As filed with the Securities and Exchange Commission on December 22, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PEOPLES BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 6712 (To be applied for)
(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial classification) identification number)
134 Franklin Corner Road
Lawrenceville, New Jersey 08648
(609) 844-3100
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
Wendell T. Breithaupt
President and Chief Executive Officer
Peoples Bancorp, Inc.
134 Franklin Corner Road
Lawrenceville, New Jersey 08648
(609) 844-3100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
John J. Gorman, Esq.
Kenneth R. Lehman, Esq.
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
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 of 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, 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 this form is a post-effective amendment filed pursuant to Rule 462(d) 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 delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Proposed maximum
Title of each class of Amount to be maximum offering aggregate Amount of
securities to be registered registered price per share offering price (1) registration fee
--------------------------- ---------- --------------- ------------------ ----------------
Common Stock, $.01 par value per share 35,707,500 shares $10.00 $357,075,000 $105,338.00
- ----------
(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
Prospectus Supplement
TRENTON SAVINGS BANK FSB
TRENTON SAVINGS BANK FSB
401(K) PROFIT SHARING PLAN
(Participation Interests in up to 200,000 shares of Common Stock)
This Prospectus Supplement relates to the offer and sale to
participants (the "Participants") in the Trenton Savings Bank FSB 401(k) Profit
Sharing Plan (the "Plan") of participation interests and shares of common stock,
par value $.01 per share (the "Common Stock"), of Peoples Bancorp, Inc. (the
"Company"), in connection with the proposed conversion of the Company from a
federally chartered mutual holding company to a Delaware stock corporation
pursuant to a Plan of Conversion and Reorganization (the "Conversion") and the
related subscription and community offering (collectively, the "Offering").
The Plan permits Participants to direct the trustee of the Plan (the
"Trustee") to purchase Common Stock with amounts in the Plan attributable to
such Participants. This Prospectus Supplement relates to the election of a
Participant to direct the purchase of Common Stock in connection with the
Conversion. A Participant will be able to provide alternative investment
instructions to the Trustee in the event that the Offering is oversubscribed and
the total amount allocated by a Participant cannot be used by the Trustee to
purchase Common Stock.
The Prospectus of the Company dated February ___, 1998 (the
"Prospectus") which is attached to this Prospectus Supplement includes detailed
information with respect to the Conversion, the Common Stock and the financial
condition, results of operations and business of Trenton Savings Bank FSB (the
"Bank"). This Prospectus Supplement, which provides detailed information with
respect to the Plan, should be read only in conjunction with the Prospectus.
THESE PARTICIPATION INTERESTS HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, SECURITIES AND EXCHANGE COMMISSION,
OR BY ANY OTHER FEDERAL AGENCY, OR BY ANY STATE SECURITIES BUREAU OR OTHER STATE
AGENCY, NOR HAS ANY SUCH OFFICE, CORPORATION, COMMISSION, BUREAU OR OTHER AGENCY
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE PARTICIPATION
INTERESTS ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM THE SECURITIES ACT OF
1933 AND HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy
any securities in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus Supplement and the Prospectus nor any sale made hereunder shall under
any circumstances create any implication that there has been no change in the
affairs of the Bank or the Plan since the date hereof, or that the information
herein contained or incorporated by reference is correct as of any time
subsequent to the date hereof. This Prospectus Supplement should be read only in
conjunction with the Prospectus that is attached hereto and should be retained
for future reference.
The date of this Prospectus Supplement is February __, 1998.
NOTICE TO PARTICIPANTS IN
THE TRENTON SAVINGS BANK FSB
401(K) PROFIT SHARING PLAN
Attached to this Notice is a copy of the Prospectus and Prospectus
Supplement relating to the offer and sale of participation interests and shares
of common stock, par value $.01 per share (the "Common Stock"), of Peoples
Bancorp, Inc. (the "Company").
The Trenton Savings Bank FSB 401(k) Profit Sharing Plan (the "Plan")
enables you to direct the investment of all or a portion of your account balance
into one of eight alternative investment funds, including an Employer Stock
Fund. The Prospectus Supplement has been prepared and distributed to you so that
you can make an informed decision regarding your opportunity to invest all or a
portion of your account balance in the Plan in the Employer Stock Fund
established as an investment option under the Plan. You are also provided the
opportunity to invest all or a portion of your account balance in the other
funds selected by the trustees of the Plan. The other funds in which you may
invest include: A. Core Equity Fund, B. Emerging Growth Equity Fund, C. Value
Equity Fund, D. Actively Managed Bond Fund, E. Intermediate-Term Bond Fund, F.
Short-Term Investment Fund, and G. International Equity Fund. The trustees of
the RSI Retirement Trust established by Retirement System Group Inc. ("RSI")
serve as trustees for the Plan, other than the Employer Stock Fund, for which
Marine Midland Bank serves as trustee (the "Employer Stock Fund Trustee").
The Plan's feature which allows participants the opportunity to direct
the investment of their account balances is intended to satisfy the requirements
of Section 404(c) of the Employee Retirement Income Security Act of 1974
("ERISA"). The effect of this is two-fold. First, you will not be deemed a
'fiduciary' by virtue of your exercise of investment discretion. Second, no
person who otherwise is a fiduciary (for example, the employer, the Plan
administrator, or the Plan's trustee) is liable under the fiduciary
responsibility provision of ERISA for any loss which results from your exercise
of control over the assets in your Plan account.
Because you are entitled to invest all or a portion of your account
balance in the Plan in the Employer Stock Fund which is invested in Common Stock
of the Company, the regulations under Section 404(c) of ERISA require that the
Plan establish procedures that ensure the confidentiality of your decision to
purchase, hold, or sell employer securities, except to the extent that
disclosure of such information is necessary to comply with federal or state laws
not preempted by ERISA. These regulations also require that your exercise of
voting and similar rights with respect to the Employer Stock Fund be conducted
pursuant to procedures that ensure the confidentiality of your exercise of these
rights. Accordingly, the Plan committee designates the person designated from
time to time (the "Designee") by the Employer Stock Fund Trustee as the person
to whom your sealed voting instructions should be returned. The Designee will
transfer your sealed instructions to an independent third party to be designated
by the Bank, to tally such instructions. In the case of an event that involves a
potential for undue employer influence, you will be instructed to return your
instructions directly to the independent third party. The independent third
party will then inform the Employer Stock Fund Trustee as to the appropriate
manner in which to vote the shares in the Employer Stock Fund.
TABLE OF CONTENTS
THE OFFERING..................................................................1
Securities Offered.........................................................1
Election to Purchase Common Stock in the Conversion; Priorities............1
Value of Participation Interests...........................................2
Method of Director Transfer................................................2
Time for Directing Transfer................................................3
Irrevocability of Transfer Direction.......................................3
Direction to Purchase Common Stock After the Conversion....................3
Purchase Price of Common Stock.............................................4
Nature of a Participant's Interest in Common Stock.........................4
Voting Rights of Common Stock..............................................5
DESCRIPTION OF THE PLAN.......................................................5
Introduction...............................................................5
Eligibility and Participation..............................................6
Contributions Under the Plan...............................................7
Limitations on Contributions...............................................8
Investment of Contributions and Account Balances...........................11
Benefits Under the Plan....................................................15
Withdrawals and Distributions From the Plan................................16
Administration of the Plan a...............................................17
Reports to Plan Participants...............................................18
Plan Administrator.........................................................18
Amendment and Termination..................................................18
Merger, Consolidation or Transfer..........................................19
Federal Income Tax Consequences............................................19
ERISA and Other Qualifications.............................................24
SEC Reporting and Short-Swing Profit Liability.............................24
Financial Information Regarding Plan Assets................................25
LEGAL OPINION.................................................................25
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan
and up to 200,000 shares (assuming a purchase price of $10 per share) of Common
Stock may be acquired by the Plan to be held in the Employer Stock Fund. The
Company is the issuer of the Common Stock. Only employees of the Bank may
participate in the Plan. The Common Stock to be issued hereby is conditioned on
the consummation of the Conversion. A Participant's investment in units in the
Employer Stock Fund in the Conversion is subject to the priority set forth in
the Plan of Conversion. Information with regard to the Plan is contained in this
Prospectus Supplement and information with regard to the Conversion and the
financial condition, results of operation and business of the Bank is contained
in the attached Prospectus. The address of the principal executive office of the
Bank is 134 Franklin Corner Road, Lawrenceville, NJ 08648-0950. The Bank's
telephone number is (609) 844-3100.
Election to Purchase Common Stock in the Conversion; Priorities
The Plan permits each Participant to direct the investment of his or
her account balance among eight investment alternatives which include an
employer stock fund (the "Employer Stock Fund"). The Trustee of the Plan will
purchase Common Stock offered for sale in connection with the Conversion in
accordance with each Participant's directions. Participants will be provided the
opportunity to elect alternative investments from among the Funds offered, which
alternative selection will be used in the event the Prospectus is oversubscribed
and the Trustee is unable to use the full amount allocated by a Participant to
purchase Common Stock in the Offering. If a Participant fails to direct the
investment of his or her account balance, the Participant's account balance will
remain in the other investment funds of the Plan as previously directed by the
Participant. If a Participant has never made an investment election, the
Participant's account balance will be invested in the Trenton Savings Bank FSB
401(k) Short-Term Investment Fund.
The shares of Common Stock to be sold in the Offering are being offered
in accordance with the following priorities: (i) depositors of the Bank with
account balances of $50 or more as of August 31, 1996 ("Eligible Account
Holders"); (ii) the Employee Stock Ownership Plan and related trust ("ESOP") in
an amount up to 4% of the shares sold in the Offering and the Bank's 401(k) Plan
in an amount up to 200,000 shares sold in the Offering; (iii) depositors of the
Bank with account balances of $50 or more as of December 31, 1997 who are not
Eligible Account Holders ("Supplemental Eligible Account Holders"); (iv)
depositors of the Bank as of January __, 1998 who are not Eligible Account
Holders or Supplemental Eligible Account Holders; (v) certain members of the
general public, with preference given to Minority Stockholders and then to
natural persons residing in Mercer, Burlington and Ocean Counties, New Jersey.
To the extent that Participants fall into one of these categories, they
are being permitted to use funds in their Plan account to subscribe or pay for
the Common Stock being acquired. Common
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Stock so purchased will be placed in a Participant's Employer Stock Fund account
within his or her 401(k) account. Funds not transferred to the Employer Stock
Fund will remain in the other investment funds of the Plan as directed by the
Participant.
Purchase of Common Stock by Participants is subject to the same
purchase limitations applicable to other purchases. No person, together with
associates of and persons acting in concert with such person, may purchase more
than 60,000 Subscription shares in the Subscription Offering, which limitation
may be increased or decreased by the Company and/or the Bank in its sole
discretion. No person may purchase fewer than 25 shares. Reference is made to
the Prospectus for a complete description of purchase limitations.
Value of Participation Interests
The assets of the Plan were valued at approximately $2,992,373.42 as of
September 30, 1997. Each Participant was informed of the value of his or her
beneficial interest in the Plan as of September 30,1997. The $2,992,373.42 value
represents the aggregate market value as of September 30,1997, of all
Participants accounts and earnings thereon, less previous withdrawals.
Method of Directing Transfer
Each Participant shall receive a form which provides for a Participant
to direct that all or a portion of his or her beneficial interest in the Plan
(but not less than 10% of such interest) be transferred to the Employer Stock
Fund (the "Contribution and Investment Form") or to the other investment options
established under the Plan. The Participant's investment in the other investment
options set forth in the Plan may be in any whole percentage from 10% to 100%.
If a Participant wishes to invest all or part of his or her beneficial interest
in the assets of the Plan to the purchase of Common Stock issued in connection
with the Conversion, he or she should indicate that decision on the Contribution
and Investment Form.
Time for Directing Transfer
Directions to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in connection with the Offering must be returned to
the Bank no later than _:00 p.m.
on March __, 1998.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Offering is irrevocable.
Participants, however, will be able to direct the investment of their accounts
under the Plan as explained below.
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Direction to Purchase Common Stock After the Offering
After the Offering, a Participant will continue to be able to direct
that a certain percentage of his or her interest in the Plan (but not less than
10%) be transferred to the Employer Stock Fund and invested in Common Stock or
to the other investment funds available under the Plan (amounts invested in the
investment funds may be invested in any whole percentage from 10% to 100%).
Alternatively, a Participant may direct that all or any portion of such
Participant's interest in the Plan be transferred to the Trenton Savings Bank
FSB 401(k): A. Core Equity Fund, B. Emerging Growth Equity Fund, C. Value Equity
Fund, D. Actively Managed Bond Fund, E. Intermediate-Term Bond Fund, F.
Short-Term Investment Fund, or G. International Equity Fund (said funds,
together with the Employer Stock Fund being hereinafter referred to as the "Plan
Funds"), in accordance with the terms of the Plan. Participants are permitted to
direct that future contributions (in any whole percentage from 10% to 100%) made
to the Plan by or on their behalf will be invested among any of the Trenton
Savings Bank FSB 401(k) Plan Funds. The allocation of a Participant's interest
in a Plan Fund may be changed not more often than once per quarter. Special
restrictions may apply to transfers directed to and from the Employer Stock Fund
by those Participants who are officers, directors and principal shareholders of
the Company who are subject to the provisions of Section 16(b) of the Securities
and Exchange Act of 1934 (the "Exchange Act"), as amended.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Offering will be used by the Employer Stock
Fund Trustee to purchase shares of Common Stock, except in the event of an
oversubscription, as discussed above. The price paid for such shares of Common
Stock will be the same price as is paid by all other persons who purchase shares
of Common Stock in the Offering.
