
is a member of the Lions' Club, the Masonic Lodge and United Methodist Christian
Church. He has served as a director since 1977.
Charles P. LaRue retired as a vice president after 39 years of service
to the Wiser Oil Company in March 1993. Mr. LaRue is a member of the Elks Club
and is a director and officer of the Sistersville Country Club and is an officer
of the First Presbyterian Church in Sistersville. He has been a director of the
Association since 1977.
Margaret A. Peters retired more than five years ago after serving for 40
years as a social worker with both private and public social agencies. A past
board member of the Sistersville Hospital, Ms.
Peters has served as a director since 1977.
James E. Willison serves as a member of the House of Delegates of the
State of West Virginia, a position he has held for more than five years. A
member of the West Virginia Veterans Association, Mr. Willison has served as a
director since 1977.
Stanley M. Kiser has been employed with the Association since October
1993 as the President and Chief Executive Officer. He has been a member of the
Board of Directors since 1994. Between November 1992 and September 1993, Mr.
Kiser was the assistant controller for a $1 billion dollar asset bank holding
company located in Parkersburg, West Virginia. During most of 1992, Mr. Kiser
was a consultant to a commercial bank located in Parkersburg. Mr. Kiser has also
served as vice president of bank operations for a commercial bank in Ohio.
57
Cynthia R. Carson has been employed by the Association since 1976. Ms.
Carson is currently the Corporate Secretary and was named Vice President in
February 1997. Prior to that time she served as Mortgage Loan Officer and
Corporate Secretary.
Meetings and Committees of the Board of Directors
The Association's Board of Directors conducts its business through
meetings of the Board and through activities of its committees. During the
fiscal year ended March 31, 1996, the Board of Directors held 24 regular
meetings and no special meetings. No director attended fewer than 75% of the
total meetings of the Board of Directors of the Association and committees on
which such director served during the fiscal year ended March 31, 1996.
The Audit Committee of the Association is comprised of Directors Doak,
Thistle, Peters, Miller, Nichols, Ash, Willison and LaRue. The Audit Committee
is responsible for developing and maintaining the Association's internal audit
program. The committee also meets with the Association's outside auditors to
discuss the results of the annual audit and any related matters. The Audit
Committee met one time during the 1996 fiscal year.
The Nominating Committee is appointed annually and consists of various
members of the Board of Directors. The committee meets annually to select
nominees to the Association's Board of Directors.
Director Compensation
Members of the Board of Directors received fees of $200 per meeting
attended during the 1996 fiscal year. The Chairman of the Board received $225
per meeting attended during the 1996 calendar year. Directors receive fees of
$100 for unattended meetings, up to a maximum of three meetings per calendar
year. No fees are paid to directors for unattended meetings in excess of three
per year. Non- employee directors receive $50 for attendance at each committee
meeting. Employee directors are not compensated for committee meetings held
during business hours. The Association paid a total of $54,350 in director fees
for the year ended March 31, 1996 which includes an aggregate discretionary
bonus of $2,000. Subsequent to March 31, 1996, the Board of Directors adopted a
bonus plan for directors and employees based on the Association's net income
levels.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the President and Chief Executive
Officer of the Association. No ^ executive officer of the Association had a
salary and bonus during the year ended March 31, 1996 that exceeded $100,000 for
services rendered in all capacities to the Association.
Annual Compensation
--------------------------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation(1) Compensation
- --------------------------- ---- ------ ----- --------------- ------------
Stanley M. Kiser 1996 $49,590 $1,787 $4,900 $ -
President and Chief
Executive Officer
^--------------------
(1) Consists of $4,900 in Board of Directors' fees.
58
Employment Agreement. The Association has entered into an employment
agreement with Mr. Stanley M. Kiser, President and Chief Executive Officer of
the Association. Mr. Kiser's salary under the employment agreement will be based
on his then current salary. Mr. Kiser's employment agreement will be for a term
of three years. The agreement will be terminable by the Association for "just
cause" as defined in the agreement. If the Association terminates the employee
without just cause, the employee will be entitled to a continuation of the
employee's salary from the date of termination through the remaining term of the
agreement. Mr. Kiser's employment agreement contains provision stating that in
the event of the termination of employment in connection with any future change
in control of the Association, as defined in the agreement, Mr. Kiser will be
paid in a lump sum an amount equal to 2.99 times Mr. Kiser's five year average
annual taxable compensation. The agreement may be renewed annually by the Board
of Directors upon a determination of satisfactory performance within the Board's
sole discretion.
Other Benefits
Employee Stock Ownership Plan. The Association has established an
employee stock ownership plan, the ESOP, for the exclusive benefit of
participating employees, to be implemented upon the completion of the
Conversion. Participating employees are employees who have completed one year of
service with the Association and have attained the age 21. The Association will
submit to the IRS an application for a letter of determination as to the
tax-qualified status of the ESOP. Although no assurances can be given, the
Association expects that the ESOP will receive a favorable letter of
determination from the IRS.
The ESOP is to be funded by tax-deductible contributions made by the
Association in cash or the Common Stock. Benefits may be paid either in shares
of the Common Stock or in cash. In accordance with the Plan, the ESOP may borrow
funds with which to acquire up to 10% of the Common Stock to be issued in the
Conversion (8% if the Association adopts the RSP within one year after the
consummation of the Conversion and the RSP purchases 4% of the Common Stock sold
in the conversion). The Company intends to finance the ESOP stock purchases
through a loan between the ESOP trust and the Company. See "Proposed Future
Stock Benefit Plans - Restrictions on Benefit Plans." 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 ESOP
will purchase up to 8% of the Common Stock to be issued in the Offerings (i.e.,
approximately $480,000, based on the midpoint of the EVR), however, no assurance
may be given that ESOP purchases, if any, will not change. This loan will be
secured by the shares purchased and earnings thereon. Shares of Common Stock
purchased with such loan proceeds will be held in a suspense account for
allocation among participants as the loan is repaid. The Association anticipates
contributing approximately $48,000 annually (based on a $10.00 share purchase)
to the ESOP to meet principal obligations under the ESOP loan, as proposed. It
is anticipated that all such contributions will be limited to an amount that is
tax-deductible.
Shares sold above the maximum of the EVR (i.e., more than 690,000
shares) may be sold to the ESOP before satisfying remaining unfilled orders of
Eligible Account Holders to fill the ESOP's subscription or the ESOP may
purchase some or all of the shares covered by its subscription after the
Conversion in the open market.
Contributions to the ESOP 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 terminate
service as a result of retirement, death or disability in order to receive an
allocation for such plan year. Participant benefits become 100% vested after
five years of service.
59
Employment prior to the adoption of the ESOP shall be credited for the purposes
of vesting. Vesting will be accelerated upon retirement, death, disability,
change in control of the Company, or termination of the ESOP. Forfeitures will
be reallocated to participants on the same basis as other contributions in the
plan year. Benefits may be payable in the form of a lump sum upon retirement,
death, disability, or separation from service. The Association's contributions
to the ESOP are discretionary and may cause a reduction in other forms of
compensation. Therefore, benefits payable under the ESOP cannot be estimated.
The Board of Directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
Board of Directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the Board of Directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
Proposed Future Stock Benefit Plans
Stock Option Plan. The Board of Directors of the Company may adopt a
stock option plan (the "Option Plan") following the Conversion, subject to
approval by the Company's stockholders at a stockholders meeting to be held no
sooner than six months after the Conversion. The Option Plan would be in
compliance with any applicable OTS regulations then in effect. See "-
Restrictions on Benefit Plans." If the Option Plan is implemented within the
year following the Conversion, in accordance with current OTS regulations, a
number of shares equal to 10% of the aggregate shares of Common Stock to be
issued in the Offerings (i.e., 60,000 shares based upon the sale of 600,000
shares at the midpoint of the EVR) would be reserved for issuance by the Company
upon exercise of stock options to be granted to officers, directors, and
employees of the Company and the Association from time to time under the Option
Plan. The purpose of the Option Plan would be to provide additional performance
and retention incentives to certain officers, directors, and employees by
facilitating their purchase of a stock interest in the Company. The Option Plan,
which would become effective upon stockholder approval of the Option Plan, would
provide for a term of 10 years, after which no awards could be made, unless
earlier terminated by the Board of Directors pursuant to the Option Plan. The
options would vest over a five year period (i.e., 20% per year), beginning one
year after the date of grant of the option. Options would be granted based upon
several factors, including seniority, job duties and responsibilities, job
performance, the Association's performance, and a comparison of awards given by
other institutions converting from mutual to stock form.
The Company would receive no monetary consideration for the granting of
stock options under the Option Plan, however, the Company would receive the
option price for each share issued to optionees upon the exercise of such
options. Shares issued as a result of the exercise of options will be either
authorized but unissued shares or shares purchased in the open market by the
Company, however, no purchases in the open market will be made that would
violate applicable regulations restricting purchases by the Company. The
exercise of options and payment for the shares received would contribute to the
equity of the Company.
If the Option Plan is implemented more than one year after the
Conversion, the Option Plan will comply with such OTS regulations and policies
that are applicable at such time.
60
Restricted Stock Plan. The Board of Directors of the Association and the
Company may adopt a restricted stock plan (the "RSP") following the Conversion,
the objective of which is to enable the Association to retain personnel and
directors of experience and ability in key positions of responsibility. The
Company expects to hold a stockholders' meeting no sooner than six months after
the Conversion in order for stockholders to vote to approve the RSP. The RSP
would be in compliance with any applicable OTS regulations then in effect. See
"- Restrictions on Benefit Plans." Awards would be granted based upon a number
of factors, including seniority, job duties and responsibilities, job
performance, the Association's performance, and a comparison of awards given by
other institutions converting from mutual to stock form. The RSP would be
managed by a committee of non-employee directors (the "RSP Trustees"). The RSP
Trustees would have the responsibility to invest all funds contributed by the
Association to the trust created for the RSP (the "RSP Trust").
The Association will contribute sufficient funds to the RSP so that the
RSP Trust can purchase, in the aggregate, up to 4% of the amount of Common Stock
that is sold in the Conversion. The shares purchased by the RSP would be
authorized but unissued shares or would be purchased in the open market. In the
event the market price of the Common Stock is greater than $10.00 per share, the
Association's contribution of funds will be increased. Likewise, in the event
the market price is lower than $10.00 per share, the Association's contribution
will be decreased. In recognition of their prior and expected services to the
Association and the Company, as the case may be, the officers, employees, and
directors responsible for implementation of the policies adopted by the Board of
Directors and the profitable operation of the Association will, without cost to
them, be awarded stock under the RSP. Based upon the sale of 600,000 shares of
Common Stock in the Offerings at the midpoint of the EVR, the RSP Trust is
expected to purchase up to 24,000 shares of Common Stock.
In accordance with applicable OTS regulations, the shares granted under
the RSP will be in the form of restricted stock vesting over a five year period
(i.e., 20% per year) beginning one year after the date of grant of the award.
Compensation expense in the amount of the market value of the Common Stock on
the date an award is granted will be recognized pro rata over the years during
which the shares are payable. Until they have vested, such shares may not be
sold, pledged, or otherwise disposed of and are required to be held in escrow.
The RSP Trustees shall vote all shares held by the RSP trust prior to vesting
and delivery of shares to participants.
If the RSP is implemented more than one year after the Conversion, the
RSP will comply with such OTS regulations and policies that are applicable at
such time.
Restrictions on Benefit Plans. OTS regulations provide that in the event
the Association or the Company implements stock option or management and/or
employee stock benefit plans within one year from the date of Conversion, such
plans must comply with the following restrictions: (1) the plans must be fully
disclosed in the prospectus, (2) 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, (3) for restricted stock plans, the shares may not exceed 3%
of the shares issued in the Conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the Conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25% of the available awards under any plan, (6) directors who are not
employees may not receive more than 5% individually or 30% in the aggregate of
the awards under any plan, (7) all plans must be approved by a majority of the
total votes eligible to be cast at any duly called meeting of the Company's
stockholders held no earlier than six months following the Conversion, (8) for
stock option plans, the exercise price must be at least equal to the market
price of the stock at the time of grant, (9) for restricted stock plans, no
stock issued in a conversion may be used to fund the plan, (10) neither stock
option awards nor restricted stock awards
61
may vest earlier than 20% as of one year after the date of stockholder approval
and 20% per year thereafter, and vesting may be accelerated only in the case of
disability or death (or if not inconsistent with applicable OTS regulations in
effect at such time, in the event of a change in control), (11) the proxy
material must clearly state that the OTS in no way endorses or approves of the
plans, and (12) prior to implementing the plans, all plans must be submitted to
the Regional Director of the OTS within five days after stockholder approval
with a certification that the plans approved by the stockholders are the same
plans that were filed with and disclosed in the proxy materials relating to the
meeting at which stockholder approval was received. Plans implemented more than
one year after the Conversion would not necessarily be subject to these
limitations. In addition, should the rules and regulations of the OTS be
liberalized, the Association and the Company reserve the right to adopt plans
qualifying under the more liberal rules.
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of Directors of the Association
appointed by the Chairman on a rotating basis. Mr. Kiser does not participate in
matters concerning his own compensation.
Certain Related Transactions
The Association, like many financial institutions, has followed a policy
of granting various types of loans to officers and directors. Such loans a) have
been made in the ordinary course of business, b) were made on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the Association's other
customers, and c) do not involve more than the normal risk of collectibility or
present other unfavorable features. All loans by the Association to its
directors and executive officers are subject to OTS regulations restricting
loans and other transactions with affiliated persons of the Association. Loans
to officers and directors of the Association and their affiliates, amounted to
approximately $53,000 or 1% of the Association's equity at December 31, 1996.
Assuming the Conversion had occurred as of December 31, 1996, and assuming the
sale of 600,000 shares at the midpoint of the EVR, loans to officers and
directors of the Association at that date would have totalled approximately .5%
of pro forma stockholders' equity of the Company.
THE CONVERSION
The Boards of Directors of the Association and the Company and the OTS
have approved the Plan subject to the Plan's approval by the Members of the
Association entitled to vote on the matter and subject to the satisfaction of
certain other conditions imposed by the OTS in its approval. OTS approval,
however, does not constitute a recommendation or endorsement of the Plan by the
OTS.
General
On December 5, 1996, the Board of Directors of the Association adopted
the Plan^ pursuant to which the Association would be converted from a federally
chartered mutual savings and loan association to a federally chartered stock
savings bank, with the concurrent formation of the Company. It is currently
intended that all of the capital stock of the Association will be held by the
Company. The OTS has approved the Plan subject to its approval by the members of
the Association entitled to vote on the matter at a special meeting (the
"Special Meeting") called for that purpose and subject to the satisfaction of
certain other conditions imposed by the OTS in its approval.
62
The OTS has approved the Company's application to become a savings and
loan holding company and to acquire all of the Common Stock of the Association
to be issued in the Conversion. Pursuant to such OTS approval, the Company plans
to retain 50% of the net proceeds from the sale of the Common Stock and to use
the remaining 50% to purchase all of the to be issued and outstanding capital
stock of the Association.
The Conversion will be accomplished through adoption of the proposed
Federal Stock Charter and Bylaws to authorize the issuance of capital stock by
the Association, at which time the Association will become a wholly owned
subsidiary of the Company. The Conversion will be accounted for at historical
cost in a manner similar to a pooling of interests. Under the Plan, the Common
Stock is being offered for sale by the Company. As part of the Conversion, the
Company is conducting a Subscription Offering of the Common Stock for holders of
subscription rights and, depending upon market conditions at or near the
completion of the Subscription Offering, may also, or in lieu thereof, conduct a
Community Offering. Shares of Common Stock not subscribed for in the
Subscription and Community Offerings may be offered on a best efforts basis by a
selling group of broker-dealers in a Syndicated Community Offering. The Plan
provides that the Conversion must be completed within 24 months after the date
of the approval of the Plan by the members of the Association.
In the event that the Association is unable to complete the sale of
Common Stock and effect the Conversion within 45 days after the end of the
Subscription Offering, the Association may request an extension of the period by
the OTS. No assurance can be given that the extension would be granted if
requested. Due to the volatile nature of market conditions, no assurances can be
given that the Association's valuation would not substantially change during any
such extension. If the EVR of the Common Stock must be amended, no assurance can
be given that such amended EVR would be approved by the OTS. Therefore, it is
possible that if the Conversion cannot be completed within the requisite period,
the Association may not be permitted to complete the Conversion. A substantial
delay caused by an extension of the period may also significantly increase the
expense of the Conversion. No sales of the Common Stock may be completed in the
Offerings unless the Plan is approved by the members of the Association.
Completion of the Offerings is subject to market conditions and other
factors beyond the Association's control. No assurance can be given as to the
length of time following approval of the Plan at the Special Meeting that will
be required to complete the Offerings. If delays are experienced, significant
changes may occur in the estimated pro forma market value of the Association
upon Conversion together with corresponding changes in the offering price and
the net proceeds realized by the Association from the sale of the Common Stock.
In the event the Conversion is terminated, the Association would be required to
charge all Conversion expenses against current income and any funds collected by
the Association in the Offerings would be promptly returned to each potential
investor, plus interest at the prescribed rate.
Reasons for the Conversion
The principal factors considered by the Association's Board of Directors
in reaching the decision to pursue a mutual-to-stock conversion are the future
of mutual institutions generally and the numerous competitive disadvantages
which the Association faces if it continues in mutual form. These disadvantages
relate to a variety of factors, including growth opportunities, employee
retention, and regulatory uncertainty.
In the opinion of management, if the Association is to continue to grow
and prosper, the mutual form of organization is the least desirable form from a
competitive standpoint. The only realistic growth opportunity available to the
Association as a mutual is branching. The opportunities for a mutual to
63
expand through mergers are extremely scarce. The only realistic merger
possibilities are mutual to mutual mergers. As the number of mutual companies
dwindles, so do the opportunities for such mergers. Although the Association
does not have any specific acquisitions planned at this time, the Conversion
will position the Association to take advantage of any acquisition opportunities
that may present themselves. Because a conversion to stock form is a
time-consuming and complex process, the Association cannot wait until an
acquisition is imminent to begin the conversion process.
As an increasing number of the Association's competitors convert to
stock form and can use stock based compensation programs, the Association, as a
mutual, is at a disadvantage in attracting and retaining qualified management.
The Association believes that the ESOP for all employees and the Stock Option
Plan and the RSP for directors, officers, and certain employees are important
tools in achieving such goals, even though the Association will be required to
wait until after the Conversion to implement the Stock Option Plan and the RSP.
See "Management of the Association - Proposed Future Stock Benefit Plans."
Another benefit of the conversion will be an increase in capital.
Notwithstanding the Association's current capital position, the importance of
higher levels of capital cannot be ignored. For several years, thrift
institutions enjoyed very favorable net interest margins as interest rates
dropped to very low levels. In more recent periods, interest rates have risen
and fallen. As has been amply demonstrated in the past, changing accounting
principles, interest rate shifts, and changing regulations can threaten even
well-capitalized institutions. As a mutual institution, the Association can only
increase capital through retained earnings, the use of pledged deposits or the
issuance of subordinated debentures and mutual capital certificates, which do
not count as Tier I capital for regulatory capital purposes. Capital that may
seem unnecessary now may help the Association withstand future threats to its
capital.
In view of the competitive disadvantage and the ongoing debate about the
future of mutual institutions in the wake of regulatory consolidation and other
forces, the Association is choosing to reject the uncertainty inherent in the
mutual structure in favor of the more widely used, recognized, and understood
stock form of ownership.
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Depositor and borrower members will have no voting rights
in the converted Association and will therefore not be able to elect directors
of the Association or to otherwise participate in the conduct of the affairs of
the Association or the Company unless they hold Common Stock. Currently, these
rights are accorded to depositor and certain borrower members of the
Association. Although the Association holds annual meetings of members for the
election of directors and for other purposes, very few members exercise their
voting rights. Accordingly, voting control of the Association has been
effectively exercised by the Board of Directors through their individual votes
and through proxies given by a limited number of members. Following the
Conversion, the Association will become a wholly owned subsidiary of the
Company, which will hold all voting rights in the Association. Voting rights in
the Company will be vested exclusively in the Company's stockholders.
Stockholders will be entitled to vote on any matter to be considered by the
stockholders of the Company and will be entitled to one vote for each share of
the Common Stock owned. See "Certain Restrictions on Acquisition of the Company"
with respect to limitations applicable to the rights of stockholders to exercise
cumulative voting.
Savings Accounts and Loans. The Association's savings accounts, balances
of the individual accounts, and the existing FDIC insurance coverage will not be
affected by the Conversion.
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Furthermore, the Conversion will not affect the loan accounts, the balances of
these accounts, or the obligations of the borrowers under their individual
contractual arrangements with the Association.
Tax Effects. A discussion of the material taxes applicable to the
Association is included above under "Taxation." A summary of the material tax
effects of the Conversion on the Association and its members is set forth below.
The Association has received an opinion from its counsel, Malizia, Spidi, Sloane
& Fisch, P.C., Washington, D.C., that the Conversion will constitute a
nontaxable reorganization under Section 368(a)(1)(F) of the Code. Among other
things, the opinion, filed as an exhibit to the registration statement of which
this prospectus is a part, provides that: (i) 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 the Association in either its mutual form or its stock form, or
by the Company, by reason of the proposed Conversion; (ii) no gain or loss will
be recognized by the Association upon the receipt of money from the Company for
stock of the Association, and no gain or loss will be recognized by the Company
upon the receipt of money for the Common Stock; (iii) the assets of the
Association in either its mutual or its stock form will have the same basis
before and after the Conversion; (iv) the holding period of the assets of the
Association will include the period during which the assets were held by the
Association in its mutual form prior to conversion; (v) no gain or loss will be
recognized by the Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members of the Association upon the issuance to them of
withdrawable savings accounts in the stock association in the same dollar amount
as their savings accounts in the Association plus an interest in the liquidation
account of the stock association in exchange for their savings accounts in the
Association; (vi) the receipt by Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members of non-transferable subscription rights to
purchase shares of the Common Stock under the Plan is taxable to Eligible
Account Holders, Supplemental Eligible Account Holders, and Other Members to the
extent the subscription rights have value; (vii) the basis of each account
holder's savings accounts in the Association after the Conversion will be the
same as the basis of his or her savings accounts in the Association prior to the
Conversion, decreased by the fair market value of the non-transferable
subscription rights received and increased by the amount, if any, of gain
recognized on the exchange; (viii) the basis of each account holder's interest
in the liquidation account will be zero; (ix) the holding period of the Common
Stock acquired through the exercise of subscription rights shall begin on the
date on which the subscription rights are exercised; (x) the Association will
succeed to and take into account the earnings and profits or deficit in earnings
and profits of the Association, in its mutual form, as of the date of
Conversion; (xi) the Association, immediately after Conversion, will succeed to
the bad debt reserve accounts of the Association, in its mutual form, and the
bad debt reserves will have the same character in the hands of the Association
after Conversion as if no distribution or transfer had occurred; and (xii) the
creation of the liquidation account will have no effect on the Association's
taxable income, deductions, or addition to reserve for bad debts either in its
mutual or stock form.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part
on the assumption that the exercise price of the subscription rights to purchase
Common Stock will be approximately equal to the fair market value of that stock
at the time of the completion of the proposed Conversion. With respect to the
subscription rights, the Association has received an opinion of Ferguson which,
based on certain assumptions, concludes that the subscription rights to be
received by Eligible Account Holders, Supplemental Eligible Account Holders, and
Other Members do not have any economic value at the time of distribution or at
the time the subscription rights are exercised, whether or not a public offering
takes place. Such opinion is based on the fact that such rights are: (i)
acquired by the recipients without payment therefor, (ii) non-transferable,
(iii) of short duration, and (iv) afford the recipients the right only to
purchase Common Stock at a price equal to its estimated fair market value, which
will be the same price at which shares of Common Stock for which no subscription
right is received in the Subscription Offering may be offered in the Community
Offering. If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders, or Other Members are deemed to have an
65
ascertainable value, receipt of such rights would be taxable probably only to
those Eligible Account Holders, Supplemental Eligible Account Holders, or Other
Members who exercise the subscription rights in an amount equal to such value
(either as a capital gain or ordinary income), and the Association could
recognize gain on such distribution.
The Association is subject to West Virginia taxation and has received
the opinion of S.R. Snodgrass, A.C. that the Conversion will be treated for West
Virginia state tax purposes similar to the Conversion's treatment for federal
tax purposes.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane &
Fisch, P.C., Ferguson, and S.R. Snodgrass, A.C. 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 West Virginia 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 deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each eligible Account Holder and
Supplemental Eligible Account Holder of the Association is entitled to a
liquidating distribution from the liquidation account, pro rata to the value of
his or her accounts, of the Association remaining after liquidation payment of
claims of all creditors (including the claims of all account holders to the
withdrawal value of their accounts). Each account holder's pro rata share of
such liquidating distribution would be in the same proportion as the value of
his or her deposit accounts was to the total value of all deposit accounts in
the Association 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 the Association. Therefore, except as described
below, a depositor's claim would be solely in the amount of the balance in his
or her deposit account plus accrued interest. A depositor would not have an
interest in the residual value of the assets of the Association above that
amount, if any.
The Plan and OTS rules provide for the establishment, upon the
completion of the Conversion, of a special "liquidation account" for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders in an
amount equal to the equity of the Association as of the date of its latest
statement of financial condition contained in the final prospectus. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he or she
continues to maintain his or her deposit account at the Association, would be
entitled pursuant to a complete liquidation of the Association after Conversion,
to an interest in the liquidation account prior to any payment to stockholders
of the Association. Each Eligible Account Holder would have an initial interest
in such liquidation account for each deposit account held in the Association on
the qualifying date, August 31, 1995. Each Supplemental Eligible Account Holder
would have a similar interest as of the qualifying date, March 31, 1997. 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 such qualifying
dates. However, if the amount in the deposit account on any annual closing date
of the Association (March 31) is less than the amount in such 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
such reduction, and the interest would cease to exist if such deposit account
were closed. The interest in the special liquidation account will never be
increased despite any increase in the related deposit account after the
respective qualifying dates.
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No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction the Association is not the surviving
institution shall be considered a complete liquidation. In such transactions,
the liquidation account shall be assumed by the surviving institution.
Subscription Rights and the Subscription Offering
In accordance with OTS regulations, non-transferable subscription rights
to subscribe for shares of the Common Stock have been granted to all persons and
entities entitled to subscribe for the Common Stock in the Subscription Offering
under the Plan. The amount of the Common Stock which these parties may purchase
will be determined, in part, by the total amount of Common Stock to be issued
and by the availability of the Common Stock for purchase under the categories
set forth in the Plan. If the Subscription Offering extends beyond _________,
1997 (45 days following the Expiration Date of the Subscription Offering),
subscribers will be resolicited. Subscription priorities have been established
for the allocation of stock to the extent that the Common Stock is available
after satisfaction of all subscriptions of all persons having prior rights and
subject to the maximum and minimum purchase limitations set forth in the Plan
and as described below under "- Limitations on Purchases of Shares." The
following priorities have been established:
Eligible Account Holders. Each Eligible Account Holder (depositors of
the Association with account balances of at least $50 on August 31, 1995) will
receive non-transferable subscription rights on a priority basis to purchase
that number of shares of Common Stock which is equal to the greater of 10,000
shares ($100,000) sold in the Conversion, one-tenth of one percent (0.10%) of
the total offering, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the qualifying
deposit of the Eligible Account Holder and the denominator is the total amount
of qualifying deposits of all Eligible Account Holders, but in no event shall
this number be greater than the maximum purchase limitation of 10,000 shares
($100,000) as specified in the Plan. If the allocation made in this paragraph
results in an oversubscription, shares of Common Stock shall be allocated among
subscribing Eligible Account Holders so as to permit each such account holder,
to the extent possible, to purchase a number of shares of Common Stock
sufficient to make his or her total allocation equal to 100 shares of Common
Stock or the total amount of his or her subscription, whichever is less. Any
shares of Common Stock not so allocated shall be allocated among the subscribing
Eligible Account Holders on an equitable basis, in the proportion that the
amounts of their respective qualifying deposits bear to the total qualifying
deposits of all subscribing Eligible Account Holders. If the amount so allocated
exceeds the amount subscribed for by any one or more Eligible Account Holders,
the excess shall be reallocated (one or more times as necessary) among those
Eligible Account Holders whose subscriptions are still not fully satisfied on
the same principle until all available shares have been allocated or all
subscriptions satisfied. Subscription rights received by officers and directors
in this category based on their increased deposits in the Association in the
one-year period preceding August 31, 1995, are subordinated to the subscription
rights of other Eligible Account Holders.