Subsequent to the Offering, Common Stock purchased by the Employer
Stock Fund Trustee will be acquired in open market transactions. The prices paid
by the Trustee for shares of Common Stock will not exceed "adequate
consideration" as defined in Section 3(18) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
Nature of a Participant's Interest in the Common Stock
The Common Stock will be held in the name of the Employer Stock Fund
Trustee, as Trustee. Shares of Common Stock acquired at the direction of a
Participant will be allocated to the Participant's account under the Plan.
Therefore, earnings with respect to a Participant's account should not be
affected by the investment designations (including investments in Common Stock)
of other Participants. The Employer Stock Fund Trustee as record holder will
vote such allocated and unallocated shares, if any, as directed by Participants.
Voting Rights of Common Stock
The Employer Stock Fund Trustee generally will exercise voting rights
attributable to all
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Common Stock held by the Trust as directed by Participants with interests in the
Employer Stock Fund. With respect to each matter as to which holders of Common
Stock have a right to vote, each Participant will be allocated voting
instruction rights reflecting such Participant's proportionate interest in the
Employer Stock Fund. The number of shares of Common Stock held in the Employer
Stock Fund that are voted in the affirmative and negative on each matter shall
be proportionate to the number of voting instruction rights exercised by
participants in the affirmative and negative respectively.
DESCRIPTION OF THE PLAN
Introduction
The Plan was adopted effective January 1, 1979 and was amended and
restated effective July 1, 1993. Amendment Number Two, permitting investment in
the Employer Stock Fund, was adopted on May 24, 1995. The Plan is a profit
sharing plan with a cash or deferred compensation feature established in
accordance with the requirements under Section 401(a) and Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Plan is qualified
under Section 401(a) of the Code, and its related trust is qualified under
Section 501(a) of the Code.
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase plan). The Plan
is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding
requirements contained in Title IV of ERISA are not applicable to Participants
(as defined below) or beneficiaries under the Plan.
Reference to full Text of Plan. The following statements are summaries
of certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan. Words capitalized but not defined
in the following discussion have the same meaning as set forth in the Plan.
Copies of the Plan are available to all employees by filing a request with the
Plan Administrator, c/o Trenton Savings Bank FSB, Attention: Ms. Judy G. Olsen,
Assistant Vice President, 134 Franklin Corner Road, Lawrenceville, NJ
08648-0950. Each employee is urged to read carefully the full text of the Plan.
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Eligibility and Participation
Any salaried employee of the Employer is eligible to participate in the
Plan on the Entry Date following completion of one (1 ) year of Eligibility
Service, as defined, with the Bank, provided he or she has reached age 21 at
such time. A year of Eligibility Service is defined as the 12 month period
following the employee's commencement date or first plan year during which an
employee completes at least 870 hours of service with the Bank, whichever occurs
first. The plan year is January 1 to December 31 (the "Plan Year"). The entry
dates are January 1 and July 1 (the "Entry Dates").
As of December 31, 1996, there were approximately 124 employees
eligible to participate in the Plan, and 101 employees participating by making
salary deferral contributions.
Contributions Under the Plan
401(k) Plan Contributions. Each Participant in the Plan is permitted to
elect to defer such Participant's compensation (as defined below) on a pre-tax
basis up to the lesser of 11% of annual compensation (expressed in terms of
whole percentages) or the applicable limit under the Code (for 1998, the
applicable limit is $10,000) and subject to certain other restrictions imposed
by the Code, and to have that amount contributed to the Plan on such
participant's behalf. (Under the Code, the pre-tax basis could be increased to
the lesser of 25% of annual compensation or the $10,000 applicable limit). For
purposes of the Plan, "Compensation" means, generally, a Participant's total
compensation received from the Bank, including amounts the Participant elects to
defer as salary contributions to the Plan. In 1998, the annual Compensation of
each Participant taken into account under the Plan was and is limited to
$160,000. (Limits established by the IRS are subject to increase pursuant to an
annual cost of living adjustment, as permitted by the Code). A Participant may
elect to modify the amount contributed to the Plan not more often than once per
quarter by providing written notice to the Plan Administrator at least thirty
(30) days prior to the effective date of the modification, unless another period
is designated by the Plan Administrator. However, special restrictions apply to
persons subject to Section 16 of the Exchange Act.
Employer Contributions. The Bank may make, but is not required to make,
discretionary matching contributions to the Plan. If the Bank makes matching
contributions to participants accounts, it will contribute an amount to be
determined annually, provided the participant has worked at least 870 hours
during the Plan Year and is employed by the Bank on the last day of the Plan
Year. In no case may the Bank's matching contribution exceed 5.4% of a
Participant's annual base Compensation. The Bank may, at its discretion, match
such lesser percentage, such as 1%, 2% or 3%, or a percentage thereof, as it
determines appropriate, or may make no matching contribution at all.
The Bank may also make discretionary Qualified Non-Elective
Contributions on behalf of Participants equal to a percentage of each eligible
Participant's Compensation, to be determined each year by the Bank.
5
Finally, the Bank may make discretionary profit sharing contributions
("Non-elective Contributions") to the accounts of Participants who work at least
870 hours in the Plan Year and are employed on the last day of the Plan Year.
Such Non-elective Contributions, if made, will be integrated with the Bank's
social security tax payments on behalf of each Participant. In effect, the
Bank's Non-elective Contribution will be allocated to each Participant's account
in the same proportion that such Participant's Compensation in excess of the
social security taxable wage base (also called "excess compensation") plus
Compensation bears to the total "excess compensation" plus Compensation of all
eligible participants. However, the maximum amount which can be allocated in the
first step is 5.7% of a Participant's "excess compensation" plus Compensation.
If after the first step, a portion of the Bank's Non-elective Contribution has
not yet been allocated, then the remainder will be allocated among Participants
in the same proportion that each Participant's Compensation bears to the total
Compensation of all Participants.
Limitations on Contributions
Limitation on Employee Salary Deferrals. The annual amount of deferred
Compensation of a Participant (when aggregated with any elective deferrals of
the Participant under a simplified employee pension plan or a tax-deferred
annuity) may not exceed the limitation contained in Section 402(g) of the Code,
adjusted for increases in the cost of living as permitted by the Code (the
limitation for 1998 is $10,000). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross income for
federal income tax purposes in the year they are made. In addition, any such
excess deferral will again be subject to federal income tax when distributed by
the Plan to the Participant, unless the excess deferral (together with any
income allocable thereto) is distributed to the Participant not later than the
first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the
distribution is made.
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions and
forfeitures allocated to each Participant's Salary Deferral Account and Employer
Contribution Account during any Plan Year may not exceed the lesser of $30,000
or 25% of the Participant's Compensation for the Plan Year (as defined). In
addition, annual additions are limited to the extent necessary to prevent
contributions on behalf of any employee from exceeding the employee's combined
plan limit, i.e., a limit that takes into account the contributions and benefits
made on behalf of an employee to all plans of the Bank. To the extent that these
limitations have been exceeded with respect to a Participant, the Plan
Administrator shall:
(i) return any voluntary after-tax employee contributions to the extent
that the return would reduce the excess amount in the Participant's accounts;
(ii) hold any excess amount remaining after the application of
paragraph (i), in a suspense account;
6
(iii) use the suspense account in the next limitation year (and
succeeding limitation years, if necessary) to reduce Employer contributions for
that Participant if such Participant is covered by the Plan at the end of the
limitation year, or if the Participant is not covered, allocate and reallocate
the suspense account in the next limitation year (and succeeding limitation
years, if necessary) to all Participants before any Employer contribution or
employee contributions which would be "annual additions" are made to the Plan
for such limitation year; and
(iv) reduce Employer contributions to the Plan for the limitation year
by the amount of the suspense account allocated and reallocated during such
limitation year.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limits the amount of salary deferral
contributions and matching contributions that may be made to the Plan in any
Plan Year on behalf of Highly Compensated Employees (defined below) in relation
to the amount of salary deferral contributions made by or on behalf of all other
employees eligible to participate in the Plan. Specifically, the "actual
deferral percentage" ("ADP") (i.e., the average of the actual deferral ratios,
expressed as a percentage, of each eligible employee's salary deferral
contribution if any, for the Plan Year over the employee's Compensation), of the
Highly Compensated Employees must meet either of the following tests: (i) the
ADP of the eligible Highly Compensated Employees is not more than 125% of the
ADP of all other eligible employees, or (ii) the ADP of the eligible Highly
Compensated Employees is not more than 200% of the ADP of all other eligible
employees, and the excess of the ADP for the eligible Highly Compensated
Employees over the ADP of all other eligible employees is not more than two
percentage points. Similarly, the actual contribution percentage ("ACP") (i.e.,
the average of the actual contribution ratios, expressed as a percentage, of
each eligible employee's matching contributions, if any, for the Plan Year over
the employees Compensation) of the Highly Compensated Employees must meet either
of the following tests: (i) the ACP of the eligible Highly Compensated Employees
is not more than 125% of the ACP of all other eligible employees, or (ii) the
ACP of the eligible Highly Compensated Employees is not more than 200% of the
ACP of all other eligible employees, and the excess of the ACP for the eligible
Highly Compensated Employees over the ACP of all other employees is not more
than two percentage points.
In general, for Plan Years beginning in 1998, a Highly Compensated
Employee includes any employee, who, (1) during the Plan Year or the preceding
Plan Year, was at any time a 5% owner (i.e., owns directly or indirectly more
than 5% of the stock of an employer, or stock possessing more than 5% of the
total combined voting power of all stock of an employer), or (2) for the
preceding Plan Year, received Compensation from an employer in excess of $80,000
(in 1998), and (if the employer elects for a Plan Year) was in the group
consisting of the top 20% of employees when ranked on the basis of Compensation
paid during the Plan Year. The dollar amounts set forth above are adjusted
annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the ADP limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. Moreover, the Bank will be subject to a
7
10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are re-characterized or are
distributed before the close of the first 2- 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the Bank
with respect to any excess aggregate contributions, unless such amounts, plus
any income allocable thereto, are distributed within 2-1/2 months following the
close of the Plan Year in which they arose.
Investment of Contributions and Account Balances
All amounts credited to Participants' accounts under the Plan are held
in the Plan Trust (the "Trust") which is administered by the Trustee appointed
by the Bank's Board of Directors.
Prior to the Offering, Participants have been provided the opportunity
to direct the investment of their accounts into one of the following funds (the
"Funds"):
A. Core Equity Fund
B. Emerging Growth Equity Fund
C. Value Equity Fund
D. Actively Managed Bond Fund
E. Intermediate-Term Bond Fund
F. Short-Term Investment Fund
G. International Equity Fund
H. Employer Stock Fund
A Participant may elect to have both past contributions (and earnings),
as well as future contributions to the Participant's accounts invested in the
Funds listed above. Transfers of past contributions (and the earnings thereon)
do not affect the investment mix of future contributions. These elections will
be effective on the effective date of the Participant's written notice to the
Plan Administrator, provided such notice is filed with the Plan Administrator at
least 15 days before it is to become effective. Alternatively, a Participant's
investment elections will be effective if made in any other manner deemed
appropriate by the Plan Administrator if such manner is communicated in writing
to the Participants by the Plan Administrator. Any amounts credited to a
Participant's accounts for which investment directions are not given will be
invested in the Trenton Savings Bank FSB 401(k) Short-Term Investment Fund.
The net gain (or loss) of the Funds from investments (including
interest payments, dividends, realized and unrealized gains and losses on
securities, and expenses paid from the Trust) will be allocated at least four
times during the Plan Year. For purposes of such allocations, all assets of the
Trust are valued at fair market value.
8
Account H (The Employer Stock Fund). Account H (The Employer Stock
Fund) consists of investments in Common Stock. Cash dividends paid on Common
Stock held in the Employer Stock Fund are credited to a cash dividend subaccount
for each Participant investing in the Employer Stock Fund. After the Offering,
the Trustee will use all amounts held by it in the Employer Stock Fund (except
the amounts credited to cash dividend subaccounts) to purchase shares of Common
Stock of the Company. All purchases will be made at prevailing market prices.
Under certain circumstances, the Trustee may be required to limit the daily
volume of shares purchased. Pending investment in Common Stock, assets held in
the Employer Stock Fund may be placed in the bank deposits and other short-term
investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the accounts of Participants affected by the purchase or
sale. Except for Common Stock purchased in the Offering, the Participant will
pay any brokerage commissions, transfer fees and other expenses incurred in the
sale and purchase of securities attributable to him or her in all the investment
alternatives, including the Common Stock for the Employer Stock Fund. At the
Bank's election, however, the Bank may pay such brokerage commissions transfer
fees, and other expenses. A Participant's account will be adjusted to reflect
changes in the value of shares of Common Stock resulting from stock dividends,
stock splits and similar changes.