Tax-Qualified Employee Benefit Plans. Tax-qualified employee benefit
plans of the Association ("Employee Plans") have been granted subscription
rights to purchase up to 10% of the total shares issued in the Conversion. The
ESOP is an Employee Plan and intends to purchase up to 8% of the Common Stock
issued in the Conversion.
The right of Employee Plans to subscribe for the Common Stock is
subordinate to the right of the Eligible Account Holders to subscribe for the
Common Stock. However, in the event the Offerings result in the issuance of
shares above the maximum of the EVR (i.e., more than 690,000 shares), the
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Employee Plans have a priority right to fill their subscription (the ESOP, the
only Employee Plan, currently intends to purchase up to 8% of the Common Stock
issued in the Conversion). The Employee Plans may, however, determine to
purchase some or all of the shares covered by their subscriptions after the
Conversion in the open market or, if approved by the OTS, out of authorized but
unissued shares in the event of an oversubscription.
Supplemental Eligible Account Holders. Each Supplemental Eligible
Account Holder (depositors who are not Eligible Account Holders of the
Association with account balances of at least $50 on March 31, 1997) will
receive non-transferable subscription rights to purchase that number of shares
of Conversion Stock which is equal to the greater of 10,000 shares ($100,000)
sold in the Conversion, one-tenth of one percent (0.10%) of the total offering,
or 15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. These
non-transferable subscription rights shall be granted only in the event that the
Eligibility Record Date is more than 15 months prior to the date of the latest
amendment to the Application filed prior to OTS approval. If the allocation made
pursuant to this paragraph results in an oversubscription, shares of Common
Stock shall be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each such account holder, to the extent possible, to purchase a
number of shares of Common Stock sufficient to make his or her total allocation
(including the number of shares of Common Stock, if any, allocated in accordance
with the subscription rights of Eligible Account Holders) equal to 100 shares of
Common Stock or the total amount of his or her subscription, whichever is less.
Any shares of Common Stock not so allocated shall be allocated among the
subscribing Supplemental Eligible Account Holders on an equitable basis, related
to the amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Supplemental Eligible Account Holders.
The rights of Supplemental Eligible Account Holders to subscribe for the
Common Stock is subordinate to the rights of the Eligible Account Holders and
Employee Plans to subscribe for the Common Stock.
Other Members. Other Members (depositors and borrowers who are entitled
to vote at a special meeting of members called to vote on the Conversion) who
are not Eligible Account Holders or Supplemental Eligible Account Holders, will
receive non-transferable subscription rights to purchase up to the greater of
10,000 shares ($100,000), or one tenth of one percent (0.10%) of the total
offering, subject to maximum and minimum purchase limitations and exclusive of
an increase in the total number of shares issued due to an increase in the
maximum EVR of up to 15%, to the extent such stock is available following
subscriptions by Eligible Account Holders, Employee Plans, and Supplemental
Eligible Account Holders. If the allocation made pursuant to this paragraph
results in an oversubscription when added to the shares of Common Stock
subscribed for by the Eligible Account Holders, the Employee Plans, and the
Supplemental Account Holders, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares of Common
Stock sufficient to make his or her total allocation equal to 100 shares of
Common Stock or the total number of shares covered by the subscription of the
Other Member. Any remaining shares 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.
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Members in Non-Qualified States. The Company will make reasonable
efforts to comply with the securities laws of all states in the United States in
which persons entitled to subscribe for the Common Stock pursuant to the Plan
reside. However, no person will be offered or allowed to purchase any Common
Stock under the Plan if he or she resides in a foreign country or in a state of
the United States with respect to which any of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares under the Plan
reside in such state or foreign country; (ii) the granting of subscription
rights or offer or sale of shares of Common Stock to such persons would require
the Association, the Company, or its employees to register, under the securities
laws of such state or foreign country, as a broker or dealer or to register or
otherwise qualify its securities for sale in such state or foreign country; or
(iii) such registration or qualification would be impracticable for reasons of
cost or otherwise. No payments will be made in lieu of the granting of
subscription rights to any such person.
Restrictions on Transfer of Subscription Rights and Shares. The OTS
conversion regulations prohibit any person with subscription rights, including
Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Members of the Association, 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 upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his or her account. Each person subscribing for shares will
be required to certify that such person is purchasing shares solely for his or
her own account and that such person has no agreement or understanding regarding
the sale or transfer of such shares. The regulations also prohibit any person
from offering or making an announcement of an offer or intent to make an offer
to purchase such subscription rights or shares of Common Stock prior to the
completion of the Conversion.
The Association and the Company will pursue any and all legal and
equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them to involve the
transfer of such rights.
Expiration Date. The Subscription Offering will expire at 12:00 noon,
Eastern Time, on ___________, 1997, unless the Subscription Offering is
extended, at the discretion of the Board of Directors, up to an additional 45
days with the approval of the OTS, 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
To the extent that shares remain available and subject to market
conditions prior to or at the completion of the Subscription Offering, the
Company may offer shares pursuant to the Plan, to selected persons in a
Community Offering with a preference given to natural persons residing in Tyler
County, West Virginia. Any orders received in connection with the Community
Offering, if any, will receive a lower priority than orders properly made in the
Subscription Offering by persons exercising Subscription Rights. Common Stock
sold in the Community Offering will be sold at $10.00 per share and hence will
be sold at the same price as all other shares in the Conversion. The Company and
the Association have the right to reject orders, in whole or in part, in their
sole discretion in the Community Offering.
No person (or persons acting through a single account) will be permitted
to purchase more than 10,000 shares or $100,000 of Common Stock in the Community
Offering. No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than 10,000 shares or $100,000 of
Common Stock in the Community Offering. To order Common Stock in connection with
the Community Offering, if any, an executed stock order and account withdrawal
authorization (if
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applicable) must be received by Trident prior to the termination of the
Community Offering. The date by which orders must be received in the Community
Offering ("Community Offering Expiration Date") will be set by the Company at
the time of commencement of the Community Offering; provided however, if the
Offerings are extended beyond __________, 1997, each purchaser will have the
opportunity to maintain, modify, or rescind his or her order. In such event, all
funds received in the Community Offering will be promptly returned with interest
to each purchaser unless he or she affirmatively indicates otherwise.
In the event the Company determines to conduct a Community Offering,
persons to whom a Prospectus is delivered may order shares of Common Stock by
submitting a completed stock order and account withdrawal authorization and an
executed certification along with immediately available funds to the Company by
not later than the Community Offering Expiration Date (as established by the
Company). If the aggregate pro forma market value of the Company and the
Association, as converted, is less than $5,100,000 or more than $7,935,000, each
purchaser will have the right to modify or rescind his or her order.
If a Community Offering is held, the opportunity to order shares of
Common Stock in the Community Offering is subject to the right of the
Association and the Company, in their sole discretion, to accept or reject any
such orders in whole or in part.
Syndicated Community Offering
To the extent that shares remain available and subject to market
conditions during or at the completion of the Subscription Offering and
Community Offering, the Company may offer shares pursuant to the Plan, to the
general public in a Syndicated Community Offering on a best efforts basis
through a syndicate of selected dealers to be formed and managed by Trident.
Neither Trident nor any registered broker-dealer shall have any obligation to
take or purchase any shares of the Common Stock in the Syndicated Community
Offering. Any orders received in connection with the Syndicated Community
Offering, if any, will receive a lower priority than orders properly made in the
Subscription Offering. Common Stock sold in the Syndicated Community Offering
will be sold at $10.00 per share and hence will be sold at the same price as all
other shares in the Conversion.
If a Syndicated Community Offering is held, the opportunity to order
shares of Common Stock in the Syndicated Community Offering is subject to the
right of the Association and the Company, in their sole discretion, to accept or
reject any such orders in whole or in part.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an Order Form or stock order and account withdrawal authorization
("Stock Order"), if applicable, in the case of the Community Offering or
Syndicated Community Offering. Any person receiving a Stock Order Form who
desires to subscribe for shares of Common Stock must do so prior to the
Expiration Date or, if applicable, the Community Offering Expiration Date, by
delivering (by mail or in person ) to the Association a properly executed and
completed Stock 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 consummation of the Conversion.
Once tendered, subscription orders cannot be revoked without the consent of the
Association and the Company unless the Conversion is not completed within 45
days of the Expiration Date.
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In the event a Stock Order Form (i) is not delivered and is returned to
the Association by the United States Postal Service or the Association is unable
to locate the addressee; (ii) is not received or is received after the
Expiration Date or the Community Offering Expiration Date; (iii) is defectively
completed or executed; (iv) 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 amount of such required payment, but excluding subscriptions by the Employee
Plans) or, in the case of an institutional investor in the Community Offering,
by delivering irrevocable orders together with a legally binding commitment to
pay the full purchase price prior to 48 hours before the completion of the
Conversion; or (v) is not mailed pursuant to a "no mail" order placed in effect
by the account holder, the subscription rights for the person to whom such
rights have been granted will lapse as though such person failed to return the
completed Stock Order Form within the time period specified. However, the
Company may, but will not be required to, waive any irregularity on any Stock
Order Form or require the submission of corrected Stock Order Forms or the
remittance of full payment for subscribed shares by such date as the Company may
otherwise specify. The waiver of an irregularity on a Stock Order Form in no way
obligates the Company to waive any other irregularity on any other Stock Order
Form. Waivers will be considered on a case by case basis. The Association and
the Company reserve the right in their sole discretion to accept or reject
orders received on photocopies or facsimile Stock Order Forms, or whose payment
is to be made by wire transfer or payment from private third parties. The
interpretation by the Association or Company of the terms and conditions of the
Plan and of the acceptability of the Stock Order Forms will be final, subject to
the authority of the OTS.
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date or, if applicable, the Community Offering Expiration
Date, in accordance with Rule 15c2-8 of the Exchange Act, no Prospectus will be
mailed any later than five days prior to such date or hand delivered any later
than two days prior to such date . Execution of the Order Form or Stock Order
will confirm receipt or delivery in accordance with Rule 15c2-8. Order Forms or
Stock Orders will only be distributed with a Prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares, computed on the basis of the Purchase Price, will be required
to accompany all properly completed Order Forms, on or prior to the expiration
date specified on the Order Form unless such date is extended by the Association
or the Company. Employee Plans subscribing for shares during the Subscription
Offering may pay for such shares upon consummation of the Conversion. Payment
for shares of Common Stock may be made (i) in cash, if delivered in person, (ii)
by check or money order, or (iii) for shares of Common Stock subscribed for in
the Subscription Offering, by authorization of withdrawal from savings accounts
(including certificates of deposit) maintained with the Association. Appropriate
means by which such withdrawals may be authorized are provided in the Order
Form. Once such a withdrawal has been authorized, none of the designated
withdrawal amount may be used by a subscriber for any purpose other than to
purchase the Common Stock for which a subscription has been made until the
Conversion 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
Conversion 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 passbook
savings account rate subsequent to the withdrawal. In the case of payments made
in cash or by check or money order, such funds will be placed in a segregated
account and interest will be paid by the Association at the passbook savings
account rate from the date payment is received until the Conversion is completed
or terminated. An executed Order Form, once received by the Company, may not be
modified, amended, or rescinded without the consent of the
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Association, unless the Conversion 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. In the event that the Conversion is not consummated
for any reason, all funds submitted pursuant to the Offerings will be promptly
refunded with interest as described above.
As indicated above, Trident may enter into agreements with
broker-dealers (selected dealers) to assist in the sale of the shares in the
Syndicated Community Offering. See also "- Plan of Distribution" and "-
Marketing Arrangements." No orders may be placed or filled by or for a selected
dealer during the Subscription Offering. After the close of the Subscription
Offering, Trident will instruct selected dealers as to the number of shares to
be allocated to each selected dealer. Only after the close of the Subscription
Offering and upon allocation of shares to selected dealers may selected dealers
take orders from their customers. During the Subscription and Community
Offerings, selected dealers may only solicit indications of interest from their
customers to place orders with the Company as of a certain date ("Order Date")
for the purchase of shares of Common Stock. When and if Trident and the Company
believe that enough indications of interest and orders have been received in the
Subscription Offering and the Community Offering and the Syndicated Community
Offering to consummate the Conversion, Trident will request, as of the Order
Date, selected dealers to submit orders to purchase shares for which they have
previously received indications of interest from their customers. Selected
dealers will send confirmations of the orders to such customers promptly after
the Order Date. Selected dealers will debit the accounts of their customers on
the "Settlement Date" which date will be promptly after the Order Date.
Customers who authorize selected dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Settlement Date. On the Settlement Date, selected dealers will remit funds to
the account established by the Association for each selected dealer. After
payment has been received by the Association from selected dealers, funds will
earn interest at the passbook savings account rate until the consummation of the
Conversion. Funds will be promptly returned, with interest, in the event the
Conversion is not consummated as described above.
However, selected dealers who do not hold or receive funds for customers
or carry accounts of, or for, customers will (1) instruct their customers who
wish to subscribe in the Offerings to make their checks payable to the
Association and (2) will transmit customer checks directly to the Association
promptly after receipt by such selected dealer.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Offerings, provided that such IRAs are not
maintained on deposit at the Association. Persons with IRAs maintained at the
Association must have their accounts transferred to an unaffiliated institution
or broker to purchase shares of Common Stock in the Offerings. Instructions on
how to transfer self- directed IRAs maintained at the Association can be
obtained from the Stock Information Center ((304) ________) located at the
Association's office.
Federal regulations prohibit the Association from lending funds or
extending credit to any person to purchase the Common Stock in the Conversion.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Conversion will be mailed to the persons entitled thereto at the
address noted on the Order Form, as soon as practicable following consummation
of the Conversion. 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.
72
Restriction on Sales Activities
The Common Stock will be offered in the Offerings principally by the
distribution of this prospectus and through activities conducted at a Stock
Information Center located at the Association. The Stock Information Center is
expected to operate during normal business hours throughout the Offerings. It is
expected that a registered representative employed by Trident will supervise the
operation of the Stock Information Center. Trident will oversee the mailing of
materials relating to the Offerings, respond to questions regarding the
Conversion and the Offerings and assist with processing Stock Order Forms. It is
expected that Association and Company personnel will be present in the Stock
Information Center to perform clerical functions and to answer questions related
to the Conversion.
Directors and executive officers of the Company may participate in the
solicitation of offers to purchase Common Stock in jurisdictions where such
participation is not prohibited. Other employees of the Company and the
Association may participate in the Offerings in ministerial capacities or
perform clerical functions in effecting sales transactions. Such other employees
have been instructed not to solicit offers to purchase Common Stock or provide
advice regarding the purchase of Common Stock. Questions of prospective
purchasers may be directed to executive officers of the Company or registered
representatives of Trident. The Company will rely on Rule 3a4-1 promulgated
under the Exchange Act, and sales of Common Stock will be conducted in
accordance with Rule 3a4-1, so as to permit officers, directors, and employees
to participate in the sale of Common Stock. No officer, director, or employee of
the Company or the Association will be compensated in connection with such
person's solicitations or other participation in the Offerings by the payment of
commissions or other remuneration based either directly or indirectly on
transactions in the Common Stock.
Limitations on Purchases of Shares
The Plan provides for certain additional limitations to be placed upon
the purchase of the Common Stock by eligible subscribers and others in the
Conversion. Each purchaser must purchase a minimum of 25 shares; provided,
however, that the minimum number of shares requirement shall not apply if the
number of shares of Conversion Stock purchased times the price per share exceeds
$500. No person (or persons through a single account) may subscribe for or
purchase more than 10,000 shares of Common Stock ($100,000) and no person (or
persons through a single account), together with any associate or group of
persons acting in concert, may subscribe for or purchase more than 10,000 shares
of Common Stock ($100,000), except for the Employee Plans which may purchase up
to 10% of the Common Stock issued in the Conversion, but currently intend to
purchase 8% of the Common Stock issued in the Conversion. Depending on market
conditions and the results of the Offerings, the Board of Directors, in its sole
discretion, may increase or decrease the purchase limitation without the
approval of the members of the Association and without resoliciting subscribers,
provided that the maximum purchase limitation may not be increased to a
percentage in excess of 5%. The OTS regulations governing the Conversion limit
the number of shares that officers and directors and their associates may
purchase. In the aggregate, the officers and directors or their associates may
not purchase more than 34% of the shares of the Common Stock issued pursuant to
the Conversion. For purposes of the Plan, the directors are not deemed to be
acting in concert solely by reason of their Board membership.
Requests to purchase additional shares of Common Stock under the Plan
will be allocated by the Board of Directors on a pro rata basis giving priority
in accordance with the priority rights set forth above and in the Plan. Pro rata
reduction within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitation is exceeded.
73
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the EVR of up to 15% (the "Adjusted Maximum"),
the additional shares will be allocated in the following order of priority: (i)
to fill the Employee Plans' subscription of up to 8% of the Adjusted Maximum
number of shares; (ii) in the event that there is an oversubscription by
Eligible Account Holders, to fill unfulfilled subscriptions of Eligible Account
Holders exclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unfulfilled
subscriptions to Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum; and (iv) in the event that there is an oversubscription by Other
Members, to fill unfulfilled subscriptions of Other Members exclusive of the
Adjusted Maximum.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Association or a majority-owned
subsidiary of the Association) of which such person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities, (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, (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), and (iii) any relative or spouse of
such person or any relative of such spouse, who has the same home as such person
or who is a director or officer of the Association, or any of its parents or
subsidiaries. For example, a corporation of which a person serves as an officer
would be an associate of such person, and therefore, all shares purchased by
such corporation would be included with the number of shares which such person
individually could purchase under the above limitations.
The term "officer" is defined in the Plan to mean an executive officer
of the Association and may include the Association's Chairman of the Board,
Chief Executive Officer, President, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Treasurer and any other
person performing similar functions. All references herein to an officer shall
have the same meaning as used for an officer in the Plan.
Each person purchasing shares of the Common Stock in the Conversion will
be deemed to confirm that such purchase does not conflict with the maximum
purchase limitation. In the event that such purchase limitation is violated by
any person (including any associate or group of persons affiliated or otherwise
acting in concert with such persons), the Association will have the right to
purchase from such person at the Purchase Price per share all shares acquired by
such person in excess of such purchase limitation or, if such excess shares have
been sold by such person, to receive the difference between the Purchase Price
per share paid for such excess shares and the price at which such excess shares
were sold by such person. This right of the Association to purchase such excess
shares will be assignable by the Association.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Association. For certain restrictions on the Common Stock purchased by directors
and officers, see "- Restrictions on Transferability by Directors and Officers."
In addition, under guidelines of the National Association of Securities Dealers,
Inc. ("NASD"), members of the NASD and their associates are subject to certain
restrictions on the transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon purchase of such
securities.
74
Plan of Distribution
The Company and the Association have entered into an Agency Agreement
with Trident under which Trident will assist, on a best efforts basis, in the
distribution of the Common Stock in the Conversion. Trident is a broker-dealer
registered with the NASD. Specifically, Trident will assist in the Subscription
Offering in the following manner: (i) training and educating the Company's and
the Association's employees regarding the procedures and regulatory requirements
of the stock conversion process; (ii) conducting information meetings for
potential subscribers, if necessary; (iii) managing the sales efforts in the
Offerings; and (iv) keeping records of all stock subscriptions. Selected dealers
may also be used in the Offerings. See "- Marketing Arrangements."
Materials for the Offerings have been initially distributed to eligible
subscribers by mail, with additional copies available at the Stock Information
Center. In the Subscription Offering, officers of the Company may be available
to answer questions about the Conversion. Such officers will not be permitted to
make statements about the Association or the Company unless such information is
also set forth in this Prospectus, and they will not be authorized to render
investment advice. All subscribers for the shares to be offered will be
instructed to send payment directly to the Association, where such funds will be
held in a segregated special escrow account and not released until the closing
of the Conversion or its termination.
Marketing Arrangements
The Association and the Company have engaged Trident as a financial and
marketing advisor in connection with the Offerings and Trident has agreed to
exercise its best efforts to assist the Association in the sale of Common Stock
in the Offerings. Trident will receive a commission of 2% of the total dollar
amount of Common Stock sold in the Subscription Offering and Community Offering,
if any, excluding subscriptions by directors and executive officers of the
Association and the Company and their immediate family members, and the ESOP.
Trident will also be reimbursed for its reasonable out-of-pocket expenses,
including legal fees, in an amount up to $37,500. The Association and the
Company have agreed to indemnify Trident, 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. See "Pro Forma Data" for
further information regarding expenses of the Conversion.
If the Company and the Association determine to offer shares of Common
Stock for sale in the Syndicated Community Offering, Trident will organize and
manage the syndicate of selected broker-dealers. Trident is directly responsible
for the payment of selling commissions to other NASD firms and licensed brokers
participating in the Syndicated Community Offering. Other firms may participate
under a selected dealers arrangement. Trident and the selected dealers will
receive an aggregate commission to be agreed upon jointly by Trident and the
Association of the stock sold in the Syndicated Community Offering, and this fee
will be in lieu of the commission to which Trident would otherwise be entitled
if the stock were sold through the Subscription and Community Offerings. Fees
paid to Trident and to any other broker-dealer may be deemed to be underwriting
fees and Trident and such broker-dealers may be deemed to be underwriters.
75
Shares to be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information as to the approximate
purchases of Common Stock by each director and executive officer of the
Association and by all directors and officers as a group, including their
"associates." All such shares will be purchased for investment purposes and not
for purposes of resale. For purposes of the following table, it has been assumed
that 600,000 shares (the midpoint of the EVR) of the Common Stock will be sold
at $10.00 per share and that sufficient shares will be available to satisfy
subscriptions in all categories.
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Purchased(1)
- ---------------------- --------------- ------------ ------------ ------------
Ellen E. Thistle Director 2,500 $25,000 .42
Lester C. Doak Chairman of the Board ^ 2,500 25,000 .42
David W. Miller Director 9,000 90,000 1.50
Guy L. Nichols Director 1,000 10,000 .17
Gary L. Ward Director 1,000 10,000 .17
Dorsey R. Ash Director 1,500 15,000 .25
Charles P. LaRue Director 7,000 70,000 1.17
Margaret A. Peters Director 750 7,500 .13
James E. Willison Director 500 5,000 .08
Stanley M. Kiser President, Chief
Executive Officer and
Director 6,500 65,000 1.08
Cynthia R. Carson Vice President and
Corporate Secretary 1,500 15,000 .25
- --------------------
(1) Does not include shares to be purchased by the ESOP.
Stock Pricing
Ferguson, a financial consulting and appraisal firm that is experienced
in the evaluation and appraisal of business entities, including thrift
institutions involved in the conversion process, has been retained by the
Association to prepare an appraisal of the estimated pro forma market value of
the Common Stock to be sold pursuant to the Conversion, as well as other
material. Ferguson will receive a fee of $19,500 plus out-of-pocket expenses.
The Association has agreed to indemnify Ferguson under certain circumstances
against liabilities and expenses (including certain legal fees) arising out of
or based on any misstatement or untrue statement of a material fact contained in
the information supplied by the Association to Ferguson, except where Ferguson
is determined to have been negligent or failed to exercise due diligence in the
preparation of the appraisal.
The appraisal was prepared by Ferguson in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors including, but not limited to, the Association's
financial condition and operating trends, the competitive environment within
which the Association operates, operating trends of certain thrift institutions
and savings and loan holding companies, relevant economic conditions, both
nationally and in the State of West Virginia which
76
affect the operations of thrift institutions, and stock market values of certain
institutions. In addition, Ferguson has advised the Association that it has
considered and will consider the effect of the additional capital raised by the
sale of the Common Stock on the estimated aggregate pro forma market value of
such shares. The appraisal has been filed as an exhibit to the registration
statement of which this prospectus is a part. See "Additional Information."
On the basis of the above, Ferguson has determined, in its opinion, that
as of March ^ 14, 1997, the estimated aggregate pro forma market value of the
Common Stock to be issued in the Conversion was $6,000,000. The Company has
determined to offer the shares in the Conversion at a price of $10.00 per share.
By dividing the price per share into the estimated aggregate value, the Company
initially plans to issue 600,000 shares. OTS regulations require, however, that
the appraiser establish a range of value for the stock to allow for fluctuations
in the aggregate value of the stock due to changing market conditions and other
factors. Accordingly, Ferguson has established a range of value from $5,100,000
to $6,900,000 for this offering (the Estimated Valuation Range) that will be
updated prior to consummation of the Conversion. If the final value is outside
the Estimated Valuation Range, the total number of shares being offered will be
further adjusted and a new Estimated Valuation Range may be established without
resolicitation of subscriptions and without the approval of the Association's
members, unless required by the OTS or unless the final valuation is less than
$5,100,000 or more than $7,935,000 (15% above the maximum of the Estimated
Valuation Range).
The Board of Directors has reviewed the independent appraisal, including
the stated methodology of the independent appraiser and the assumptions used in
the preparation of the independent appraisal. The Board of Directors is relying
upon the expertise, experience and independence of the appraiser and is not
qualified to determine the appropriateness of the assumptions or the
methodology.
No sale of the shares will take place unless prior thereto Ferguson
confirms to the OTS that, to the best of Ferguson's knowledge and judgment,
nothing of a material nature has occurred which would cause it to conclude that
the Purchase Price on an aggregate basis was incompatible with its estimate of
the aggregate pro forma market value of the Common Stock at the time of the sale
thereof. If, however, the facts do not justify such a statement, an amended
Estimated Valuation Range may be set and subscribers may be resolicited.
Subscribers will not be resolicited in the event the final valuation is not less
than the minimum of the Estimated Valuation Range and is not more than 15% above
the Estimated Valuation Range.
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the appraisal, Ferguson has relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Association. Ferguson did not independently verify the financial statements
and other information provided by the Association, nor did Ferguson value
independently the assets and liabilities of the Association. The appraisal
considers the Association only as a going concern and should not be considered
as an indication of the liquidation value of the Association. Moreover, because
such appraisal is necessarily based upon estimates and projections of a number
of matters, all of which are subject to change from time to time, no assurance
can be given that persons purchasing the Common Stock will thereafter be able to
sell such shares at prices within the estimated range at the time of the
Offerings.
Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the
completion of the Offerings, the Company may significantly increase or decrease
the number of shares to be issued in the Conversion. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel
77
their subscriptions unless the change in the number of shares to be issued in
the Conversion results in an offering which is either below the minimum of the
EVR or materially above the maximum of the EVR, provided that up to a 15%
increase in the maximum of the EVR will not be deemed to be material. Any
adjustments to the EVR as a result of market and financial conditions would be
subject to OTS review.
In the event of a material increase in the valuation, the Company may
increase the total number of shares to be issued in the Conversion. An increase
in the total number of shares to be issued in the Conversion would decrease both
a subscriber's ownership interest and the pro forma equity and income on a per
share basis while increasing the pro forma net income and equity and income on
an aggregate basis. If the number of shares to be offered is to be increased,
any person who subscribed in the Subscription Offering for the maximum number of
shares permitted may be given the opportunity to purchase an additional number
of shares sufficient to make the total number of shares of the Common Stock
purchased by such subscriber equal to the same percentage of the increased
number of shares of Common Stock to be issued in the Conversion. Purchase
limitations will be based on the actual number of shares issued in the
Conversion.
In the event of a material reduction in the valuation, the Association
may decrease the number of shares to reflect fully the reduced valuation. A
decrease in the number of shares to be issued in the Conversion would increase
both a subscriber's ownership interest and the pro forma equity on a per share
basis while decreasing equity on an aggregate basis. A decrease in the total
number of shares to be issued in the Conversion would not affect subscription
rights by reducing the maximum number of shares that may be purchased under
various purchase limitations and would not change the number of shares that a
subscriber may purchase unless the purchase limitation was also changed.
However, such a decrease could reduce the amount of shares allocated in the
event of an oversubscription.
Restrictions on Repurchase of Stock
Generally, within one year following the Conversion, the Company may not
repurchase Common Stock and in the second and third year following the
Conversion, the Company may only repurchase Common Stock as part of an
open-market stock repurchase program in an amount up to 5% of the outstanding
stock during each of those two years, provided the repurchase does not cause the
Association to become undercapitalized and at least 10 days prior notice of the
repurchase is provided to the OTS. The OTS may disapprove the repurchase program
upon a determination that (1) the repurchase program would adversely affect the
financial condition of the Association, (2) the information submitted is
insufficient upon which to base a conclusion as to whether the financial
condition would be adversely affected, or (3) a valid business purpose was not
demonstrated. However, the Regional Director of the OTS may permit repurchases
after six months following the Conversion and may permit additional repurchases
during the second and third year. In addition, SEC rules also restrict the
method, time, price, and number of shares of Common Stock that may be
repurchased by the Company and affiliated purchasers. If, in the future, the
rules and regulations regarding the repurchase of stock are liberalized, the
Company may utilize the rules and regulations then in effect.