Investments in the Employer Stock Fund may involve certain special
risks in investments in Common Stock of the Company. For a discussion of these
risk factors, see the Prospectus. Neither the Bank nor the Plan guarantee the
performance of the Employer Stock Fund nor are the amounts in the Employer Stock
Fund or any of the Plan Funds insured by the Federal Deposit Insurance
Corporation.
The following is a description of each of the Plan's seven other
investment funds.
Account A (Core Equity Fund). This fund seeks capital appreciation and
income and invests in a broadly diversified group of high quality, large
capitalization companies exhibiting sustainable growth in earnings and
dividends.
Account B (Emerging Growth Equity Fund). This fund seeks capital
appreciation and income by investing primarily in stocks of smaller companies
with higher-than-average earnings and dividend growth potential. The fund will
generally have a higher degree of risk and price volatility than the portfolios
of the Core Equity Fund and the Value Equity Fund.
Account C (Value Equity Fund). This fund seeks capital appreciation and
income and invests heavily in out-of-favor stocks of financially sound companies
that are selling at unjustifiably low market valuations based on price/earnings
ratios, price-to-book ratios, etc.
Account D (Active Managed Bond Fund). This fund invests in high quality
fixed income securities and seeks both principal appreciation and income. The
maturity structure of this fund is expected to vary substantially based on the
perceived relative attractiveness of different areas of the fixed income market.
At least 65% of its assets must be invested in securities issued or backed by
9
the United States government, or its agencies or instrumentalities.
Account E (Intermediate-Term Bond Fund). This fund seeks principal
appreciation and income and invests in high quality fixed-income vehicles that
mature within 10 years or have expected average lives of 10 years or less. At
least 65% of its assets must be invested in securities issued or backed by the
United States government, or its agencies or instrumentalities.
Account F (Short-Term Investment Fund). This fund is invested in high
quality, money market instruments with a maximum average maturity of one year.
This fund focuses on preservation of principal will producing a competitive
money market return.
Account G (International Equity Fund). This fund seeks capital
appreciation and income by investing in stocks of companies headquartered in
foreign countries. Each selection is based on companies whose current prices do
not reflect the true earnings potential and for companies that are misperceived
by investors, and therefore, are selling at "undervalued" prices (unjustifiably
low price- to-book ratios, price/earnings ratios, etc). Investments in foreign
markets with unacceptable political or economic risks are avoided. Holdings are
concentrated in the larger markets of Europe, Australia and the Far East. In
addition, the portfolio manager will invest in emerging markets, as
opportunities arise. The fund generally carries a higher degree of risk and
price volatility than the Core Equity Fund and the Value Equity Fund, but less
than the Emerging Growth Equity Fund.
The annual percentage total returns for the above funds for the most
recent quarter, the past year and the past three years is given in the following
table:
Net Investment Performance
(After Investment Expense)
Quarter Annualized
Ended -----------------------
Fund 9/30/97 12 Months 3 Years
---- ------- --------- -------
A. Core Equity Fund(1) 6.69% 34.54% 28.86%
B. Emerging Growth Equity Fund(1) 20.91% 25.94% 32.93%
C. Value Equity Fund(1) 10.67% 44.59% 28.47%
D. Actively Managed Bond Fund(1) 3.93% 10.07% 9.15%
E. Intermediate-Term Bond Fund(1) 2.47% 7.68% 7.50%
F. Short-Term Investment Fund(1) 1.24% 4.89% 4.96%
G. International Equity Fund(1) -1.22% 12.91% 10.29%
- --------------
(1) Source, RSI Retirement Trust
Benefits Under the Plan
Vesting. A Participant, at all times, has a fully vested,
nonforfeitable interest in his or her
10
salary deferral contribution and the earnings thereon under the Plan. The
Participant's Employer Contribution Account (consisting of matching
contributions and forfeitures) vests in the Participant in accordance with the
following schedule:
Years of Vesting Service Vested Percentage
------------------------ -----------------
Less than 1 year 0%
1 year but less than 2 years 20%
2 years but less than 3 years 40%
3 years but less than 4 years 60%
4 years but less than 5 years 80%
5 years or more 100%
A Participant will also be 100% vested in Employer contributions and
forfeitures, regardless of his or her years of vesting service, upon attainment
of normal retirement age under the Plan, death or disability. Any non-vested
contributions which are forfeited shall be used to reduce the Bank's future
contributions to the Plan.
Withdrawals and Distributions From the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF
EMPLOYMENT WITH THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED
ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2,
REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH
THE BANK OR AFTER TERMINATION OF EMPLOYMENT.
Withdrawals Prior to Termination of Employment. A Participant may make
a withdrawal from his or her accounts prior to termination of employment only in
the event of financial hardship, subject to the hardship distribution rules
under the Plan. These requirements insure that Participants have a true
financial need before a withdrawal may be made.
Distribution Upon Retirement or Disability. Payment of benefits to a
Participant who retires, incurs a disability, or otherwise terminates employment
shall be made in a lump-sum payment or in installments, over a period that does
not extend beyond the life expectancy of the Participant (or the Participant and
his designated beneficiary). Benefit payments ordinarily shall commence as soon
as practicable following termination of service upon (i) retirement on or after
attainment of normal retirement age; (ii) retirement due to disability; or (iii)
death of the Participant. With respect of a 5% owner, benefit payments must
commence no event later than April 1 following the calendar year in which the
Participant attains age 70-1/2.
Distribution Upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have
11
his or her benefits valued as of the valuation date immediately following the
Participant's death and paid to the surviving spouse. With respect to an
unmarried Participant, and in the case of a married Participant with spousal
consent to the designation of another beneficiary, payment of benefits to the
beneficiary, payment of benefits to the beneficiary of a deceased Participant
shall be made in accordance with the Participant's election, in the form and
manner specified above.
Distribution Upon Termination for Any Other Reason. Distribution of
benefits to a Participant who terminates employment for any other reason will
not be made to the Participant at the time of termination but shall be made on
the occurrence of an event which would result in a distribution had the
Participant remained in the employ of the Bank (i.e., upon the Participant's
death, disability, or attainment of early or normal retirement age).
Alternatively, at the Participant's election, a Participant may receive a
distribution of his accounts after he has incurred a one year break in service.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
The trustee with respect to the Plan is the named fiduciary of the Plan for
purposes of Section 402 of ERISA.
Trustee. The trustee is appointed by the Board of Directors of the Bank
to serve at its pleasure. The trustees of the RSI Retirement Trust are the
trustees of the Plan, other than of the Employer Stock Fund, for which Marine
Midland Bank serves as trustee. The trustees are referred to collectively herein
as the Trustee.
The Trustee receives and holds the contributions to the Plan in trust
and distributes the account balances to Participants and beneficiaries in
accordance with the terms of the Plan and the directions of the Plan
Administrator. The Trustee is responsible for investment of the assets of the
Trust.
Reports to Plan Participants
The Trustee will furnish to each Participant a statement at least
annually showing (i) the balance in the Participant's accounts as of the end of
that period, (ii) the amount of contributions allocated to such Participant's
accounts for that period, and (iii) the adjustments to such Participant's
accounts to reflect earnings or losses (if any).
12
Plan Administrator
Pursuant to the terms of the Plan, the Plan is administered by the plan
administrator (the "Plan Administrator"). The Bank is the Plan Administrator and
has designated a committee consisting of Wendell T. Breithaupt, President and
Chief Executive Officer, Leo J. Bellarmino, Executive Vice President, Robert
Russo, Vice President and Treasurer and Judy G. Olsen, Assistant Vice President,
to supervise its responsibilities as such. The address and telephone number of
the Plan Administrator is c/o Trenton Savings Bank FSB, Attention: Ms. Judy G.
Olsen, Assistant Vice President, 134 Franklin Corner Road, Lawrenceville, NJ
08648-0950, Telephone number (609) 844- 3100. The Plan Administrator is
responsible for the administration of the Plan, interpretation of the provisions
of the Plan, prescribing procedures for filing applications for benefits,
preparation and distribution of information explaining the Plan, maintenance of
plan records, books of account and all other data necessary for the proper
administration of the Plan, and preparation and filing of all returns and
reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries, and others under Sections 104 and 105 of ERISA.
Amendment and Termination
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee affected by such termination shall have a fully vested interest in
his or her accounts. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust to
be used for, or diverted to, any purpose other than the exclusive benefit of
Participants or their beneficiaries; provided, however, that the Bank may make
any amendment it determines necessary or desirable, with or without retroactive
effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the Trust assets to another plan, the Plan requires
that each Participant would (if either the Plan or the other plan then
terminated) receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit he or she would have been
entitled to receive immediately before the merger, consolidation or transfer (if
the Plan had then terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state
13
and local income tax laws may not be the same as under the federal income tax
laws. Participants are urged to consult their tax advisors with respect to any
distribution from the Plan and transactions involving the Plan.
The Plan is qualified under Section 401(a) and 401(k) of the Code and
the related Trust is exempt from tax under Section 501(a) of the Code. A plan
that is qualified. under these sections of the Code is afforded special tax
treatment which include the following: (1) the Bank is allowed an immediate tax
deduction for the amount contributed to the Plan each year; (2) Participants pay
no current income tax on amounts contributed by the Bank on their behalf; and
(3) Earnings of the plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Bank expects to timely adopt any
amendments to the Plan that may be necessary to maintain the qualified status of
the Plan under the Code.
Assuming that the Plan is administered in accordance with the
requirements of the Code, participation in the Plan under existing federal
income tax laws will have the following effects:
(a) Amounts contributed to a Participant's account and the investment
earnings on the account are not includable in a Participant's federal taxable
income until such contributions or earnings are actually distributed or
withdrawn from the Plan. Special tax treatment may apply to the taxable portion
of any distribution that includes Common Stock or qualifies as a Lump Sum
Distribution (as described below).
(b) Income earned on assets held by the Trust will not be taxable to
the Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a lump sum distribution ("Lump
Sum Distribution") if it is made: (i) within one taxable year of the Participant
or beneficiary; (ii) on account of the Participant's death, disability or
separation from service, or after the Participant attains age 59-1/2; and (ii)
consists of the balance to the credit of the Participant under this Plan and all
other profit sharing plans, if any, maintained by the Bank. The portion of any
Lump Sum Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the"total taxable
amount") consists of the entire amount of such Lump Sum Distribution less the
amount of after-tax contributions, if any, made by the Participant to any other
profit sharing plan maintained by the Bank which is included in such
distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in the Plan or in
any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit-sharing plan maintained by the Bank), may
14
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59-1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1985 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the Participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such Common
Stock, i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations to be issued by the IRS.
Contribution to Another Qualified Plan or to an IRA. A Participant may
defer federal income taxation of all or any portion of the total taxable amount
of a Lump Sum Distribution (including the proceeds from the sale of any Common
Stock included in the Lump Sum Distribution) to the extent that such amount, or
a portion thereof, is contributed, within 60 days after the date of its receipt
by the Participant, to another qualified plan or to an individual retirement
account ("IRA"). If less than the total taxable amount of a Lump Sum
Distribution is contributed to another qualified plan or to an IRA within the
applicable 60-day period, the amount not so contributed must be included in the
Participant's income for federal income tax purposes and will not be eligible
for the special averaging rules or for capital gains treatment. Additionally, a
Participant may defer the federal income taxation of any portion of an amount
distributed from the Plan on account of the Participant's disability or
separation from service, generally, if the amount is distributed within one
taxable year of the Participant, and such amount is contributed, within 60 days
after the date of its receipt by the Participant, to an IRA. Prior to 1993,
following the partial distribution of a Participant's account, any remaining
balance under the Plan (and the balance to the credit of the Participant under
any other profit sharing plan sponsored by the Bank) would not be eligible for
the special averaging rules or for capital gains treatment. For these purposes,
a "partial distribution" is a distribution within one taxable year of the
Participant equal to at least 50% of the balance of a Participant's account
("Partial
15
Distribution").
Pursuant to a change in the law, effective January 1, 1993, virtually
all distributions from the Plan may be rolled over to another qualified Plan or
to an IRA without regard to whether the distribution is a Lump Sum Distribution
or a Partial Distribution. Effective January 1, 1993, Participants have the
right to elect to have the Trustee transfer all or any portion of an "eligible
rollover distribution" directly to another plan qualified under Section 401(a)
of the Code or to an IRA. If the Participant does not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
IRA, the distribution will be subject to a mandatory federal withholding tax
equal to 20% of the taxable distribution. An "eligible rollover distribution"
means any amount distributed from the Plan except: (1) a distribution that is
(a) one of a series of substantially equal periodic payments made (not less
frequently than annually ) over the Participant's life or the joint life of the
Participant and the Participant's designated beneficiary, or (b) for a specified
period of ten years or more; (2) any amount that is required to be distributed
under the minimum distribution rules; and (3) any other distributions excepted
under applicable federal law.