Restrictions on Transferability by Directors and Officers
Shares of the Common Stock purchased by directors and officers of the
Company shall be subject to the restriction that said shares shall not be sold
for a period of one year following completion of the Conversion, except for a
disposition of shares in the event of the death of the stockholder or in any
exchange of the Common Stock in connection with a merger or acquisition of the
Company approved by the regulatory authorities. Accordingly, shares of the
Common Stock issued by the Company to directors and officers shall bear a legend
giving appropriate notice of the foregoing restriction, and, in addition, the
Company will give appropriate instructions to the transfer agent for the Common
Stock with respect
78
to the applicable restriction relating to the transfer of any restricted stock.
Any shares issued to directors and officers as a stock dividend, stock split, or
otherwise with respect to restricted stock shall be subject to the same
restrictions.
For a period of three years following the Conversion, no director or
officer of the Association, the Company or their associates may, without the
prior approval of the OTS, purchase any shares of Common Stock other than from
or through a broker or dealer registered with the SEC unless the purchase
involves more than 1% of the outstanding shares of Common Stock through an arm's
length transaction.
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Association will be final, however, such
interpretations shall have no binding effect on the OTS. The Plan provides that,
if deemed necessary or desirable by the Board of Directors, the Plan may be
substantively amended by the Board of Directors as a result of comments from the
OTS or otherwise, prior to the solicitation of proxies from the members and at
any time thereafter with the concurrence of the OTS, except that in the event
that the regulations under which the Plan was adopted are liberalized subsequent
to the approval of the Plan by the OTS and the members at the Special Meeting,
the Board of Directors may amend the Plan to conform to the regulations without
further approval of the OTS or the members of the Association to the extent
permitted by law. An amendment to the Plan that would result in a material
adverse change in the terms of the Conversion would require a resolicitation. In
the event of a resolicitation, subscriptions for which a confirmation or
modification was not received would be rescinded.
Conditions and Termination
Completion of the Conversion requires the approval of the Plan and the
affirmative vote of not less than a majority of the total number of votes of the
members of the Association eligible to be cast at the Special Meeting and the
sale of all shares of Common Stock within 24 months following approval of the
Plan by members. If these conditions are not satisfied, the Plan will be
terminated and the Association will continue its business in the mutual form of
organization. The Plan may be terminated by the Board of Directors at any time
prior to the Special Meeting and, with the approval of the OTS, by the Board of
Directors at any time thereafter.
Other
All statements made in this prospectus are hereby qualified by the
contents of the Plan, the material terms of which are set forth herein. The Plan
is attached to the Proxy Statement. Copies of the Plan are available from the
Association and it should be consulted for further information. Adoption of the
Plan by the Association's members authorizes the Board of Directors to amend or
terminate the Plan.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
Although the Boards of Directors of the Association and the Company are
not aware of any effort that might be made to obtain control of the Company
after Conversion, the Boards of Directors, as discussed below, believe it is
appropriate to include certain provisions in the Company's Certificate of
Incorporation to protect the interests of the Company and its stockholders from
takeovers which the Board of Directors of the Company might conclude are not in
the best interests of the Association, the Company or the Company's
stockholders.
79
The following discussion is a general summary of certain material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other regulatory provisions, which may be deemed to have an "anti-takeover"
effect. The following description of certain of these provisions is necessarily
general and, with respect to provisions contained in the Company's Certificate
of Incorporation and Bylaws and the Association's proposed stock charter and
bylaws, reference should be made in each case to the document in question, each
of which is part of the Association's application to the OTS and the Company's
Registration Statement filed with the SEC. See "Additional Information."
Provisions of the Company's Certificate of Incorporation and Bylaws
Limitations on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. In addition, for a period of five years from
the completion of the Conversion of the Association, no person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of an equity security of the Company. After five years from the
date of the Conversion, a beneficial holder submitting a proxy or proxies
totalling more than 10% of the then outstanding shares of Common Stock will be
able to vote in the following manner: the number of votes which may be cast by
such a beneficial owner shall be a number equal to the total number of votes
that a single record owner of all Common Stock owned by such person would be
entitled to cast, multiplied by a fraction, the numerator of which is the number
of shares of such class or series which are both beneficially owned and owned of
record by such beneficial owner and the denominator of which is the total number
of shares of Common Stock beneficially owned by such beneficial owner. The
impact of these provisions on the submission of a proxy on behalf of a
beneficial holder of more than 10% of the Common Stock is (1) to disregard for
voting purposes and require divestiture of the amount of stock held in excess of
10% (if within five years of the Conversion more than 10% of the Common Stock is
beneficially owned by a person) and (2) limit the vote on Common Stock held by
the beneficial owner to 10% or possibly reduce the amount that may be voted
below the 10% level (if more than 10% of the Common Stock is beneficially owned
by a person more than five years after the Conversion). Unless the grantor of a
revocable proxy is an affiliate or an associate of such a 10% holder or there is
an arrangement, agreement or understanding with such a 10% holder, these
provisions would not restrict the ability of such a 10% holder of revocable
proxies to exercise revocable proxies for which the 10% holder is neither a
beneficial nor record owner. A person is a beneficial owner of a security if he
has the power to vote or direct the voting of all or part of the voting rights
of the security, or has the power to dispose of or direct the disposition of the
security. The Certificate of Incorporation of the Company further provide that
this provision limiting voting rights may only be amended upon the vote of 80%
of the outstanding shares of voting stock.
Election of Directors. Certain provisions of the Company's Certificate
of Incorporation and Bylaws will impede changes in majority control of the Board
of Directors. The Company's Certificate of Incorporation provides that the Board
of Directors of the Company will be divided into three classes, with directors
in each class elected for three-year staggered terms except for the initial
directors. Thus, it would take two annual elections to replace a majority of the
Company's Board. The Company's Certificate of Incorporation provides that the
size of the Board of Directors may be increased or decreased only if two-thirds
of the directors then in office concur in such action. The Certificate of
Incorporation also provides that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the Certificate of Incorporation
and the bylaws impose certain notice and information requirements in connection
with the nomination by stockholders of
80
candidates for election to the Board of Directors or the proposal by
stockholders of business to be acted upon at an annual meeting of stockholders.
The Certificate of Incorporation provides that a director may only be
removed for cause by the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
Restrictions on Call of Special Meetings. The Certificate of
Incorporation of the Company provides that a special meeting of stockholders may
be called only pursuant to a resolution adopted by a majority of the Board of
Directors, or a Committee of the Board or other person so empowered by the
Bylaws. The Certificate of Incorporation also provides that any action required
or permitted to be taken by the stockholders of the Company may be taken only at
an annual or special meeting and prohibits stockholder action by written consent
in lieu of a meeting.
Absence of Cumulative Voting. The Company's Certificate of Incorporation
provides that there shall be no cumulative voting rights in the election of
directors.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 2,000,000 shares of Common Stock and 500,000 shares of preferred
stock ("Preferred Stock"). The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of the Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post-tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board currently has no plans
for the issuance of additional shares, other than the issuance of additional
shares upon exercise of stock options.
Procedures for Certain Business Combinations. The Certificate of
Incorporation requires the affirmative vote of at least 80% of the outstanding
shares of the Company entitled to vote in the election of director in order for
the Company to engage in or enter into certain "Business Combinations," as
defined therein, with any Principal Stockholder (as defined below) or any
affiliates of the Principal Stockholder, unless the proposed transaction has
been approved in advance by the Company's Board of Directors, excluding those
who were not directors prior to the time the Principal Stockholder became the
Principal Stockholder. The term "Principal Stockholder" is defined to include
any person and the affiliates and associates of the person (other than the
Company or its subsidiary) who beneficially owns, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Company. Any amendment to
this provision requires the affirmative vote of at least 80% of the shares of
the Company entitled to vote generally in an election of directors.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by the Company's Board
of Directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to restrictions on the acquisition and voting of greater
than 10% of the Common Stock; number, classification, election and removal of
directors; amendment of Bylaws; call of special stockholder
81
meetings; director liability; certain business combinations; power of
indemnification; and amendments to provisions relating to the foregoing in the
Certificate of Incorporation).
The Bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of the holders of at least 80% of the outstanding shares
of the Company entitled to vote in the election of Directors cast at a meeting
called for that purpose.
Purpose and Takeover Defensive Effects of the Company's Certificate of
Incorporation and Bylaws. The Board of Directors of the Association believes
that the provisions described above are prudent and will reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist the Association and the Company in the orderly deployment of
the Conversion proceeds into productive assets during the initial period after
the Conversion. The Board of Directors believe these provisions are in the best
interests of the Association and of the Company and its stockholders. In the
judgment of the Board of Directors, the Company's Board will be in the best
position to determine the true value of the Company and to negotiate more
effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interests of
the Company and its stockholders to encourage potential acquirors to negotiate
directly with the Board of Directors of the Company and that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It is
also the view of the Board of Directors that these provisions should not
discourage persons from proposing a merger or other transaction at prices
reflective of the true value of the Company and which is in the best interests
of all stockholders.
Attempts to take over financial institutions and their holding companies
have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Company's assets.
Effect of Takeover Defenses on Stockholder Interests. An unsolicited
takeover proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Although a tender offer or other
takeover attempt may be made at a price substantially above the current market
prices, such offers are sometimes made for less than all of the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise that is under
different management and whose objectives may not be similar to those of the
remaining stockholders.
Potential Negative Impact of Takeover Defenses on Stockholder Interests.
Despite the belief of the Association and the Company as to the benefits to
stockholders of these provisions of the Company's Certificate of Incorporation
and Bylaws, these provisions may also have the effect of discouraging a future
takeover attempt which would not be approved by the Company's Board, but
pursuant to which stockholders may receive a substantial premium for their
shares over then-current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have any opportunity to do
so. Such provisions will also render the removal of the Company's Board of
Directors and of management more difficult. The Boards of Directors of the
Association and the Company, however, have concluded that the potential benefits
outweigh the possible disadvantages.
82
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Company may adopt additional charter
provisions regarding the acquisition of its equity securities that would be
permitted to a Delaware corporation. The Company and the Association do not
presently intend to propose the adoption of further restrictions on the
acquisition of the Company's equity securities.
Effect of Employment Agreement. The Association has entered into an
employment agreement with President Stanley M. Kiser that provides for payments
in the event of termination of employment following a change in control, as
defined in the agreement, of 2.99 times the five year average compensation paid
to Mr. Kiser. At December 31, 1996, such payment would have totalled
approximately $149,000, rendering an acquisition, followed by termination of his
employment, more expensive to a possible acquiror as a result of this agreement.
See "Management of the Association Executive Compensation - Employment
Agreement."
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, 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 any converted savings institution if such person is, or
after consummation 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 securities 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.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless at least 60 days prior written notice
has been given to the OTS and the OTS has not objected to the proposed
acquisition. Control is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of a savings association or to
vote more than 25% of any class of voting securities of a savings association.
Under federal law (as well as the regulations referred to below) the term
"savings association" includes state chartered and federally chartered
SAIF-insured institutions, federally chartered savings and loans and savings
banks whose accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days notice to
the OTS and have received no OTS objection to such acquisition of control, and a
company must apply for and receive OTS approval of the acquisition. Control, as
defined under federal law, involves a 25% voting stock test, control in any
manner of the
83
election of a majority of the institution's directors, or a determination by the
OTS that the acquiror has the power to direct, or directly or indirectly to
exercise a controlling influence over, the management or policies of the
institution. Acquisition of more than 10% of an institution's voting stock, if
the acquiror also is subject to any one of either "control factors," constitutes
a rebuttable determination of control under the regulations. The determination
of control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock after the effective date of the regulations must file with
the OTS a certification that the holder is not in control of such institution,
is not subject to a rebuttable determination of control, and will take no action
which would result in a determination or rebuttable determination of control
without prior notice to or approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 2,000,000 shares of the Common Stock,
$0.10 par value per share, and 500,000 shares of serial preferred stock, $0.10
par value per share. The Company currently expects to issue up to 690,000 shares
of Common Stock in the Conversion. The Company does not intend to issue any
shares of serial preferred stock in the Conversion, nor are there any present
plans to issue such preferred stock following the Conversion. The aggregate par
value of the issued shares will constitute the capital account of the Company.
The balance of the purchase price will be recorded for accounting purposes as
additional paid-in capital. See "Capitalization." The capital stock of the
Company will represent nonwithdrawable capital and will not be insured by the
Company, the Association, the FDIC, or any other government agency.
Common Stock
Voting Rights. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of the
Common Stock will be entitled to only one vote for each share held of record on
all matters submitted to a vote of holders of the Common Stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits in the Association and accrued interest
thereon); (ii) any accrued dividend claims; (iii) liquidation preferences of any
serial preferred stock which may be issued in the future; and (iv) any interests
in the liquidation account established upon the Conversion for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders who continue
their deposits at the Association.
Restrictions on Acquisition of the Common Stock. See "Certain
Restrictions on Acquisition of the Company" for a discussion of the limitations
on acquisition of shares of the Common Stock.
84
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. Therefore, the Board of Directors may sell shares of
capital stock of the Company without first offering such shares to existing
stockholders of the Company. The Common Stock is not subject to call for
redemption, and the outstanding shares of Common Stock when issued and upon
receipt by the Company of the full purchase price therefor will be fully paid
and non-assessable.
Transfer Agent and Registrar. American Stock Transfer & Trust Co., New
York, New York, is expected to act as the transfer agent and registrar for the
Common Stock of the Company.
Issuance of Additional Shares. Except, possibly, pursuant to the RSP or
Option Plan, the Company has no present plans, proposals, arrangements or
understandings to issue additional authorized shares of the Common Stock. In the
future, the authorized but unissued and unreserved shares of the Common Stock
will be available for general corporate purposes, including, but not limited to,
possible issuance as stock dividends, in connection with mergers or
acquisitions, under a cash dividend reinvestment or stock purchase plan, in a
public or private offering, or under employee benefit plans. See "Risk Factors -
Possible Dilutive Effect of RSP and Stock Options and Effect of Purchases by the
RSP and ESOP" and "Pro Forma Data." Normally no stockholder approval would be
required for the issuance of these shares, except as described herein or as
otherwise required to approve a transaction in which additional authorized
shares of the Common Stock are to be issued.
For additional information, see "Dividends," "Regulation," and
"Taxation" with respect to restrictions on the payment of cash dividends; "-
Restrictions on Transferability by Directors and Officers" relating to certain
restrictions on the transferability of shares purchased by directors and
officers; and "Certain Restrictions on Acquisition of the Company" for
information regarding restrictions on acquiring Common Stock of the Company.
Serial Preferred Stock
None of the 500,000 authorized shares of serial preferred stock of the
Company will be issued in the Conversion. After the Conversion is completed, the
Board of Directors of the Company will be authorized to issue serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of such shares and the qualifications, limitations, and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the Common Stock as to dividend rights, liquidation preferences, or both, and
may have full or limited voting rights. The Board of Directors, without
stockholder approval, can issue serial preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the Common Stock. The Board of Directors has no present intention to issue
any of the serial preferred stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock has been passed upon for the
Association and the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C. Certain legal matters for Trident may be passed upon by Housley Kantarian &
Bronstein, P.C., Washington, D.C. The federal income tax consequences of the
Conversion have been passed upon for the Association and the Company by Malizia,
Spidi, Sloane & Fisch, P.C., Washington, D.C. The West Virginia income tax
consequences of the Conversion have been passed upon for the Association and the
Company by S.R. Snodgrass, A.C.
85
EXPERTS
The consolidated financial statements of the Association as of March
31, 1996 and for the three years ended March 31, 1996, appearing in this
prospectus have been audited by S.R. Snodgrass, A.C., independent certified
public accountants, as set forth in their report thereon appearing elsewhere
herein, and is included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
Ferguson has consented to the inclusion herein of a summary of its
appraisal report setting forth its opinion as to the estimated pro forma market
value of the Common Stock to be issued in the Conversion and its opinion setting
forth the value of subscription rights and to the use of its name and statements
with respect to it appearing herein.
REGISTRATION REQUIREMENTS
The Common Stock of the Company will be registered pursuant to Section
12(g) of the Exchange Act prior to completion of the Conversion. The Company
will be subject to the information, proxy solicitation, insider trading
restriction, tender offer rules, periodic reporting and other requirements of
the SEC under the Exchange Act. The Company will not deregister the Common Stock
under the Exchange Act for a period of at least three years following the
Conversion.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the SEC, this prospectus
does not contain all the information set forth in the registration statement.
Such 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 such material can be obtained from the SEC at prescribed rates.
The SEC also maintains an internet address ("Web site") that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the SEC. The address for
this Web site is "http://www.sec.gov." The statements contained herein as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The Association has filed an Application for Conversion with the OTS
with respect to the Conversion. Pursuant to the rules and regulations of the
OTS, this prospectus omits certain information contained in that Application.
The Application may be examined at the principal office of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Northeast Regional Office of the
OTS, 10 Exchange Place, Jersey City, New Jersey 07302 without charge.
A copy of the Certificate of Incorporation and Bylaws of the Company are
available without charge from the Association.
86
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SISTERSVILLE
Index to Consolidated Financial Statements
Page(s)
-------
Independent Auditors' Report ............................................................. F-1
Consolidated Statements of Financial Condition as of December 31, 1996 and
March 31, 1996 and 1995................................................................ F-2
Consolidated Statements of Operations for the nine months ended December 31, 1996
and 1995 and for the years ended March 31, 1996, 1995 and 1994...........................
Consolidated Statements of Changes in Equity for the nine months ended
December 31, 1996 and 1995 and for the years ended March 31, 1996, 1995, and 1994 ...... F-3
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1996 and 1995 and for the years Ended March 31, 1996, 1995, and 1994 .... F-4
Notes to Consolidated Financial Statements ............................................... F-5
All schedules (other than financial data schedules) are omitted because the
required information is either not applicable or is included in the consolidated
financial statements or related notes.
Separate financial statements for the Company have not been included because the
Company will not engage in material transactions until after the Conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses, or contingent liabilities.
87
SNODGRASS
Certified Public Accountants
[LOGO]
Independent Auditor's Report
----------------------------
Board of Directors
First Federal Savings and Loan
Association of Sistersville
We have audited the accompanying consolidated statements of financial condition
of First Federal Savings and Loan Association of Sistersville and Subsidiary as
of March 31, 1996 and 1995, and the related consolidated statements of
operations, changes in equity, and cash flows for the three years ended March
31, 1996. These financial statements are the responsibility of the association's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Savings and Loan
Association of Sistersville and Subsidiary at March 31, 1996 and 1995, and the
results of its operations, changes in retained earnings and cash flows for the
three years ended March 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1, the association changed its method of accounting for
debt and equity securities in 1995.
/s/S.R. Snodgrass, A.C.
Wheeling, West Virginia
May 2, 1996
F-1
S.R. Snodgrass, A.C.
980 National Road Wheeling, WV 26003-6400
Phone: 304-233-5030 Facsimile: 304-233-3062
First Federal Savings and Loan Association of Sistersville
and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, March 31,
------------ ------------------------
1996 1996 1995
------------- ------------------------
(Unaudited)
ASSETS
Cash (including interest bearing short-term deposits of $936,110 at 12/31/96;
$2,326,463 at 3/31/96; and $236,881 at 3/31/95) $ 1,017,941 $ 2,424,571 $ 316,956
Investment securities:
Available for sale (at market value) 2,307,295 2,134,589 501,789
Held to maturity (market value - $349,088 at 12/31/96; $784,267 at 3/31/96; and
$6,932,984 at 3/31/95) 342,088 775,025 7,127,964
Term deposits 400,000 - -
Loans receivable, net 21,635,358 20,038,692 17,686,249
Real estate acquired in settlement of loans, net of ^ allowances of -0 - 28,646 28,646
Office properties and equipment, at cost, less accumulated depreciation of
$244,611 at 12/31/96; $214,235 at 3/31/96; and $187,744 at 3/31/95 372,964 400,714 177,417
Accrued interest receivable - investments 15,245 16,333 73,635
Accrued interest receivable - loans (net of reserve for uncollected interest of
$4,638 at 12/31/96; and $-0- at 3/31/96 and 3/31/95) 127,442 123,028 106,041
Prepaid federal income taxes 5,739 - -
Prepaid expenses and other assets 34,278 25,028 35,415
----------- ----------- -----------
TOTAL ASSETS $26,258,350 $25,966,626 $26,054,112
=========== =========== ===========
LIABILITIES AND EQUITY
NOW and Money Market withdrawal accounts $ 2,612,815 $ 2,699,712 $ 2,905,029
Savings accounts 18,585,848 18,391,103 16,905,396
----------- ----------- -----------
Total deposits 21,198,663 21,090,815 19,810,425
Borrowed funds - - 1,685,000
Accrued interest payable on savings 7,465 14,420 13,350
Accrued compensation 8,575 4,780 -
Accrued federal income taxes - 60,833 58,226
Deferred federal taxes 234,914 176,806 159,011
Other liabilities 61,785 71,291 51,033
----------- ----------- -----------
Total liabilities 21,511,402 21,418,945 21,777,045
----------- ----------- -----------
Commitments and contingencies (Note 10)
Retained earnings-substantially restricted 4,348,511 4,262,801 4,065,564
Unrealized gain on securities available for sale, net of
applicable defer income taxes 398,437 284,880 211,503
----------- ----------- -----------
Total equity 4,746,948 4,547,681 4,277,067
----------- ----------- -----------
TOTAL LIABILITIES AND EQUITY $26,258,350 $25,966,626 $26,054,112
=========== =========== ===========
The accompanying notes are an integral part of the financial
statements.
F-2
First Federal Savings and Loan Association of Sistersville
and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Net Unrealized
Gain (Loss)
on Securities
Retained Available for Sale
Earnings Net of Income Taxes Total
-------- ------------------- ---------
Balance, March 31, 1993 $3,587,470 $ - $3,587,470
Net income for the year ended March 31, 1994 247,897 - 247,897
---------- -------- ----------
Balance, March 31, 1994 3,835,367 - 3,835,367
Effect of adopting FAS No. 115 - 175,474 175,474
Net income for the year ended March 31, 1995 230,197 - 230,197
Change in fair value of securities available for sale - 36,029 36,029
---------- -------- ----------
Balance, March 31, 1995 4,065,564 211,503 4,277,067
Net income for the year ended March 31, 1996 197,237 - 197,237
Change in fair value of securities available for sale - 73,377 73,377
---------- -------- ----------
Balance, March 31, 1996 4,262,801 284,880 4,547,681
Net income for the nine months ended December 31, 1996
(unaudited) 85,710 - 85,710
Change in fair value of securities available for sale
(unaudited) - 113,557 113,557
---------- -------- ----------
Balance, December 31, 1996 (unaudited) $4,348,511 $398,437 $4,746,948
========== ======== ==========
The accompanying notes are an integral part of the financial
statements.
F-3
First Federal Savings and Loan Association of Sistersville
and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31, Year Ending March 31,
----------------------- -------------------------------------
1996 1995 1996 1995 1994
---------- --------- --------- --------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 85,710 $ 148,009 $ 197,237 $ 230,197 $ 247,897
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 30,376 17,781 26,491 18,404 12,495
Deferred federal income taxes (394) (30,325) (20,004) 20,019 22,035
Provision for loan losses 5,583 5,600 6,800 27,900 10,321
Federal Home Loan Bank stock dividend - - - - (3,000)
Net amortization/accretion of investment
security premiums and discounts (2,746) (2,914) (4,490) 1,511 5,698
Gain on sale of real estate owned (3,903) - - (4,114) (1,899)
Loss on sale of investment securities - 8,750 8,340 - -
Accrued interest receivable (3,326) 37,942 40,315 (29,212) (21,304)
Prepaid income taxes (5,739) - - 35,388 -
Accrued federal income taxes (60,833) 15,165 2,607 26,330 (11,971)
Prepaid expenses and other assets (9,250) 25,084 10,387 (11,759) (48,885)
Accrued interest payable on savings (6,955) 2,713 1,070 (1,098) (3,459)
Other liabilities and accrued expenses (5,711) 27,303 25,038 (31,693) ^ 28,110
---------- ----------- ----------- ---------- -----------
Net cash provided by operating
activities 22,812 255,108 293,791 281,873 236,038
---------- ----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of
U.S. Government obligations - - 2,800,000 1,200,000 400,000
Proceeds from available-for-sale securities 400,000 4,291,250 1,991,250 - -
Purchase of term deposits (400,000) - - - -
Purchase of Federal Home Loan Bank stock - - (23,900) (28,000) -
Purchase of U.S. Government obligations - - - (1,984,688) (1,913,686)
Principal payments on mortgage-backed loans 35,035 47,550 60,115 64,952 127,652
Net increase in loans (1,602,249) (2,231,557) (2,359,243) (3,509,515 )(1,415,031)
Acquisition of office properties and
equipment (2,627) (183,365) (249,788) (63,289) (15,618)
Disposition of real estate owned 32,549 - - 18,377 -
---------- ----------- ----------- ---------- -----------
Net cash provided by (used in)
investing activities (1,537,292) 1,923,878 2,218,434 (4,302,163) (2,816,683)
---------- ----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer deposit accounts 107,850 736,732 1,280,390 13,272 2,227,617
Net increase (decrease) in borrowed funds - (1,685,000) (1,685,000) 1,685,000 -
---------- ----------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities 107,850 (948,268) (404,610) 1,698,272 2,227,617
---------- ----------- ----------- ---------- -----------
Increase (decrease) in cash and cash
equivalents (1,406,630) 1,230,718 2,107,615 (2,322,018) (353,028)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,424,571 316,956 316,956 2,638,974 2,992,002
---------- ----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,017,941 $ 1,547,674 $ 2,424,571 $ 316,956 $ 2,638,974
========== ========== =========== ========== ===========
F-4
First Federal Savings and Loan Association of Sistersville and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, MARCH 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial statements of
the Association and Subsidiary. The accounting and reporting policies of the
Association conform to generally accepted accounting principles and to general
practices within the savings and loan industry. The following is a description
of the more significant of those policies.
The consolidated statements of financial condition as of December 31, 1996 and
the consolidated statements of income, retained earnings, and cash flows for the
nine-month periods ended December 31, 1996 and 1995 are unaudited. However, in
the opinion of management, these financial statements include all material
adjustments necessary for the fair presentation of the Association's financial
position, consisting solely of normal and recurring adjustments.
Nature of Operations - The Association provides savings and financing services
primarily to individuals through its office located in Sistersville, West
Virginia. Primary deposit products consist of savings, NOW and Money Market
withdrawal accounts, and certificates of deposit. Primary lending products
consist of conventional mortgage, construction, and consumer loans.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Association and its wholly-owned subsidiary, First Service
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation. First Service Corporation had no activity for all
periods presented through December 31, 1996. Assets at December 31, 1996, March
31, 1996 and 1995 consisted solely of $1,000 in cash.
Investment Securities - Effective April 1, 1994, the Association adopted the
provisions of Statement of Financial Accounting Standards (FAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Under FAS
No. 115, investment securities in the portfolio are classified as either
available for sale or held to maturity. The Association does not currently
conduct short term purchase and sale transactions of investment securities which
would be classified as trading securities.
The initial determination of investments classified as available for sale was
based principally on the Association's asset/liability position and potential
liquidity needs. These securities are available for sale at any time based upon
management's assessment of changes in economic or financial market conditions,
interest rate or prepayment risks, liquidity considerations, and other factors.
Securities classified as available for sale are carried at market value. The
unrealized holding gains (losses), net of taxes, related to securities
classified as available for sale are reflected as a component of equity.
All remaining securities in the investment portfolio are classified as held to
maturity. The Association purchases these securities with the intent and the
ability to hold until their maturity. Securities classified as held to maturity
are carried at cost, adjusted for amortization of premiums and accretion of
discounts.
Gains or losses on dispositions of investment securities are computed by using
the adjusted cost of the specific certificates sold. Securities gains or losses
are shown separately as non-interest income in the Consolidated Statements of
Operations.
The accounting effect of adopting FAS No. 115 on April 1, 1994, was to increase
investments by $265,869 and increase shareholders equity by $175,474 after the
tax effect of $90,395.
F-5
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In November, 1995, the Financial Accounting Standards Board issued
implementation guidance on FAS No. 115. In accordance with this guidance, the
Association reassessed the appropriateness of the classifications of all
securities. As a result, securities with an amortized cost of $3,497,099 and
unrealized loss of $29,062 were transferred from the held to maturity category
to the available for sale category ^ on December 1, 1995.