The beneficiary of a Participant who is the Participant's surviving
spouse also may defer federal income taxation of all or any portion of a
distribution from the Plan to the extent that such amount, or a portion thereof,
is contributed within 60 days after the date of its receipt by the surviving
spouse, to an IRA. If all or any portion of the total taxable amount of a Lump
Sum Distribution is contributed by the surviving spouse of a Participant to an
IRA within the applicable 60-day period, any subsequent distribution from the
IRA will not be eligible for the special averaging rules or for capital gains
treatment. Any amount received by the Participant's surviving spouse that is not
contributed to another qualified plan or to an IRA within the applicable 60-day
period, and any amount received by a nonspouse beneficiary will be included in
such beneficiary's income for federal tax purposes in the year in which it is
received.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59-1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate or a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his beneficiary, (iv)
made to the Participant after separation from service on account of early
retirement under the Plan after attainment of age 55, (v) made to pay medical
expenses to the extent deductible for federal income tax purposes, (vi) payments
made to an alternate payee pursuant to a qualified domestic relations order, or
(vii) made to effect the distribution of excess contributions or excess
deferrals.
ERISA and Other Qualifications
As noted above, the Plan is subject to certain provisions of the ERISA
and has received a
16
favorable determination that it is qualified under Section 401(a) of the Code.
The foregoing is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Participant is urged to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Exchange Act imposes reporting and liability
requirements on officers, directors, and persons beneficially owning more than
10% of public companies such as the Company. Section 16(a) of the Exchange Act
requires the filing of reports of beneficial ownership. Within 10 days of
becoming a person subject to the reporting requirements of Section 16(a), a Form
3 reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission ("SEC") . Certain changes in beneficial ownership, such as
purchases, sales and gifts must be reported periodically, either on a Form 4
within 10 days after the end of the month in which a change occurs, or annually
on a Form 5 within 45 days after the close of the Company's fiscal year. Certain
discretionary transactions in and beneficial ownership of the Common Stock
through the Employer Stock Fund of the Plan by officers, directors and persons
beneficially owning more than 10% of the Common Stock of the Company must be
reported to the SEC by such individuals.
In addition to the reporting requirements described above, Section
16(b) of the Exchange Act as provides for the recovery by the Company of profits
realized by an officer, director or any person beneficially owning more than 10%
of the Company's Common Stock ("Section 16(b) Persons") resulting from
non-exempt purchases and sales of the Company's Common Stock within any
six-month period.
The SEC has adopted rules that provide exemption from the profit
recovery provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided certain
requirements are met. These requirements generally involve restrictions upon the
timing of elections to acquire or dispose of employer securities for the
accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, under the Plan, Section 16(b) Persons are required to hold shares of
Common Stock distributed from the Plan for six months following such
distribution and are prohibited from directing additional purchases of units
within the Employer Stock Fund for six months after receiving such a
distribution.
Financial Information Regarding Plan Assets
Financial statements for the Plan for the year ending December 31,
1996, are attached to the Prospectus. The financial statements were prepared by
RSI.
17
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., which firm acted as special counsel to the Bank in connection with the
Company's Conversion from a mutual holding company to a stock corporation.
18
PROSPECTUS
Peoples Bancorp, Inc.
(Proposed Holding Company for Trenton Savings Bank FSB)
35,707,500 Shares of Common Stock
Peoples Bancorp, Inc., a Delaware corporation (the "Company"), is
offering up to 31,050,000 shares (subject to adjustment to up to 35,707,500
shares as described herein) of its common stock, par value $.01 per share (the
"Common Stock"), in connection with the conversion of Peoples Bancorp, M.H.C.
(the "Mutual Holding Company"), from a federally chartered mutual holding
company to a Delaware stock corporation pursuant to a Plan of Conversion and
Reorganization (the "Plan of Conversion"). As of December 1, 1997, the Mutual
Holding Company held no material assets except for 5,796,000 shares, or
approximately 64.1%, of the common stock ("Mid-Tier Common Stock") of Peoples
Bancorp, Inc. (the "Mid-Tier Holding Company"), a federal savings and loan
holding company, which owns 100% of the common stock of Trenton Savings Bank FSB
(the "Bank"), a federal stock savings bank. The remaining 3,250,444 shares, or
approximately 35.9%, of the Mid-Tier Common Stock (the "Minority Shares") were
publicly owned by stockholders including the Bank's employees, directors, and
stock benefit plans (together, the "Minority Stockholders"). After the
Conversion (as defined herein), the Company will be the sole stockholder of the
Bank.
(continued on next page)
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK CENTER AT (609) ________
--------------------------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR, SEE "RISK
FACTORS" BEGINNING ON PAGE ______.
--------------------------------------------
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.
================================================================================================================
Estimated Underwriting Estimated
Commissions and Other Net Cash
Subscription Price (1) Fees and Expenses (2) Proceeds (3)
---------------------- --------------------- ------------
Minimum Per Share........................ $10.00 $.13 $9.87
Midpoint Per Share....................... $10.00 $.11 $9.89
Maximum Per Share........................ $10.00 $.10 $9.90
Maximum Per Share (as adjusted).......... $10.00 $.08 $9.92
Minimum Total............................ $149,611,000 $1,935,000 $147,676,000
Midpoint Total........................... $176,013,000 $1,935,000 $174,078,000
Maximum Total............................ $202,416,000 $1,935,000 $200,481,000
Maximum Total, as adjusted (4)........... $232,778,000 $1,935,000 $230,843,000
================================================================================================================
(1) Based on (i) the independent appraisal prepared by FinPro, Inc. ("FinPro")
dated December 17, 1997, which states that the estimated pro forma market
value of the Common Stock ranged from $229,500,000 to $310,500,000 (subject
to adjustment to $357,075,000), and (ii) the Adjusted Minority Ownership
Percentage (as defined herein), pursuant to which 65.2% of the to-be
outstanding shares of Common Stock will be offered as Subscription Shares
in the Offering. See "The Conversion--Share Exchange Ratio," and "--Stock
Pricing and Number of Shares to be Issued."
(2) Consists of the estimated costs of the Conversion, including estimated
fixed expenses of $935,000 and marketing fees to be paid to Friedman,
Billings, Ramsey & Co., Inc. Actual expenses may vary from these estimates.
See "Pro Forma Data" for the assumptions used in arriving at these
estimates.
(3) Includes proceeds from the sale of shares of Common Stock in the Offering
to the Bank's employee stock ownership plan and trust (the "ESOP"). The
ESOP intends to purchase 4% of the shares sold in the Offering. Funds to
purchase such shares will be loaned to the ESOP by the Company, which may
fund such loan with offering proceeds. The Bank intends to repay the ESOP
loan with funds from future operations. See "The Conversion--Plan of
Distribution and Selling Commissions" and "Management of the Bank--Benefit
Plans."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares that may be offered without a resolicitation of subscribers or any
right of cancellation. See "The Conversion--Stock Pricing and Number of
Shares to be Issued."
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is February ____, 1998
1
Of the shares of Common Stock offered hereby, (i) up to 20,241,623
shares (subject to adjustment to up to 23,277,802 shares) of Common Stock (the
"Subscription Shares") are being offered for a subscription price of $10.00 per
share (the "Subscription Price") in a subscription and community offering as
described below, and (ii) up to 10,808,377 shares (subject to adjustment to up
to 12,429,698 shares) of Common Stock (the "Exchange Shares") will be issued to
Minority Stockholders pursuant to an Agreement of Merger, whereby Minority
Shares shall automatically, without further action by the holder thereof, be
converted into and become a right to receive shares of Common Stock (the "Share
Exchange"). See "The Conversion--Share Exchange Ratio." The simultaneous
conversion of the Mutual Holding Company to stock form pursuant to the Plan of
Conversion, the exchange of all of the Minority Shares for Common Stock, and the
offer and sale of Subscription Shares pursuant to the Plan of Conversion are
herein referred to collectively as the "Conversion."
Non-transferable rights to subscribe for Common Stock in a subscription
offering (the "Subscription Offering") have been granted, in order of priority,
to the following: (i) depositors of the Bank with account balances of $50 or
more as of August 31, 1996 (the "Eligibility Record Date," and such account
holders "Eligible Account Holders"); (ii) the Bank's employee stock ownership
plan and related trust (the "ESOP") in an amount up to 4% of the shares sold in
the Offering and the Bank's 401(k) Plan in an amount up to 200,000 of the shares
sold in the Offering; (iii) depositors with aggregate account balances of $50 or
more as of December 31, 1997 (the "Supplemental Eligibility Record Date") who
are not Eligible Account Holders ("Supplemental Eligible Account Holders"); and
(iv) depositors of the Bank as of January ___, 1998 (the "Voting Record Date")
who are not Eligible Account Holders or Supplemental Eligible Account Holders
("Other Members"). Subscription rights are nontransferable; persons found to be
transferring subscription rights will be subject to the forfeiture of such
rights and possible further sanctions and penalties imposed by the OTS. Subject
to the prior rights of holders of subscription rights, the Company is offering
the shares of Common Stock not subscribed for in the Subscription Offering for
sale in a concurrent community offering (the "Community Offering") to certain
members of the general public with preference given to Minority Stockholders and
then to natural persons residing in the New Jersey counties of Burlington,
Mercer and Ocean (the "Community"). The Company retains the right, in its
discretion, to accept or reject any order in the Community Offering. The
Subscription Offering and Community Offering are referred to collectively as the
"Offering." Unless otherwise specifically provided, the term "Offering" does not
include the shares of Common Stock that will be issued in the Share Exchange.
The minimum number of shares that may be purchased is 25 shares. Except
for the ESOP and the 401(k) Plan, no Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member may in their capacities as such purchase
in the Subscription Offering more than 60,000 Subscription Shares; no person,
together with associates of and persons acting in concert with such person, may
purchase in the Offering more than 60,000 Subscription Shares; and no person
together with associates of and persons acting in concert with such person may
purchase in the aggregate more than the number of Subscription Shares that when
combined with Exchange Shares received by such person together with associates
of and persons acting in concert with such person exceeds 5.0% of the shares
sold in the Offering, provided, however, that the maximum purchase limitation
may be increased or decreased at the sole discretion of the Company and the
Bank. See "The Conversion--Subscription Offering and Subscription Rights,"
"--Community Offering" and "--Limitations on Common Stock Purchases."
The Subscription Offering and Community Offering will terminate at
______ p.m. local time, on March ____, 1998 (the "Expiration Date") unless
extended by the Bank and the Company, with the approval of the OTS, if
necessary. The Bank and the Company may determine to extend the Community
Offering for any reason, whether or not subscriptions have been received for
shares at the minimum, midpoint, or maximum of the Offering Range, and are not
required to give subscribers notice of any such extension. The Community
Offering must be completed within 45 days after the expiration of the
Subscription Offering unless extended by the Bank and the Company with the
approval of the OTS, if necessary. Orders submitted are irrevocable until the
completion or termination of the Conversion; provided that all subscribers will
have their funds returned promptly, with interest, and all withdrawal
authorizations will be canceled if the Conversion is not completed within 45
days after the expiration of the Subscription Offering, unless such period has
been extended with the consent of the OTS, if necessary. See "The
Conversion--Subscription Offering and Subscription Rights" and "--Procedure for
Purchasing Shares in Subscription and Community Offerings."
The Mid-Tier Common Stock is currently traded on the Nasdaq National
Market. The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market under the Mid-Tier Holding Company's
previous symbol "TSBS." Friedman, Billings, Ramsey & Co., Inc. ("FBR") has
advised the Company that upon completion of the Conversion, it intends to act as
a market maker in the Common Stock. See "Market for Common Stock."
2
[INSERT MAP]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR
ANY OTHER GOVERNMENT AGENCY.
3
SUMMARY
The following summary does not purport to be complete, and is qualified
in its entirety by the more detailed information including the "Recent
Developments" section and Consolidated Financial Statements and Notes thereto of
the Bank appearing elsewhere in this Prospectus.
The Company
The Company was organized in December 1997 by the Bank for the purpose
of owning all of the capital stock of the Bank upon completion of the
Conversion. Immediately following the Conversion, the only significant assets of
the Company will be the capital stock of the Bank and that percentage of the
Offering proceeds retained by the Company and the loan to fund the proposed
ESOP. The Company will succeed to the Mid-Tier Holding Company's name: "Peoples
Bancorp, Inc." See "The Company" and "Regulation and Supervision--Holding
Company Regulation."
The Mutual Holding Company
The Mutual Holding Company is a federal mutual holding company that was
organized on August 3, 1995 in connection with the mutual holding company
reorganization of the Bank's mutual savings bank predecessor. The Mutual Holding
Company has no material assets other than Mid-Tier Common Stock. Accordingly,
all financial and other information contained in this Prospectus relates to the
business, financial condition, and results of operations of the Mid-Tier Holding
Company and/or its wholly-owned subsidiary, the Bank. Upon consummation of the
Conversion, the Mutual Holding Company will convert from mutual to stock form
and simultaneously merge with and into the Mid-Tier Holding Company. See "The
Conversion"
The Mid-Tier Holding Company
The Mid-Tier Holding Company was formed to become the stock holding
company of the Bank in the two-tier reorganization (the "Two-Tier
Reorganization") of the Bank and the Mutual Holding Company, which was completed
in July 1997. In the Two-Tier Reorganization, all of the outstanding shares of
the Bank's common stock ("Bank Common Stock"), including shares held by the
Mutual Holding Company and Minority Stockholders, were converted into shares of
Mid-Tier Common Stock, and the Bank became the wholly-owned subsidiary of the
Mid-Tier Holding Company. As of September 30, 1997, the Mid-Tier Holding
Company's only material asset consisted of 100% of the outstanding shares of
common stock of the Bank.