Reclassification - Certain amounts for the year ended March 31, 1996, 1995, and
1994, have been reclassified to conform with the current period's presentation.
Office Properties and Equipment - Land is carried at cost; buildings and
equipment are stated at cost, less accumulated depreciation. Maintenance,
repairs, and minor improvements are charged to operating expenses as incurred.
Major improvements and betterments are capitalized.
Depreciation is computed on the straight-line method for financial reporting
purposes over the following estimated useful lives:
Building and improvements 10 - 50 years
Furniture, fixtures and equipment 5 - 10 years
Real Estate Acquired in Settlement of Loans - Real estate acquired in settlement
of loans is ^ classified separately on the Statement of Financial Condition at
the lower of the recorded investment in the property or its fair value minus
estimated costs of sale.
Interest and Fees on Loans - Loans receivable are stated at their unpaid
principal balance, net of the allowance for losses on loans. Interest on loans
is credited to income as earned and is accrued only if it is considered
collectible. An allowance for uncollected interest on mortgage loans is provided
for all accrued interest on loans which are delinquent 90 days or more resulting
in interest previously accrued on those loans being reversed from income, and
thereafter, interest is recognized only to the extent of payments received.
Loans are returned to accrual status when less than 90 days delinquent and when,
in management's judgment, collection is probable.
Effective April 1, 1995, the Association adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures" (FAS No.
114 and No. 118). Impaired loans as defined by FAS No. 114 and No. 118 exclude
certain consumer loans and residential real estate loans. Loan impairment is
measured based on the present value of estimated cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. Since the adoption of FAS No. 114 and No. 118, the
Association had no loans which management has determined to be impaired.
Loan origination and commitment fees and certain direct loan origination costs
are deferred, and the net amount amortized over the contractual lives of the
related loans or commitments as an adjustment of the related loan's yield using
the interest method.
F-6
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses - The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses. Because of uncertainties inherent to
the estimation process, management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change in the near term.
Income Taxes - In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". FAS No. 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the asset and liability method of accounting
for income taxes. Under the asset and liability method of FAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under FAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Retirement Plan - The retirement plan is a noncontributory plan for all eligible
employees and is funded through the Financial Institutions Retirement Fund. All
past service costs have been funded and appropriately expensed.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
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.
NOTE 2 - CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purpose of these statements, cash equivalents include cash in other
banks and Federal Home Loan Bank demand accounts.
The Association made federal income tax payments of $99,000 and $96,000 for the
nine months ended December 31, 1996 and 1995, respectively. Federal income tax
payments for the years ended March 31, 1996, 1995, and 1994, were $130,594,
$79,255, and $93,696, respectively.
F-7
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
The Association paid interest on deposits and Federal Home Loan Bank advances of
$742,562 and $721,161 for the nine months ended December 31, 1996 and 1995,
respectively. Interest paid for the years ended March 31, 1996, 1995, and 1994,
was $975,666, $841,644, and $765,507, respectively.
NOTE 3 - INVESTMENTS
The carrying amounts and fair values of the Association's investment securities
at December 31, 1996, and March 31, 1996 and 1995, are summarized as follows:
The carrying amounts and fair values of the Association's investment securities
at December 31 are summarized as follows:
December 31, 1996 (Unaudited)
-------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
Value Gains Losses Value
----- ----- ------ -----
Securities Available for Sale:
Federal Home Loan Bank Stock
(restricted) $ 183,000 $ - $ - $ 183,000
Federal Home Loan Mortgage
Corporation stock 22,231 625,544 - 647,775
U.S. Government and Federal Agencies 1,498,372 - 21,851 1,476,521
--------- ---------- ------- ---------
Total Available for Sale 1,703,603 625,544 21,851 2,307,296
--------- -------- ------- ---------
Securities to be Held to Maturity:
Mortgage-backed Securities (GNMA) 342,088 7,000 - 349,088
--------- -------- --------- ---------
Total $2,045,691 $632,544 $ 21,851 $2,656,384
========= ======= ======= =========
The gross realized losses were $-0- for December 31, 1996; $8,340 for March 31,
1996, and December 31, 1995; and $-0- for March 31, 1995.
F-8
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENTS (CONTINUED)
March 31, 1996
-------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
Value Gains Losses Value
----- ----- ------ -----
Securities Available for Sale:
Federal Home Loan Bank Stock
(restricted) $183,000 $ - $ - $ 183,000
Federal Home Loan Mortgage
Corporation Stock 22,231 460,228 - 482,459
U.S. Government and Federal Agencies 1,497,724 - 28,594 1,469,130
--------- -------- ------- ---------
Total Available for Sale 1,702,955 460,228 28,594 2,134,589
--------- -------- ------- ---------
Securities to be Held to Maturity:
U.S. Government and Federal Agencies 397,902 2,098 - 400,000
Mortgage-backed Securities (GNMA) 377,123 7,144 - 384,267
--------- ------- ------- ---------
Total Held to Maturity 775,025 9,242 - 784,267
--------- ------- ------- ---------
Total $2,477,980 $469,470 $ 28,594 $2,918,856
========= ======= ======= =========
March 31, 1995
--------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
Value Gains Losses Value
----- ----- ------ -----
Securities Available for Sale:
Federal Home Loan Bank Stock
(restricted) $ 159,100 $ - $ - $ 159,100
Federal Home Loan Mortgage
Corporation Stock 22,231 320,458 - 342,689
--------- -------- ---------- ---------
Total Available for Sale 181,331 320,458 - 501,789
--------- -------- ---------- ---------
Securities to be Held to Maturity:
U.S. Government and Federal Agencies 6,690,726 590 198,128 6,493,188
Mortgage-backed Securities (GNMA) 437,238 2,558 - 439,796
--------- -------- ---------- ---------
Total Held to Maturity 7,127,964 3,148 198,128 6,932,984
--------- -------- ------- ---------
Total $7,309,295 $323,606 $198,128 $7,434,773
========= ======= ======= =========
F-9
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENTS (CONTINUED)
The book value and fair value of investment securities at December 31,
1996, and March 31, 1996 and 1995, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
of without call or prepayment penalties.
December 31, 1996 (Unaudited)
----------------------------------------------------------------------
Securities to be Held Securities Available
to Maturity for Sale
------------------------------ ------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ - $ - $ - $ -
Due from one year through five years - - 1,498,372 1,476,521
Due after five years through ten years - - - -
Equity securities - - 205,231 830,775
Mortgage-backed securities (GNMA) 342,088 349,088 - -
------- ------- ------------ ------------
Total $342,088 $349,088 $1,703,603 $2,307,296
======= ======= ========= =========
March 31, 1996
------------------------------------------------------------------------
Securities to be Held Securities Available
to Maturity for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $397,902 $400,000 $ - $ -
Due from one year through five years - - 1,497,724 1,469,130
Due after five years through ten years - - - -
Equity securities - - 205,231 665,459
Mortgage-backed securities (GNMA) 377,123 384,267 - -
------- ------- ------------ ------------
Total $775,025 $784,267 $1,702,955 $2,134,589
======= ======= ========= =========
March 31, 1995
----------------------------------------------------------------------
Securities to be Held Securities Available
to Maturity for Sale
-------------------------------- ----------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $2,301,510 $2,293,282 $ - $ -
Due from one year through five years 4,389,216 4,199,906 - -
Due after five years through ten years - - - -
Equity securities - - 181,331 501,789
Mortgage-backed securities (GNMA) 437,238 439,796 - -
--------- --------- --------- -------
Total $7,127,964 $6,932,984 $181,331 $501,789
========= ========= ======= =======
F-10
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LOANS RECEIVABLE
December 31, March 31,
----------------------------------------
1996 1996 1995
-------------------- ------------------- ------------------
(Unaudited)
Mortgage loans: ^
Construction ^ $ 757,655 $ 358,800 $ 346,200
^ 1-4 family 20,525,405 19,132,196 17,043,721
Consumer loans ^:
Automobiles 773,523 786,468 700,451
Savings account 312,046 404,904 344,567
^ Other 31,651 25,873 22,003
Commercial 28,234 36,633 45,685
------------ ------------ ------------
Total ^ $22,428,514 $20,744,874 $18,502,627
Less:
Reserve for loan losses on
mortgage loans 130,000 126,750 123,000
Reserve for loan losses on
consumer loans 32,000 29,667 26,617
Undisbursed funds 549,174 466,980 597,601
Income deferred to future
operations 81,982 82,785 69,160
---------- ---------- ----------
Loans receivable, net $21,635,358 $20,038,692 $17,686,249
========== ========== ==========
^
Activity in the allowance for loan losses is summarized as follows:
Nine Months Ended Year Ended
December 31, March 31,
------------------------------ ------------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- --------------- -------------- -------------
(Unaudited)
Balance, beginning of period $156,417 $149,617 $149,617 $120,470 $110,009
Provision charged to income 5,583 5,600 6,800 27,900 10,321
^ Recoveries - - - 1,247 140
-------- -------- -------- ------- -------
Balance, end of period $162,000 $155,217 $156,417 $149,617 $120,470
======= ======= ======= ======= =======
F-11
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
December 31, March 31,
--------------------------------------------
1996 1996 1995
-------------------- ------------------- ----------------------
(Unaudited)
Land $ 38,500 $ 38,500 $ 38,500
Office buildings and
improvements 406,233 406,233 190,136
Furniture, fixtures, and
equipment 172,842 170,216 127,075
Construction and renovation in
progress - - 9,450
---------- ---------- --------
Total 617,575 614,949 365,161
Less accumulated depreciation 244,611 214,235 187,744
------- ------- -------
Net office properties and
equipment $372,964 $400,714 $177,417
======= ======= =======
Depreciation charged to operations was $26,491, $18,404, and $12,495 for the
years ended March 31, 1996, 1995, and 1994, respectively and $30,376 and
$17,781 for the nine months ended December 31, 1996 and 1995.
NOTE 6 - DEPOSITS ANALYSIS
The Association has savings accounts with interest rates ranging from 3.25%
to 7.30% at December 31, 1996. The range of rates on savings was 3.25% to
7.3% at March 31, 1996, and 3.25% to 7.9% at March 31, 1995.
Such deposits are summarized as follows:
Weighted December 31, 1996 March 31, 1996 March 31, 1995
------------------------ ------------------------ -------------------
Interest Rate Average
Paid Rate Amount Percent Amount Percent Amount Percent
---- ---- ------ ------- ------ ------- ------ -------
(Unaudited)
Savings - Passbook 4.00% $ 8,491,661 40.1 $ 8,269,871 39.2 $ 8,934,578 45.1
Christmas Clubs 3.50 15,527 0.1 32,032 0.2 34,907 0.2
3.25 TO 3.75 (NOW & MMDA 2,612,815 12.3 2,699,712 12.8 2,905,029 14.7
accounts) 3.49
3.01 to 4.00 - 0.0 29,795 0.1 796,759 4.0
4.01 to 5.00 4.80 3,960,059 18.7 4,423,114 21.0 3,297,890 ^ 16.6
5.01 to 6.00 5.46 3,839,945 18.1 3,132,215 14.9 2,149,897 10.8
6.01 to 7.00 6 .64 1,919,984 9.1 2,136,366 10.1 1,103,559 5.6
7.01 to 8.00 7.27 358,672 1 .7 367,710 1.7 587,806 3.0
---------- ------ ----------- ---- ---------- -----
Total $21,198,663 100.0 $21,090,815 100.0 $19,810,425 100.0
========== ===== ========== ===== ========== =====
F-12
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DEPOSITS ANALYSIS (CONTINUED)
The Association had jumbo certificates of deposit with a minimum
denomination of $100,000 in the amount of $401,000 at December 31, 1996,
$300,000 at March 31, 1996, and $200,000 at March 31, 1995. Deposits in
excess of $100,000 are not Federally insured.
December 31, March 31,
------------------------------------------------
1996 1966 1995
---- ---- ----
(Unaudited)
Certificates of deposit:
One year $ 5,686,133 $ 5,570,724 $ 4,373,204
One to two years 2,199,492 1,852,575 1,162,986
Two to three years 1,034,325 1,220,563 1,120,753
Three to four years 692,571 1,085,954 304,110
Four to five years 466,139 359,384 974,858
---------- ---------- ----------
10,078,660 10,089,200 7,935,911
Passbook, NOW, and
MMDA accounts 11,120,003 11,001,615 11,874,514
---------- ---------- ----------
Total $21,198,663 $21,090,815 $19,810,425
========== ========== ==========
Interest expense by deposit category is as follows:
Nine Months Ended
December 31, Year ended March 31,
------------------------------- --------------------------------------------------
1996 1995 1996 1995 1994
--------------- -------------- -------------- -------------- -----------------
Savings - Passbook $254,246 $248,497 $328,505 $407,584 $320,422
NOW and Money Market 70,525 74,032 96,160 123,271 125,187
Time certificates of deposit 410,836 392,160 530,889 287,793 316,439
------- ------- ------- ------- -------
Totals $735,607 $714,689 $955,554 $818,648 $762,048
======= ======= ======= ======= =======
F-13
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision. Failure to meet the minimum regulatory capital requirements can
initiate certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material affect on the
Association's financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines involving quantitative
measures of the Association's assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices. The
Association's capital amounts and classification under the prompt corrective
action guidelines are also subject to qualitative judgement by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of tangible
capital, tangible equity, core capital (Tier 1), leverage capital, and
risk-based capital.
F-14
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - REGULATORY MATTERS (CONTINUED)
As of December 31, 1996, the most recent notification from the OTS
categorized the Association as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well
capitalized" the Association must maintain minimum total risk-based, core
(Tier 1), leverage, and tangible ratios set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the institution's category.
The Association's actual capital amounts and ratios are also presented in the
table. Risk-based capital includes tangible capital plus $156,000 of the
Association's allowance for loan losses.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In thousands) (In thousands) (In thousands)
As of December 31, 1996
(unaudited):
Total risk-based capital
(To risk weighted assets) $4,505 36.09% $999 8.0% $1,248 10.0%
Core (Tier 1) capital
(To risk weighted assets) 4,349 35.84% 499 4.0% 749 6.0%
Core (Tier 1) capital
(To total assets) 4,349 16.82% 776 3.0% Not Defined
Core (Tier 1) capital
(To average assets) 4,349 16.66% 783 3.0% 1,305 5.0%
Tangible capital
(To total assets) 4,349 16.82% 388 1.5% Not Defined
F-15
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - FEDERAL INCOME TAX
The Association was permitted until 1996 a special bad debts deduction
limited generally in the current year to 8% of otherwise taxable income and
subject to certain limitations based on aggregate loans and savings account
balances at the end of the year. In 1996, the bad debt reserve method for
Thrifts was repealed and in the future bad debts for federal income taxes
will be determined based primarily on the experience method. If the amounts
that qualify as deductions for federal income tax purposes are later used for
purposes other than for bad debt losses, they will be subject to federal
income tax at the then corporate rate. Retained income at December 31, 1996,
and March 31, 1996 and 1995, included approximately $696,000 for which
federal income tax has not been provided.
The provisions for Federal income taxes consist of:
Nine Months Ended
December 31, Year Ended March 31,
-------------------------------------------------------------------
1996 1995 1996 1995 1994
-------------------------------------------------------------------
(Unaudited)
Current $33,001 $106,369 $133,202 $105,585 $51,615
Deferred (443) (25,528) (20,004) 20,019 26,714
------- -------- --------- ------ ------
Total $32,558 $ 80,841 $113,198 $125,604 $78,329
====== ======= ======= ======= ======
The following temporary differences gave rise to the deferred tax liability
at:
^
December 31, March 31,
------------ ---------------------------
1996 1996 1995
-------- ----------- --------------
^ Income and expense recognized in the financial
statements on the accrual basis, but on the cash $ 11,267 $ ^ 11,661 $ 32,695
basis for tax purposes
Depreciation 14,515 14,515 13,485
FHLB stock dividend (including redemptions) 3,876 3,876 3,876
-------- -------- --------
29,658 ^ 30,052 50,056
Deferred tax liability arising from market
adjustments of securities available for sale 205,256 ^ 146,754 108,955
------- --------- -------
Total deferred tax liability $234,914 $176,806 $159,011
======= ======= =======
F-16
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - FEDERAL INCOME TAX (CONTINUED)
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the Federal income tax rate to income before
income taxes is as follows:
Nine Months Ended
December 31, March 31,
------------------------- -------------------------------------
1996 1995 1996 1995 1994
------------ ----------- ----------- ----------- -----------
(Unaudited)
Tax at statutory rate (34%) $40,211 $77,809 $105,548 $120,972 $109,326
Increase (decrease^ in
taxes resulting from:
^ Nondeductible (nontaxable)
expenses and income 1,898 2,184 2,312 9,486 (3,509)
Surtax exemption (7,082) (1,762) (2,040) - (1,143)
Others, net (2,469) 2,610 7,378 (4,854) (26,345)
------- ------ ------ ------ -------
Total $32,558 $ 80,841 $113,198 $125,604 $78,329
====== ======= ======= ======= =======
Effective rate 27.5% 35.3% 36.5% 35.3% 24.4%
NOTE 9 - RETIREMENT PLAN
The Association participates in the multi-employer Financial Institutions
Retirement Fund covering all officers and employees. Because the plan is a
multi-employer plan, the data available from the administrator of the plan is
not sufficient to determine actuarial information applicable to the
Association. The plan is noncontributory and benefits are funded by the
Association's monthly contribution to the Trust Fund. All prior service
pension costs have been paid. Pension expense for the years ended March 31,
1996 and 1995, amounted to $17,225 and $7,367, respectively. Pension expense
for the nine months ended December 31, 1996 and 1995, amounted to $9,150 and
$12,650, respectively.
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association 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 risk in
excess of the amount recognized in the consolidated statements of financial
condition. The contract amounts of these instruments reflect the extent of
involvement the institution has in particular classes of financial
instruments. The institution uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
F-17
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The following represents financial instruments whose contract amounts
represent credit risk at:
December 31, March 31,
1996 1996 1995
-------------- ------------ --------------
(Unaudited)
Commitments to originate loans $ 138,000 $ 291,000 $ 378,700
Loans in process 549,174 466,980 597,601
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. The institution evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the institution upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral held
consists primarily of single-family residences. Commitments to originate
loans at December 31, 1996, consisted of fixed-rate mortgage loans at 8.25%.
Concentration of Credit Risk
The Association's real estate loans and loan commitments are primarily for
properties located throughout Northern West Virginia. Repayment of these
loans is in part dependent upon the economic conditions in this region. The
Association evaluates each customer's creditworthiness on a case-by-case
basis. The Association requires collateral on all real estate exposure which
consists primarily of residential properties.
NOTE 11 - RELATED PARTY TRANSACTIONS
Directors and officers of the Association and its wholly-owned subsidiary
were customers of, and had other transactions with, the Association in the
ordinary course of business during the years ended March 31, 1996 and 1995,
and for the nine months ended December 31, 1996
Loans and commitments included in such transactions were made with
substantially the same terms and collateral as those prevailing at the time
for comparable transactions with other persons. Loans to directors and
officers did not involve more than the normal risk of collectibility, or
present other unfavorable features. The loans to directors and officers at
December 31, 1996, March 31, 1996 and 1995, were $53,000, $88,052 and
$154,298, respectively, in the aggregate amount.
F-18
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating fair values of
financial instruments as disclosed herein:
Cash and Cash Equivalents: For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment Securities and Securities Held for Sale: For debt securities
and marketable equity securities held for investment purposes and for
sale, fair values are based on quoted market prices or dealer quotes. If
a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans: For certain homogeneous categories of loans, such as some
residential mortgages, fair value is estimated using the quoted market
prices for securities backed by similar loans. The fair value of other
types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit Liabilities: The fair value of NOW accounts, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit
is estimated using the rates currently offered for deposits of similar
remaining maturities.
The estimated fair values of the Association's financial instruments are as
follows:
December 31, 1996 March 31, 1996
------------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(Unaudited)
Financial Assets:
Cash and cash equivalents $1,018,000 $1,018,000 $2,425,000 $2,425,000
Term deposits 400,000 400,000 - -
Securities available for sale 2,307,000 2,307,000 2,135,000 2,135,000
Securities held to maturity 342,000 349,000 775,000 784,000
Loans, net 21,635,000 22,052,000 20,039,000 20,456,000
Financial Liabilities:
Deposits 21,199,000 21,174,000 21,091,000 21,064,000
F-19
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DEPOSIT INSURANCE
Savings Association Insurance Fund member institutions were assessed a
one-time deposit insurance premium to recapitalize the Fund. The assessment
totaled approximately $129,000 and was recorded during the nine months ended
December 31, 1996. The premium was based on deposits as of March 31, 1995 at
$.657 per $100 of deposits. As a result of the assessment, the Association's
deposit insurance rate was reduced from $.23 to $.065 per $100 of deposits.
NOTE 14 - CONVERSION AND REORGANIZATION (UNAUDITED)
On December 5, 1996, the Board of Directors of the Association, subject to
regulatory approval, adopted the Plan of Conversion pursuant to which the
Association proposed to convert from a federally-chartered mutual savings and
loan to a federally-chartered stock savings institution and concurrently form
a Savings and Loan Holding Company. The conversion is expected to be
accomplished through amendment of the Association's federal charter and the
sale of the holding company's common stock in an amount equal to the pro
forma market value of the Association after giving effect of the conversion.
A subscription offering of the sale of the holding company's common stock
will be offered initially to the Association's depositors, then to other
members and directors, officers, and employees of the Association. Any shares
of the holding company's common stock not sold in the subscription offering
will be offered for sale to the general public in the Association's market
area.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. At December 31, 1996, the Association had
incurred approximately $20,000 in conversion costs. In the event that the
conversion is not completed, any deferred conversion costs will be charged to
operations.
In accordance with regulations, at the time that the Association converts
from a mutual savings association to a stock savings institution, a portion
of retained earnings will be restricted by establishing a liquidation
account. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the
Association after the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation of the Association, each account holder will be entitled
to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances of accounts then
held. The Association may not pay dividends if those dividends would reduce
equity capital below required liquidation account amount.
F-20
First Federal Savings and Loan Association of Sistersville
and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 ^- ADVANCES FROM FEDERAL HOME LOAN BANK
^ Advances from the Federal Home Loan Bank consist of the following:
^ Principal Interest Interest December 31, March 31, March 31,
^ Due Due Rate 1996 1996 1995
----------- --------- ---------- ------------ --------- ---------
^ Flexline 3-25-97 Monthly Variable - - $1,685,000
Advance
^ The above borrowing is subject to the terms and conditions of the Advances,
Collateral Pledge and Security Agreements between the Federal Home Loan Bank of
Pittsburgh and the Association.
^ As of December 31, 1996, the Association had a Flexline line of credit with
the Federal Home Loan Bank of $1,832,000 of which there were no amounts
outstanding.
Interest paid on borrowings for the nine months ended December 31, 1996 and
1995 amounted to $0 and $21,185, respectively. Interest paid on borrowings for
the years ended March 31, 1996, 1995, and 1994 amounted to $21,182, $21,898, and
$0, respectively.
^
F-21
============================================ =================================
No dealer, salesman or other person has
been authorized to give any information
or to make any representations not
contained in this prospectus in connection
with the offering made hereby, and, if
given or made, such information or
representations must not be relied upon Up to 690,000 Shares
as having been authorized by the (Anticipated Maximum
Association or the Company or Trident Common Stock
Securities. This prospectus does not
constitute an offer to sell, or the
solicitation of an offer to buy, any of the
securities offered hereby to any person in
any jurisdiction in which such offer
or solicitation would be unlawful.
Neither the delivery of this prospectus by
the Association or the Company or Trident
Securities nor any sale made hereunder
shall in any circumstances create an
implication that there has been no change
in the affairs of the Association or the
Company since any of the dates as of
which information is furnished herein or
since the date hereof.
---------
TABLE OF CONTENTS
Page
----
Summary................................ (i)
Selected Financial and Other Data......
Recent Selected Financial and Other Data
Risk Factors........................... 1 SISTERSVILLE BANCORP, INC.
Sistersville Bancorp, Inc.............. (Proposed Holding Company for
First Federal Savings and Loan First Federal Savings Bank)
Association of Sistersville
Use of Proceeds........................
Dividends..............................
Market for the Common Stock............
Capitalization.........................
Pro Forma Data......................... ----------------
Historical and Pro Forma Capital
Compliance PROSPECTUS
Consolidated Statements of Operations..
Management's Discussion and Analysis ----------------
of Financial
Condition and Results of Operations..
Business of the Company................
Business of the Association............
Regulation.............................
Taxation...............................
Management of the Company..............
Management of the Association.......... TRIDENT SECURITIES, INC.
The Conversion.........................
Certain Restrictions on Acquisition of
the Company..........................
Description of Capital Stock...........
Legal and Tax Matters..................
Experts................................
Registration Requirements.............. Dated May ____, 1997
Additional Information.................
Index to Consolidated Financial
Statements...........................
Until the later of ___________, 1997, THESE SECURITIES ARE NOT DEPOSITS
or 25 days after commencement of the OR ACCOUNTS AND ARE NOT FEDERALLY
offering of Common Stock, all dealers INSURED OR GUARANTEED
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required
to deliver a prospectus. This is in
addition to the obligation of dealers to
deliver a prospectus when acting as
underwriters and with respect to their
unsold allotments or subscriptions.
============================================ =================================
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
* Legal fees.................................................$134,000
* Consulting fees and expenses............................... 37,500
* Printing, Postage and Mailing.............................. 70,000
* Appraisal.................................................. 24,600
* Accounting fees............................................ 40,000
* Data processing............................................ 10,000
* Filing fees................................................ 35,000
* Nasdaq listing fees........................................ 6,000
* Transfer agent............................................. 5,000
* Miscellaneous expenses..................................... 20,000
-------
* TOTAL......................................................$382,100
========
- -----------------
* Estimated
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits:
1.1 Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion of First Federal Savings and Loan
Association of Sistersville*
3(i) Certificate of Incorporation of Sistersville Bancorp, Inc.*
3(ii)Bylaws of Sistersville Bancorp, Inc.*
4 Specimen Stock Certificate of Sistersville Bancorp, Inc.*
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding
legality of securities registered*
5.2 Opinion of Ferguson & Company as to the value of subscription
rights*
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 State Tax Opinion of S.R. Snodgrass, A.C.*
10.1 Employment Agreement with Stanley M. Kiser*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in
its opinions filed as Exhibits 5.1 and 8.1)
23.2 Consent of S.R. Snodgrass, A.C.
23.3 Consent of Ferguson & Company*
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule*
99.1 Stock Order Form
99.2 Marketing Materials
99.3 Appraisal Report of Ferguson & Company
(b) Financial Statements Schedules**
- ---------------------------
* Previously filed
** All schedules are omitted because they are not required or applicable or
the required information is shown in the financial statements or the notes
thereto.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Sistersville, West Virginia, as of
April 25, 1997.
SISTERSVILLE BANCORP, INC.
By: /s/ Stanley M. Kiser
----------------------------------
Stanley M. Kiser
President
(Duly Authorized Representative)
We the undersigned directors and officers of Sistersville Bancorp, Inc. do
hereby severally constitute and appoint Stanley M. Kiser our true and lawful
attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said Stanley M. Kiser may deem
necessary or advisable to enable Sistersville Bancorp, Inc. to comply with the
Securities Act of 1933, as amended, and any rules, regulations, and requirements
of the Securities and Exchange Commission, in connection with the registration
statement on Form S-1 relating to the offering of Sistersville Bancorp, Inc.'s
common stock, including specifically but not limited to, power and authority to
sign for us or any of us in our names in the capacities indicated below the
registration statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that Stanley M. Kiser
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated as of April 25, 1997.
/s/ Stanley M. Kiser /s/ Lester C. Doak
- ------------------------------------- ---------------------------------
Stanley M. Kiser Lester C. Doak
President and Chief Executive Officer Chairman of the Board
(Principal Executive Officer)
/s/ Gary L. Ward /s/ Ellen E. Thistle
- ------------------------------------- --------------------------------
Gary L. Ward Ellen E. Thistle
Director Assistant Secretary and Director
/s/ David W. Miller /s/ Dorsey R. Ash
- ------------------------------------- --------------------------------
David W. Miller Dorsey R. Ash
Vice President and Director Director
/s/ Charles P. LaRue /s/ Guy L. Nichols
- ------------------------------------- --------------------------------
Charles P. LaRue Guy L. Nichols
Director Director
/s/ Margaret A. Peters
- ------------------------------------- --------------------------------
Margaret A. Peters James E. Willison
Director Director