The Bank
The Bank conducts its business from a corporate center located in
Lawrenceville, New Jersey, 14 branch offices located in Mercer, Burlington and
Ocean Counties, New Jersey, and a trust services subsidiary with an office
located in Ocean County, New Jersey. On January 1, 1995, the Bank completed a
charter change from a New Jersey chartered mutual savings bank to a federally
chartered mutual savings bank, permitting expansion of branch offices into
adjacent market areas in Pennsylvania. On August 3, 1995, the Bank's mutual
predecessor reorganized from a federally chartered mutual savings bank into the
Mutual Holding Company and concurrently formed the Bank, which succeeded to the
name and operations of the Bank's mutual predecessor (the "Reorganization"). At
the time of the Reorganization, the Bank conducted a stock offering (the
"Minority Stock Offering") in which it raised approximately $30.0 million of net
proceeds
The Bank has traditionally operated as a community-oriented savings
institution providing mortgage loans and other traditional financial services to
its local community. The Bank is primarily engaged in attracting deposits from
the general public through its offices and using those funds to originate loans
secured by one- to four-family residences primarily located in Mercer and
Burlington Counties where the Bank's offices are located, as well as in
neighboring Bucks County, Pennsylvania. Loans secured by one- to four-family
residences amounted to $242.4
4
million, or 60.4%, of the Bank's total loan portfolio at September 30, 1997. In
recent years the Bank has substantially increased its portfolio of mortgage
loans secured by multi-family and commercial real estate, commercial business
loans, consumer loans and home equity and property improvement loans, which, in
the aggregate, amounted to $158.7 million, or 39.6%, of the total loan portfolio
at September 30, 1997. The Bank also has a securities portfolio primarily
consisting of U.S. Treasury and federal government agency obligations, corporate
and municipal bonds and mortgage-backed securities issued by federal agencies,
which portfolio amounted to $198.4 million, or 31.1%, of the Bank's assets at
September 30, 1997.
The Bank's executive offices are located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number at that location is (609)
844-3100.
The Conversion
General. On September 24, 1997, the Board of Directors of the Mutual
Holding Company unanimously adopted the Plan of Conversion and Reorganization
(the "Plan of Conversion"), pursuant to which the Mutual Holding Company is
converting from a federally chartered mutual holding company to a Delaware
chartered stock corporation. As part of the Conversion each of the issued and
outstanding Minority Shares shall automatically, without further action by the
holder thereof, be converted into and become a right to receive a number of
shares of Common Stock determined pursuant to the Exchange Ratio. See "The
Conversion--Share Exchange Ratio".
Reasons for the Conversion. The Board of Directors unanimously
determined to conduct the Conversion because it believed that the market for
equity securities in financial services companies was at an unprecedented level
and that the Bank (together with the Company, the "Converted Institution") could
raise substantial funds from such a transaction. The Board of Directors believed
that maximizing such proceeds is in the best interests of the Converted
Institution because such proceeds can be used to increase the net income of the
Converted Institution though investment and eventual leveraging of the proceeds,
and support the possible expansion of the Bank's existing franchise through
internal growth or the acquisition of branch offices or other financial
institutions. Management believed that acquisition opportunities would increase
as a result of the Conversion because the Converted Institution would have
substantially more capital following the Conversion. The Bank has acquired two
financial institutions since September 30, 1996, and intends to actively explore
additional acquisitions, although neither the Company nor the Bank has any
specific plans, arrangements or understandings regarding any additional
expansions or acquisitions at this time. In addition, the Board considered that
there was no assurance that the pricing for financial services stocks would
continue at such favorable levels, and that if the market were to become less
favorable, the amount of capital that could be raised in the Conversion might be
substantially reduced. See "Risk Factors--Potential Low Return on Equity" and "
Uncertainty as to Future Growth Opportunities." See "The Conversion--Purposes of
Conversion."
Approvals Required. The Plan of Conversion and the transactions
incident to the Conversion must be approved by the affirmative vote of: (i) a
majority of the total eligible votes of the members of the Mutual Holding
Company at the Special Meeting of Members to be held on March ___, 1998 (the
"Special Meeting of Members"); (ii) the holders of at least two-thirds of the
outstanding common stock of the Mid-Tier Holding Company; and (iii) the holders
of a majority of the Minority Shares at a special meeting of stockholders of the
Mid-Tier Holding Company to be held on March ___, 1998 (the "Special Meeting of
Stockholders"). Consummation of the Conversion is also subject to the approval
of the OTS.
Effective Date. The Effective Date is the date upon which the
Conversion is consummated, which is expected to be during the fiscal quarter
ended June 30, 1997.
Share Exchange Ratio. OTS regulations and policy provide that in a
conversion of a mutual holding company to stock form, stockholders other than
the mutual holding company will be entitled to exchange their shares of
subsidiary savings bank (or mid-tier holding company) common stock for common
stock of the converted holding company, provided that the bank and the mutual
holding company demonstrate to the satisfaction of the OTS that the basis for
the exchange is fair and reasonable. The Boards of Directors of the Bank and the
Company have determined
5
that each Minority Share will on the Effective Date be automatically converted
into and become the right to receive a number of Exchange Shares determined
pursuant to an exchange ratio (the "Exchange Ratio") which was established as
the ratio that ensures that after the Conversion, subject to the Dividend Waiver
Adjustment described in "The Conversion Share Exchange Ratio" and a slight
adjustment to reflect the receipt of cash in lieu of fractional shares, the
percentage of the to-be outstanding shares of Common Stock issued to Minority
Stockholders in exchange for their Minority Shares will be equal to the
percentage of the Mid-Tier Common Stock held by Minority Stockholders
immediately prior to the Conversion. The total number of shares held by Minority
Stockholders after the Conversion would also be affected by any purchases by
such persons in the Offering.
Based on the 35.9% of the outstanding shares of the Mid-Tier Common
Stock held by Minority Stockholders as of December 1, 1997, the $3.9 million of
dividends waived by the Mutual Holding Company as of December 1, 1997, the
$21,000 of assets other than Mid-Tier Common Stock held by the Mutual Holding
Company as of December 1, 1997, and the Independent Valuation, the following
table sets forth, at the minimum, midpoint, maximum, and adjusted maximum of the
Offering Range, the following: (i) the total number of Subscription Shares and
Exchange Shares to be issued in the Conversion, (ii) the percentage of Common
Stock outstanding after the Conversion that will be sold in the Offering and
issued in the Share Exchange, and (iii) the Exchange Ratio.
Subscription Shares Exchange Shares Total Shares
to be Issued to be Issued of Common
-------------------- --------------------- Stock to be Exchange
Amount Percent Amount Percent Outstanding Ratio
------ ------- ------ ------- ----------- -----
Minimum.................... 14,961,058 65.2% 7,988,942 34.8% 22,950,000 2.4578
Midpoint................... 17,601,341 65.2% 9,398,659 34.8% 27,000,000 2.8915
Maximum.................... 20,241,623 65.2% 10,808,377 34.8% 31,050,000 3.3252
Adjusted maximum........... 23,277,802 65.2% 12,429,698 34.8% 35,707,500 3.8240
The final Exchange Ratio will be calculated at the conclusion of the
Conversion and will be affected by any additional waivers of dividends by the
Mutual Holding Company, any change in the Mutual Holding Company's assets other
than Mid-Tier Common Stock, and any options exercised subsequent to December 1,
1997.
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
Conversion will increase the stockholders' equity of Minority Stockholders. At
September 30, 1997, the stockholders' equity per share was $11.97 for each share
of Mid-Tier Common Stock outstanding, including shares held by the Mutual
Holding Company. Based on the pro forma information set forth in "Pro Forma
Data," assuming the sale of 17,601,341 shares of Common Stock at the midpoint of
the Offering Range, the pro forma stockholders' equity per share of Common Stock
was $9.94, and the aggregate pro forma stockholders' equity for the number of
Exchange Shares to be received for each Minority Share was $28.74. The pro forma
stockholders' equity for the aggregate number of Exchange Shares to be received
for each Minority Share was $26.15, $31.35 and $34.34 at the minimum, maximum,
and adjusted maximum of the Offering Range.
Effect on Earnings per Share of the Shares Exchanged. The Conversion
will also affect Minority Stockholders' pro forma earnings per share. For the
nine months ended September 30, 1997, and the fiscal year ended December 31,
1996, the earnings per share was $.65 and $.94, respectively, for each share of
Mid-Tier Common Stock outstanding, including shares held by the Mutual Holding
Company. Based on the pro forma information set forth in "Pro Forma Data,"
assuming the sale of 17,601,341 shares of Common Stock at the midpoint of the
Offering Range, the pro forma earnings per share of Common Stock was $.34 and
$.49, respectively, for such periods, and the aggregate pro forma earnings for
the number of Exchange Shares to be received for each Minority Share was $.98
and $1.42, respectively. For the nine months ended September 30, 1997, the
aggregate pro forma earnings for the number of Exchange Shares to be received
for each Minority Share was $.93, $1.03 and $1.11 at the minimum, maximum, and
adjusted maximum of the Offering Range. For the fiscal year ended December 31,
1996, the aggregate pro forma earnings for the number of Exchange Shares to be
received for each Minority Share was $1.20, $1.63 and $1.87 at the minimum,
maximum, and adjusted maximum of the Offering Range.
6
Effect on Dividends per Share. The Company's Board of Directors
anticipates declaring and paying quarterly cash dividends of $.025, or $.10 per
share of Common Stock on an annual basis, or an aggregate annual dividend of
$.25, $.29, $.34 and $.38 for the number of Exchange Shares received for each
Minority Share, at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range, respectively. The Bank, or the Mid-Tier Holding Company, have
paid quarterly cash dividends of $.0875 per Minority Share, or $.35 per Minority
Share on an annual basis, for each of the full fiscal quarters since the
Minority Stock Offering in August 1995. See "Market for Common Stock." The
Mid-Tier Holding Company intends to continue to pay a quarterly cash dividend of
$.0875 per share through the fiscal quarter ended March 31, 1998. Dividends,
when and if paid, will be subject to determination and declaration by the Board
of Directors in its discretion, which will take into account the Company's
consolidated financial condition and results of operations, tax considerations,
industry standards, economic conditions, regulatory restrictions on dividend
payments by the Bank to the Company, general business practices and other
factors. See "Dividend Policy."
Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate Subscription Price of the shares of Common Stock received in exchange
for each Minority Share is $24.58, $28.92, $33.25, and $38.24 at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range. The last trade of
Mid-Tier Common Stock on August 7, 1997, the day preceding the announcement of
the Conversion, was $22 per share, and the price at which Mid-Tier Common Stock
last traded on February ____, 1998, was $________ per share.
Dissenters' and Appraisal Rights. Under OTS regulations, Minority
Stockholders will not have dissenters' rights or appraisal rights in connection
with the exchange of Minority Shares for shares of Common Stock of the Company.
Tax Consequences of Conversion. The Bank will receive an opinion of
counsel with regard to federal income taxation and will receive an opinion of
counsel or tax advisor with regard to New Jersey taxation, which will indicate
that the adoption and implementation of the Plan of Conversion will not be
taxable for federal or New Jersey income tax purposes to the Bank, the Mutual
Holding Company, the Mid-Tier Holding Company, the Minority Stockholders, the
Interim Savings Bank, members of the Mutual Holding Company or eligible account
holders or the Company. Consummation of the Conversion is conditioned upon prior
receipt by the Bank of such opinions. See "The Conversion--Tax Aspects."
Exchange of Mid-Tier Holding Company Stock Certificates. Until the
Effective Date, the Minority Shares will continue to be available for trading on
the Nasdaq National Market. The exchange and conversion of Minority Shares for
shares of the Common Stock will occur automatically on the Effective Date. After
the Effective Date, former holders of the Mid-Tier Common Stock will have no
further equity interest in the Bank (other than as stockholders of the Company)
and there will be no further transfers of the Mid-Tier Common Stock on its stock
transfer records. For persons holding Minority Shares in street name, the
conversion of Minority Shares into shares of Common Stock will occur without any
action on the part of such stockholder. For persons holding certificated shares,
as soon as practicable after the Effective Date, the Company, or a transfer
agent, bank or trust company designated by the Company, in the capacity of
exchange agent (the "Exchange Agent"), will send a transmittal form to each
Minority Stockholder of record as of the Effective Date. The transmittal forms
are expected to be mailed within five business days after the Effective Date and
will contain instructions with respect to the surrender of certificates
representing the Mid-Tier Common Stock or Certificates formerly representing
shares of Bank Common Stock that were not replaced with Certificates
representing Mid-Tier Common Stock into which such shares were converted in the
Two-Tier Reorganization ("Converted Bank Common Stock Certificates"). It is
expected that certificates for shares of the Company's Common Stock will be
distributed within five business days after the receipt of properly executed
transmittal forms and other required documents. See "The Conversion--Exchange of
Certificates." MID-TIER HOLDING COMPANY STOCKHOLDERS SHOULD NOT FORWARD STOCK
CERTIFICATES TO THE MID-TIER HOLDING COMPANY, THE BANK OR THE EXCHANGE AGENT
UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
7
The Subscription and Community Offerings
Up to 20,241,623 Subscription Shares (subject to adjustment to up to
23,277,802 shares) will be offered for a subscription price of $10.00 per share
(the "Subscription Price") in the Subscription Offering and, to the extent
shares remain available for sale, in the Community Offering which is being
conducted concurrently with, and/or following the conclusion of the Subscription
Offering (together, the "Offering"). Common Stock offered in the Subscription
Offering shall be offered in the following order of priority to: (i) Eligible
Account Holders; (ii) the Bank's ESOP in an amount up to 4% of the shares sold
in the Offering and the Bank's 401(k) Plan in an amount up to 200,000 of the
shares sold in the Offering; (iii) Supplemental Eligible Account Holders; and
(iv) Other Members.
Common Stock not subscribed for in the Subscription Offering may be
offered in the Community Offering to certain members of the general public, with
preference given, in the Bank's discretion, to Minority Stockholders and then to
natural persons residing in the Community. The Company and the Bank reserve the
absolute right to reject or accept any orders in the Community Offering, in
whole or in part, either at the time of receipt of an order or as soon as
practicable following the Expiration Date. The Bank and the Company have hired
FBR as consultant and advisor in the Conversion and to assist in soliciting
subscriptions in the Offering. See "The Conversion--Subscription Offering and
Subscription Rights" and "--Community Offering."
The Offering will terminate at ______ p.m. local time, on March ___,
1998 (the "Expiration Date") unless the Community Offering is extended by the
Bank and the Company, with the approval of the OTS, if necessary. The Bank and
the Company may determine to extend the Community Offering for any reason,
whether or not subscriptions have been received for the minimum, midpoint, or
maximum of the number of shares offered in the Offering, and the Bank and the
Company are not required to give subscribers notice of any such extension. The
Community Offering must be completed within 45 days after the expiration of the
Subscription Offering unless extended by the Bank and the Company with the
approval of the OTS, if necessary.
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, Prospectuses may not be mailed later than five
days prior to such date or be hand delivered later than two days prior to such
date. Order forms that include certain certifications ("Order Forms") may only
be distributed with a Prospectus. Execution of an Order Form will confirm
receipt or delivery of the Prospectus. The Bank will accept for processing only
properly completed Order Forms. The Bank will not be required to accept orders
submitted on photocopied or facsimilied Order Forms. Payment by check, bank
draft, certified or teller's check, money order, or debit authorization to an
existing passbook or certificate of deposit account at the Bank must accompany
each stock order form. See "The Conversion--Procedure for Purchasing Shares."
To ensure that each prospective purchaser is properly identified as to
his stock purchase priority, depositors as of the Eligibility Record Date and
Supplemental Eligibility Record Date must list all accounts on the stock order
form giving all names in each account and the account number, and shareholders
of the Mid-Tier Holding Company must list the number of shares of Mid-Tier
Common Stock held as of February _____, 1997. Failure to list all accounts or
share holdings may result in a subscriber's loss of subscription rights, receipt
of lower priority subscription rights or loss of preference in the Community
Offering. The priority of any order submitted by two or more persons will be
based on the priority of the person with the lowest priority subscription
rights.
Restrictions on Transfer of Subscription Rights and Shares
No person may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan of Conversion or the shares of Common Stock to be issued upon
their exercise. Each person exercising subscription rights will be required to
certify that a purchase of Common Stock is solely for the purchaser's own
account and that there is no agreement or understanding regarding the sale or
transfer of such shares. See "The Conversion--Restrictions on Transfer of
Subscription Rights and Shares." The
8
Company and the Bank 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.
Purchase Limitations
The minimum number of shares that may be purchased is 25 shares. Except
for the ESOP and the 401(k) Plan, no Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member may in their capacities as such purchase
in the Subscription Offering more than 60,000 Subscription Shares; no person,
together with associates of and persons acting in concert with such person, may
purchase in the Offering more than 60,000 Subscription Shares; and no person
together with associates of and persons acting in concert with such person may
purchase in the aggregate more than the number of Subscription Shares that when
combined with Exchange Shares received by such person together with associates
of and persons acting in concert with such person exceeds 5.0% of the shares
sold in the Offering, provided, however, that at any time during the Offering
and without further approval by the members of the Mutual Holding Company or
stockholders of the Mid-Tier Holding Company and without further notice to
subscribers, the Company and the Bank, in their sole discretion, may increase
the maximum purchase limitation to up to 5% of the aggregate number of shares of
Common Stock issued in the Conversion. Under certain circumstances, subscribers
for the maximum number of shares will, and certain large subscribers may, be
resolicited to increase their subscriptions in the event of any such increase.
The Company and the Bank may determine to increase the maximum purchase
limitation in their sole discretion whether or not subscriptions have been
received for shares at the minimum, midpoint or maximum of the Offering Range,
subject to any necessary regulatory approval, for any reason, including to sell
the minimum number of shares offered, and to raise more capital. See "The
Conversion--Limitations on Common Stock Purchases." In the event of an
oversubscription, shares will be allocated as described in "The
Conversion--Subscription Offering and Subscription Rights" and "--Community
Offering," and in accordance with the Plan of Conversion. In the event of a 15%
increase in the total number of shares to be offered, the additional shares will
be distributed and allocated as described herein without the resolicitation of
subscribers as described in "The Conversion--Subscription Offering and
Subscription Rights" and "--Limitation on Common Stock Purchases."
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion and Federal regulations require that the
aggregate purchase price of the Common Stock in the Offering must be based on
the appraised aggregate pro forma market value of the Common Stock, as
determined by an independent valuation. The Bank and the Company have retained
FinPro, Inc. ("FinPro") to make such valuation (the "Independent Valuation").
The Independent Valuation was prepared based on the assumption that the
aggregate amount of Common Stock sold in the Offering would be equal to the
estimated pro forma market value of the Company multiplied by the Adjusted
Majority Ownership Percentage (as defined in "the Conversion--Share Exchange
Ratio"). The Independent Valuation states that as of December ___, 1997, the
estimated pro forma market value of the Company ranged from a minimum of
$229,500,000 to a maximum of $310,500,000 with a midpoint of $270,000,000 (the
"Valuation Range"). The aggregate offering price of the Subscription Shares
offered in the Offering will be equal to the Valuation Range multiplied by the
Adjusted Majority Ownership Percentage (as defined in "the Conversion--Share
Exchange Ratio"). The number of Subscription Shares offered in the Offering will
be equal to the aggregate offering price of the Subscription Shares divided by
the Subscription Price. The number of Subscription Shares offered in the
Offering and/or the aggregate of the offering price of the Subscription Shares
are referred to herein as the "Offering Range." Based on the Valuation Range,
the Adjusted Minority Ownership Percentage and the Subscription Price, the
minimum of the Offering Range will be 14,961,058 Subscription Shares, the
midpoint of the Offering Range will be 17,601,341 Subscription Shares, and the
maximum of the Offering Range will be 20,241,623 Subscription Shares.
The Board of Directors reviewed the Independent Valuation and, in
particular, considered (i) the Mid-Tier Holding Company's financial condition
and results of operations, (ii) financial comparisons of the Mid-Tier Holding
Company in relation to holding company's of financial institutions of similar
size and asset quality, (iii) stock market conditions generally and in
particular for financial institutions, and (iv) the historical trading price of
the Minority Shares, all of which are set forth in the Independent Valuation.
The Board also reviewed the methodology and the
9
assumptions used by FinPro in preparing its appraisal. The Independent Valuation
of the Common Stock is not intended and should not be construed as a
recommendation of any kind as to the advisability of purchasing the Common Stock
in the Offering, nor can any assurance be given that those who purchase or
receive Common Stock in the Conversion will be able to sell such shares after
the Conversion at or above the Subscription Price. Further, the pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be greater than amounts that would be available for
distribution to stockholders in the event of liquidation. See "Pro Forma Data"
and "The Conversion--Stock Pricing and Number of Shares to be Issued."
There is no obligation or understanding on the part of management or
the Board of Directors to take and/or pay for any shares in order to complete
the Conversion. Following commencement of the Subscription Offering, the maximum
of the Valuation Range may be increased by up to 15% to up to $357,075,000,
which will result in a corresponding increase of up to 15% in the maximum of the
Offering Range to $232,778,020, or 23,277,802 shares, to reflect changes in the
market and financial conditions, without the resolicitation of subscribers. The
minimum of the Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. See "--Limitations on Common
Stock Purchases" as to the method of distribution and allocation of additional
shares that may be issued in the event of an increase in the Offering Range to
fill unfilled orders in the Subscription and Community Offerings. See "The
Conversion--Stock Pricing" and --Number of Shares to be Issued."
Use of Proceeds
Net proceeds from the sale of the Common Stock are estimated to be
between $147.7 million and $200.5 million, based on the assumptions set forth in
"Pro Forma Data." Actual net cash proceeds cannot be determined until the
Conversion is completed, and will depend on the number of shares sold in the
Offering and the expenses of the Conversion. See "Pro Forma Data." The Company
will contribute at least 50% of the estimated adjusted net Offering proceeds to
the Bank.
The Company will be unable to utilize any of the net proceeds of the
Offering until the Effective Date. The Company and the Bank intend to initially
use funds from the Offering for general business purposes including investment
in one- to four-family residential mortgage loans and other loans, and
investment in short-term and intermediate-term securities and mortgage-backed
securities. In addition, the Bank and the Company intend in the future to
utilize net proceeds to expand current operations through internal growth or
acquisitions, or for diversification into other banking-related businesses and
for other business and investment purposes. The Bank has acquired two financial
institutions since September 30, 1996, and the Company and the Bank intend to
actively explore additional acquisitions, although neither the Company nor the
Bank has any specific plans, arrangements or understandings regarding any
additional expansions or acquisitions at this time. Net proceeds retained by the
Company may be used for general business activities including, subject to
applicable limitations, the possible payment of dividends and repurchases of
Common Stock. See "Use of Proceeds."
Dividends
The Company intends to pay a quarterly cash dividend of $.025 per share
of Common Stock, or $.10 per share of Common Stock on an annual basis. The first
dividend is expected to be declared for the fiscal quarter ended June 30, 1998.
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors in its discretion, which will take into account the
Company's consolidated financial condition and results of operations, tax
considerations, industry standards, economic conditions, regulatory restrictions
on dividend payments by the Bank to the Company, general business practices and
other factors. See "Dividend Policy."
Market for Common Stock
There is an established market for the Mid-Tier Common Stock which is
currently listed on the Nasdaq National Market under the symbol "TSBS," and the
Mid-Tier Holding Company had 12 market makers as of September 30, 1997. As a
newly formed company, however, the Company has never issued capital stock and
consequently there is no established market for its Common Stock. It is expected
that the Company's Common Stock
10
may be more liquid than the Minority Shares because there will be significantly
more outstanding shares owned by the public. However, there can be no assurance
that an active and liquid trading market for the Common Stock will develop, or
if developed, will be maintained. The Minority Shares will automatically on the
Effective Date, without further action by the holder thereof, be converted into
and become a right to receive shares of Common Stock based on the Exchange
Ratio.
The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market under the Mid-Tier Holding Company previous
symbol "TSBS." FBR has advised the Company that upon completion of the
Conversion, it intends to act as a market maker in the Common Stock.
Benefit Plans
The Bank's ESOP is expected to purchase up to 4% of the shares sold in
the Offering, or 704,054 shares assuming the sale of 17,601,341 shares, after
satisfaction of purchase orders of Eligible Account Holders. The shares
purchased by the ESOP will be allocated to the accounts of employees (except for
Messrs. Breithaupt and Bellarmino who have voluntarily agreed not to
participate) without payment by such persons of additional cash consideration.
Subject to participant direction of the plan's investment, the Bank's 401(k)
Plan may purchase up to 150,000 of the shares sold in the offering, after
satisfaction of purchase orders or Eligible Account Holders. In addition,
subject to stockholder approval, the Bank or the Company intends to adopt (i) a
recognition and retention plan (the "1998 Recognition Plan") pursuant to which
the Bank or the Company intends to award to employees and directors of the Bank
a number of shares of Common Stock equal to up to 4% of the number of shares
sold in the Offering, and (ii) a stock option plan (the "1998 Stock Option
Plan") pursuant to which the Company intends to award options to purchase a
number of shares of Common Stock equal to up to 10% of the number of shares sold
in the Offering at an exercise price equal to the fair market value of the
Common Stock at the time of the award. Shares awarded pursuant to the 1998
Recognition Plan or the 1998 Stock Option Plan may be authorized but unissued
shares, or shares of Common Stock acquired by the Bank, the Company, or such
plans in the open market. The exercise of such options may, and such awards of
Recognition Plan shares and ESOP shares from authorized but unissued shares of
the Company would, dilute the interest of existing stockholders. The Company
intends to submit the 1998 Recognition Plan and 1998 Stock Option Plan to
stockholders for approval. In addition, the Bank or the Company intend to adopt
employment contracts for additional senior officers. See "Management of the
Bank--Benefit Plans."
Risk Factors
Attention should be given to the matters discussed under "Risk Factors"
which include, among others, discussions of low returns on equity that may
follow the Conversion, uncertainty as to future growth opportunities and ability
to successfully deploy Offering proceeds, the Independent Valuation and its
impact on the trading price of the Common Stock, absence of future securities
gains, the possible increase in the Offering Range and number of shares issued
in the Offering, the potential impact of changes in interest rates, risks
related to an increased portfolio of higher yielding loans, certain
anti-takeover considerations, the possible dilutive effect of the issuance of
additional shares, expected higher compensation expenses in future periods,
regulatory oversight and legislation, and capability of the Bank's data
processing systems to accommodate the year 2000.
11
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF THE BANK AND SUBSIDIARIES
The following tables set forth selected consolidated historical
financial and other data of the Mid-Tier Holding Company (including its
subsidiaries) for the periods and at the dates indicated. The information is
derived in part from and should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Mid-Tier Holding Company contained
elsewhere herein. The Selected Consolidated Financial Condition and Operating
Data at and for the nine month periods ended September 30, 1997 and 1996 are
derived from unaudited consolidated financial statements 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.
The results of operations data presented below for the nine months ended
September 30, 1997, are not necessarily indicative of the results that may be
expected for any future period.
At At December 31,
September 30, ----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
Total assets............................ $638,942 $601,016 $514,218 $441,019 $435,746 $409,227
Cash and cash equivalents............... 13,209 20,938 16,253 12,665 15,763 11,983
Securities available for sale........... 127,651 87,648 83,776 64,961 -- --
Securities held to maturity:
Debt securities....................... 31,158 37,935 36,945 27,017 121,814 161,923
Mortgage-backed securities............ 39,603 48,618 54,316 35,087 33,169 23,800
Federal Home Loan Bank stock.......... 3,386 3,089 2,864 2,495 -- --
Loans, net.............................. 397,866 380,288 306,093 289,504 255,656 201,889
Deposits................................ 493,334 491,246 410,770 377,559 383,840 366,069
Stockholders' equity.................... 108,239 103,352 97,542 58,769 49,123 40,624
Intangible assets....................... 10,834 9,164 2,325 -- -- --
Borrowings.............................. 30,000 -- -- -- -- --
Nine Months Ended
September 30, Years Ended December 31,
------------------ -------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Selected Operating Data:
Total interest income.................... $32,616 26,662 $36,903 $33,518 $29,468 $30,754 $31,440
Total interest expense................... 16,223 12,865 17,941 17,010 12,851 13,253 16,179
------- ------- ------ ------- ------- ------- -------
Net interest income.................... 16,393 13,797 18,962 16,508 16,617 17,501 15,261
Provision for loan losses................ 1,488 -- -- 150 180 880 520
------- ------- ------ ------- ------- ------- -------
Net interest income after provision
for loan losses...................... 14,905 13,797 18,962 16,358 16,437 16,621 14,741
Other income............................. 4,169 2,711 3,818 4,946 3,150 3,819 1,172
Operating expenses....................... 9,844 6,434 9,669 7,792 7,475 6,536 6,010
------- ------- ------ ------- ------- ------- -------
Income before income taxes and
cumulative effect of accounting change 9,230 10,074 13,111 13,512 12,112 13,904 9,903
Income taxes............................. 3,332 3,626 4,720 4,864 4,437 4,876 3,369
------- ------- ------ ------- ------- ------- -------
Income before cumulative effect of
accounting change...................... 5,898 6,448 8,391 8,648 7,675 9,028 6,534
Cumulative effect of accounting change -- -- -- -- -- (529) --
------- ------ ------ ------- ------- ------- -------
Net income......................... $ 5,898 $ 6,448 $8,391 $ 8,648 $ 7,675 $ 8,499 $ 6,534
======= ======= ====== ======= ======= ======= =======
12
At or for the
Nine Months Ended
September 30, (5) At or for the Years Ended December 31,
------------------ ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
Selected Operating Ratios and Other Data:
Performance Ratios:
Return on average assets .......................... 1.25% 1.66% 1.56% 1.73% 1.72% 2.00% 1.64%
Return on average equity .......................... 7.57% 8.61% 8.34% 11.33% 13.45% 18.75% 17.52%
Interest rate spread (1) .......................... 3.06% 2.96% 2.98% 2.96% 3.49% 3.94% 3.62%
Net interest margin (1) ........................... 3.65% 3.69% 3.66% 3.47% 3.87% 4.26% 3.97%
Net interest income after provision for
loan losses to total operating expense .......... 151.41% 214.44% 196.11% 209.93% 219.89% 254.30% 245.27%
Operating expenses to average total assets ........ 2.09% 1.66% 1.80% 1.56% 1.67% 1.54% 1.51%
Efficiency ratio (2) .............................. 55.81 43.77 46.53 43.84 42.95 45.15 43.07
Asset Quality Ratios:
Nonperforming loans to net loans at
end of period ................................... 1.43% 0.47% 1.03% 0.71% 0.87% 0.71% 0.82%
Nonperforming assets to total assets
at end of period ................................ 0.91% 0.33% 0.69% 0.43% 0.59% 0.42% 0.40%
Allowance for loan losses to
nonperforming loans at end of period ............ 56.25% 109.15% 74.19% 80.91% 65.24% 80.65% 38.35%
Average interest-earning assets to
average interest-bearing liabilities ............ 116.06% 120.96% 119.80% 114.32% 112.72% 109.92% 108.36%
Capital and Equity Ratios:
Average equity to average assets .................. 16.52% 19.26% 18.67% 15.27% 12.78% 10.67% 9.38%
Equity to assets at end of period ................. 16.94% 19.38% 17.20% 18.97% 13.33% 11.27% 9.93%
Per Share Data:
Book value per share .............................. $11.97 $11.24 $11.44 $10.94 N/A N/A N/A
Earnings per share ................................ $ 0.65 $ 0.72 $ 0.94 N/A N/A N/A N/A
Other Data:
Full service offices .............................. 14 11 14 10 9 9 9
- -----------------------
(1) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average costs of
average interest-bearing liabilities, and net interest margin represents
net interest income as a percentage of average interest-earning assets.
(2) The efficiency ratio is calculated by dividing non-interest expense, net of
nonrecurring items into net interest income before provision for loan
losses plus non-interest income, net of non-recurring items.
(3) The Minority Stock Offering, which raised net proceeds of $30.0 million,
was completed on August 3, 1995.
(4) During the nine month periods ended September 30, 1997 and 1996, and the
fiscal years ended December 31, 1996, 1995 and 1994, the Bank recorded net
securities gains of $2.9 million, $2.2 million, $2.8 million, $4.1 million
and $2.4 million, respectively. The Bank's portfolio of equity securities
was completely divested as of September 30, 1997 and management believes
that the Company's earnings after the Conversion will not be enhanced by
net securities gains in the amounts recently experienced by the Bank. See
"Risk Factors--Absence of Securities Gains."
(5) Annualized where appropriate.
13
RISK FACTORS
The following risk factors, in addition to the other information
presented in this Prospectus, should be considered by prospective investors in
deciding whether to purchase the Common Stock offered hereby.
Low Return on Equity Following the Conversion
At September 30, 1997, the Mid-Tier Holding Company's ratio of equity
to assets and return on average assets was 16.9% and 7.4%, respectively. The
Company's equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of September 30, 1997, assuming the sale of
Common Stock at the midpoint of the Offering Range, the Company's ratio of
equity to assets would be approximately 33.6% and, assuming the sale of Common
Stock at the adjusted maximum of the Offering Range, the Company's ratio of
equity to assets would be approximately 37.7%. The Company's ability to invest
the Offering proceeds in loans and ultimately leverage the capital raised in the
Offering will be significantly affected by industry competition for loans and
deposits. In addition, future income is likely to be adversely affected by the
absence of securities gains (see "--Absence of Securities Gains") and higher
compensation expenses (see "--Higher Compensation Expenses in Future Periods").
The Company currently anticipates that it will take time to prudently deploy
such capital, and, as a result, the Company's return on equity initially is
expected to be below the industry average immediately after the Conversion.
Uncertainty as to Future Growth Opportunities and Ability to Successfully Deploy
Offering Proceeds
In an effort to fully deploy post-Conversion capital, in addition to
attempting to increase its loan and deposit growth, the Company may seek to
expand its banking franchise by acquiring other financial institutions or
branches. The Company's ability to grow through selective acquisitions of other
financial institutions or branches of such institutions will be dependent on
successfully identifying, acquiring and integrating such institutions or
branches. There can be no assurance the Company will be able to generate
internal growth or to identify attractive acquisition candidates, acquire such
candidates on favorable terms, successfully integrate any acquired institutions
or branches into the Company, or increase profits sufficiently to offset the
increase in expenses that will result from an acquisition. The Bank has acquired
two financial institutions since September 30, 1996, and the Company and the
Bank intend to actively explore additional acquisitions, although neither the
Company nor the Bank has any specific plans, arrangements or understandings
regarding any additional expansions or acquisitions at this time.
Independent Valuation of the Company and its Impact on the Trading Price of the
Common Stock
The offering price as a percentage of pro forma tangible book value of
the Common Stock sold in the Offering ranges from 98.3% at the minimum of the
Offering Range to 115.2% at the adjusted maximum of the Offering Range. For the
nine months ended September 30, 1997, on an annualized basis, the price to pro
forma earnings per share of the Common Stock sold in the Offering ranges from
19.7x at the minimum of the Offering Range to 25.9x at the adjusted maximum of
the Offering Range. The price to pro forma tangible book value at which the
Common Stock is being sold in the Offering substantially exceeds the price to
pro forma tangible book value of common stock sold in most mutual-to-stock
conversions that do not involve a mutual holding company conversion or
reorganization. Moreover, the Bank and the Company may determine to extend the
Community Offering for any reason, whether or not subscriptions have been
received for shares at the minimum, midpoint, or maximum of the Offering Range
Prospective investors should be aware that as a result of the relatively high
valuation and any extension of the Community Offering to increase the number of
shares sold in the Offering, the after-market performance of the Common Stock is
likely to be less favorable during the period immediately following the
Conversion than the price performance of common stock sold in recent
mutual-to-stock conversions that do not involve a mutual-to-stock conversion of
a mutual holding company, and the price performance of common stock sold in the
Minority Stock Offering.
Absence of Securities Gains
At the time it converted to a federal savings bank charter in January
1995, the Bank had a portfolio of equity securities that the OTS required to be
divested over a period of time. Such securities had appreciated in value, and
the Bank recorded substantial gains on their sale. Due in large part to such
divestiture, the Bank recorded net
14
securities gains of $2.9 million and $2.2 million, and $2.8 million, $4.2
million, and $2.4 million, for the nine months ended September 30, 1997 and
1996, and the fiscal years ended December 31, 1996, 1995 and 1994, respectively.
The Bank's portfolio of equity securities was completely divested as of
September 30, 1997, therefore the Company's earnings after the Conversion will
not be enhanced by net securities gains in the amounts recently experienced by
the Bank.
Possible Increase in Offering Range and Number of Shares Issued
The number of Subscription Shares to be sold in the Conversion may be
increased as a result of an increase in the Offering Range of up to 15% to
reflect changes in market and financial conditions following the commencement of
the Subscription and Community Offerings. In the event that the Offering Range
is so increased, it is expected that the Company will issue up to 23,277,802
shares of Common Stock at the Subscription Price. Based upon various
assumptions, such an increase in the number of shares issued in the Offering
will decrease a subscriber's pro forma annualized net earnings per share and pro
forma stockholders' equity per share, but will increase the Company's
consolidated pro forma stockholders' equity and pro forma net income. See "Pro
Forma Data."
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
The operations of the Bank are substantially dependent on its net
interest income, which is the difference between the interest income earned on
its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. Like most savings institutions, the Bank's
earnings are affected by changes in market interest rates, and other economic
factors beyond its control. If an institution's interest-earning assets have
longer effective maturities than its interest-bearing liabilities, the yield on
the institution's interest-earning assets generally will adjust more slowly than
the cost of its interest-bearing liabilities and, as a result, the institution's
net interest income and interest rate spread generally would be adversely
affected by material and prolonged increases in interest rates and positively
affected by comparable declines in interest rates. Based upon certain repricing
assumptions, the Bank's interest-earning liabilities repricing or maturing
within one year exceeded its interest-bearing assets with similar
characteristics by $17.3 million or 2.7 % of total assets. Accordingly, an
increase in interest rates generally would result in a decrease in the Bank's
average interest rate spread and net interest income. The Bank's average
interest rate spread remained relatively stable at 3.06%, 2.98% and 2.96% for
the nine months ended September 30, 1997 and the fiscal years ended December 31,
1996 and 1995, although no assurance can be given that the Bank's average
interest rate spread will not decrease in future periods. Any such decrease in
the Bank's average interest rate spread could adversely affect the Bank's net
interest income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Assets and Liability Management."
In addition to affecting interest income and expense, changes in
interest rates also can affect the value of the Bank's interest-earning assets,
which comprise fixed- and adjustable-rate instruments, and the ability to
realize gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. At September
30, 1997, the Bank had $127.7 million of securities available for sale and the
Bank had $0.6 million of net unrealized gains with respect to such securities,
which were included as a separate component in the Bank's total stockholders'
equity, net of tax, as of such date.
Changes in interest rates also can affect the average life of loans and
mortgage-related securities. Decreases in interest rates in recent periods have
resulted in increased prepayments of loans and mortgage-backed securities, as
borrowers refinanced to reduce borrowing costs. Under these circumstances, the
Bank is subject to reinvestment risk to the extent that it is not able to
reinvest such prepayments at rates which are comparable to the rates on the
maturing loans or securities. See "Business of the Bank--Lending Activities."
Risks Related to Increased Portfolio of Higher-Yielding Loans
To complement the Bank's traditional emphasis on one- to four-family
residential real estate lending, the Bank has recently increased its portfolio
of higher-yielding loans. During the 21 months ended September 30, 1997, the
Bank's portfolio of commercial business loans increased by $50.7 million, or
438%, to $62.2 million from $11.6 million, the Bank's portfolio of commercial
real estate and multifamily residential real estate loans increased by $12.5
million, or 44.8%, to $40.3 million from $27.8 million, and the Bank's portfolio
of home equity loans increased by
15
$12.1 million, or 55.3%, to $33.9 million from $21.8 million. Management's goal
is to continue to increase the Bank's portfolio of these loans.
Commercial and multifamily residential real estate and commercial
business lending generally are considered to involve a higher degree of risk
than single-family residential lending due to a variety of factors, including
generally larger loan balances to single borrowers or groups of related
borrowers, the dependency for repayment on successful development and operation
of the project or business and income stream of the borrower, and loan terms
which often do not require full amortization of the loan over its term.
Commercial business loans are generally considered to involve a higher degree of
risk because, in addition to the factors described above, the collateral may be
in the form of intangible assets and/or inventory subject to market
obsolescence. Such risks can be significantly affected by economic conditions.
In addition, commercial real estate and commercial business lending generally
requires substantially greater oversight efforts compared to other lending.
Moreover, such lending frequently necessitates greater allowances for loan
losses to address these increased risks, and larger provisions for loan losses
that are charged to earnings. See "Business--Lending Activities." As of
September 30, 1997, the Bank had $3.0 million of non-performing real estate
loans, and $2.5 of non-performing commercial business loans. See
"Business--Asset Quality--Non-Performing Assets."
Certain Anti-Takeover Considerations
Provisions in the Company's and the Bank's Governing Documents.
Provisions in the Company's Certificate of Incorporation and the Bank's Charter
and their respective Bylaws provide for limitations on stockholder voting
rights. In addition, the Bank's Federal Stock Charter and Bylaws, as well as
certain federal regulations, assist the Company in maintaining its status as an
independent publicly owned corporation. These provisions may prevent a change of
control of the Company even if desired by a majority of stockholders. These
provisions provide for, among other things, supermajority voting, staggered
boards of directors, noncumulative voting for directors, limits on the calling
of special meetings, and certain uniform price provisions for 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. The Bank's
amended Federal Stock Charter also prohibits, for a period of five years from
the closing of the Conversion, the acquisition of, or offer to, acquire,
directly or indirectly, the beneficial ownership of more than 10% of the Bank's
voting securities. Any person violating this restriction, except for the
Company, may not vote any of the Bank's securities held in excess of the 10%
limitation. In the event that holders of revocable proxies for more than 10% of
the shares of Common Stock of the Company acting as a group or in concert with
other proxy holders attempt actions that could indirectly result in a change in
control of the Bank, management of the Bank will be able to assert this
provision of the Bank's Federal Stock Charter against such holders if it deems
such assertion to be in the best interests of the Bank, the Company and its
stockholders. It is uncertain, however, whether the Bank would be successful in
asserting such provision against such persons.
Provisions of Compensation Plans and Employment Agreements. Moreover,
the Bank's current and proposed employment agreements provide for benefits and
cash payments in the event of a change in control of the Company or the Bank.
Additionally, the Bank's current stock benefit plans, and the 1998 Recognition
Plan and 1998 Stock Option Plan may provide for accelerated vesting in the event
of a change in control. These provisions may have the effect of increasing the
cost of acquiring the Company, thereby discouraging future attempts to acquire
control of the Company or the Bank. See "Restrictions on the Acquisition of the
Company and the Bank--Restrictions in the Company's Certificate of Incorporation
and Bylaws," and "Management of the Bank--Benefits."
Possible Dilutive Effect of Issuance of Additional Shares
If the 1998 Recognition Plan is approved by stockholders of the
Company, the Recognition Plan intends to acquire an amount of Common Stock equal
to 4% of the shares of Common Stock sold in the Offering. If such shares are
acquired at a per share price equal to the Subscription Price, the cost of such
shares would be $8.0 million, assuming the Common Stock sold in the Offering at
the maximum of the Offering Range. Such shares of Common Stock may be acquired
in the open market with funds provided by the Company, or from authorized but
unissued shares of Common Stock. In the event that the 1998 Recognition Plan
acquires authorized but unissued shares of
16
Common Stock from the Company, the interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share would be
decreased.
If the Stock Option Plan is approved by stockholders of the Company,
the Company intends to reserve for future issuance pursuant to such plan a
number of shares of Common Stock equal to 10% of the Common Stock sold in the
Conversion (2,024,162 shares, based on the issuance of the maximum 20,241,623
shares). Such shares may be authorized but previously unissued shares, treasury
shares or shares purchased by the Company in the open market or from private
sources. If authorized but previously unissued shares are used under such plan,
the issuance of the total number of shares available under such plan would
dilute the voting interests of stockholders at the time of such award and
decrease net income per share and stockholders' equity per share.
As of December 1, 1997, there were options outstanding to purchase
294,637 Minority Shares at an average exercise price of approximately $15.47 per
share. On the Effective Date these options will be converted into and become
options to purchase Common Stock of the Company. The number of shares of Common
Stock to be received upon exercise of such options will be determined pursuant
to the Exchange Ratio. The exercise of such currently existing stock options
will result in dilution of the Common Stock holdings of the existing
stockholders.
Higher Compensation Expenses in Future Periods
Management believes that the Company's compensation expenses are likely
to increase substantially in the future due to the additional stock benefit
plans that the Company intends to implement, and the additional employees that
the Bank and its subsidiaries have recently hired and expect to hire in the
future to assist the Company in executing its strategy of growing the Company's
operations.
Among the benefit plans that the Company intends to establish are the
1998 Recognition Plan and the ESOP. Generally accepted accounting principals
will require the Company to record compensation expense upon the vesting of
shares of restricted stock awarded pursuant to the 1998 Recognition Plan and
upon the commitment to release shares under the ESOP. As regards the ESOP, the
compensation expense will be equal to the fair value of the shares committed to
be released, and future increases and decreases in fair value of Common Stock
committed to be released will have a corresponding effect on compensation
expense related to the ESOP. To the extent that the fair value of the Bank's
ESOP shares differ from the cost of such shares, the differential will be
charged or credited to equity.
Regulatory Oversight and Legislation
The Bank is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority, and by the FDIC as insurer
of its deposits up to applicable limits. The Bank is a member of the FHLB System
and is subject to certain limited regulations promulgated by the FRB. As the
holding company of the Bank, the Company also will be subject to regulation and
oversight by the OTS. Such regulation and supervision govern the activities in
which an institution can engage and are intended primarily for the protection of
the insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress, could have a
material impact on the Company, the Bank and their respective operations. See
"Regulation."
On September 30, 1996, the Deposit Insurance Funds ("DIF") Act of 1996
was enacted into law. The DIF Act contemplates the development of a common
charter for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings associations. It is not
known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Bank. See "Regulation--Federal Regulation of Savings
Institutions."
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding
17
companies and (iii) abolish the OTS. It is uncertain when or if any of this type
of legislation will be passed, and, if passed, in what form the legislation
would be passed. As a result, management cannot accurately predict the possible
impact of such legislation on the Bank.
Capability of the Bank's Data Processing Hardware to Accommodate the Year 2000
Like many financial institutions the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. The
Bank generally relies on independent third parties to provide data processing
services to the Bank, and has been advised by its data processing service center
that the issue has been addressed. Based on these representations, management
does not believe that significant additional costs will be incurred in
connection with the year 2000 issue.
THE COMPANY
The Company was organized in November 1997 for the purpose of acquiring
all of the outstanding shares of capital stock of the Bank. The Company has
applied to the OTS to become a savings and loan holding company and as such will
be subject to regulation by the OTS. After completion of the Conversion, the
Company will conduct business initially as a unitary savings and loan holding
company. See "Regulation--Holding Company Regulation." Upon consummation of the
Conversion, the Company's assets will be primarily the shares of the Bank's
capital stock acquired in the Conversion, the portion of the net proceeds of the
Conversion permitted by the OTS to be retained by the Company, and the ESOP
loan. The Company initially will have no significant liabilities. See "Use of
Proceeds." The management of the Company is set forth under "Management of the
Company." Initially, the Company will neither own nor lease any property, but
instead will use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
officers but will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands its business.
The Conversion will provide the Bank with additional capital to support
future growth and enhance results of operations. Management believes that the
holding company structure will provide the Company with additional flexibility
to diversify its business activities through existing or newly formed
subsidiaries, or through acquisitions of or mergers with other financial
institutions and financial services related companies or for other business or
investment purposes, including the possible repurchase Common Stock as permitted
by the OTS. Although there are no current arrangements, understandings or
agreements, written or oral, regarding any such opportunities or transactions,
the Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. The initial activities
of the Company are anticipated to be funded by the proceeds permitted to be
retained by the Company and earnings thereon or, alternatively, through
dividends received from the Bank.
The Company's executive office is located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number is (609) 844-3100.
THE BANK
Chartered by the New Jersey State Legislature on March 7, 1844, the
Trenton Savings Fund Society was founded to promote thrift in the area of
Trenton, New Jersey. It adopted the name "Trenton Savings Bank" in early 1990.
Throughout its history, the Bank has been engaged in lending funds to home
buyers, consumers, and businesses within its local community. The Bank has
maintained a commitment to conservative lending practices, community service and
control of operating expenses, resulting in a strong capital position.
Management believes that this philosophy enabled the Bank to survive the Civil
War, the Great Depression, two World Wars, two stock market crashes and the
1980s crisis in the banking and thrift industries. At September 30, 1997, the
Bank had $638.9 million of total assets, $493.3 million of total deposits, and
$108.2 million of total stockholders' equity.
The Bank conducts its business from a corporate center located in
Lawrenceville, New Jersey, 14 branch offices located in Mercer, Burlington and
Ocean Counties, New Jersey, and a trust services subsidiary with an office
18
in Ocean County, New Jersey. On January 1, 1995, the Bank completed a charter
change from a New Jersey chartered mutual savings bank to a federally chartered
mutual savings bank, permitting expansion of branch offices into adjacent market
areas in Pennsylvania, and the OTS has recently approved, and the Bank intends
to establish, a branch office in Bucks County, Pennsylvania. In the
Reorganization on August 3, 1995, the Bank's mutual predecessor reorganized from
a federally chartered mutual savings bank into the Mutual Holding Company and
concurrently formed the Bank, which succeeded to the name and operations of the
Bank's mutual predecessor. At the time of the Reorganization, the Bank conducted
the Minority Stock Offering in which it raised approximately $30.0 million of
net proceeds.
The Bank has traditionally operated as a community-oriented savings
institution providing mortgage loans and other traditional financial services to
its local community. The Bank is primarily engaged in attracting deposits from
the general public through its offices and using those funds to originate
mortgage and commercial loans primarily located in Mercer and Burlington
Counties where the Bank's offices are located, as well as in neighboring Bucks
County, Pennsylvania. Loans secured by one- to four-family residences amounted
to $242.4 million, or 60.4%, of the Bank's total loan portfolio at September 30,
1997. The Bank also originates other mortgage loans secured by multi-family and
commercial real estate, commercial business loans, consumer loans and home
equity and property improvement loans, which, in the aggregate, amounted to
$158.7 million, or 39.6%, of the total loan portfolio at September 30, 1997. The
Bank also has a securities portfolio primarily consisting of U.S. Treasury and
federal government agency obligations, corporate and municipal bonds and
mortgage-backed securities which are insured by federal agencies, which
portfolio amounted to $201.8 million, or 31.6%, of the Bank's assets at
September 30, 1997. In addition, as of that same date, aggregate cash and cash
equivalents totaled $13.2 million, or 2.07%, of total assets.
The Bank's executive offices are located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number at that location is (609)
844-3100.
19
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded all OTS regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of September 30, 1997, on a historical and pro forma basis
assuming that the indicated number of shares were sold as of such date, and that
the Company contributes to the Bank 50% of the estimated net proceeds of the
Offering. See "Pro Forma Data" for the assumptions used to determine the net
proceeds of the Offerings. For purposes of the table below, the amount expected
to be borrowed by the ESOP and the cost of the shares expected to be acquired by
the 1998 Recognition Plan are deducted from pro forma regulatory capital.
Pro Forma at September 30, 1997, Based Upon the Sale of
Historical at ---------------------------------------------------------------------------------------
September 30, 1997 14,961,058 Shares 17,601,341 Shares 20,241,623 Shares 23,277,802 Shares
------------------- ------------------ -------------------- ------------------- ---------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets(1)(2)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ------------
(Dollars in Thousands)
GAAP capital.......... $108,239 16.94% $ 170,109 24.27% $ 181,196 25.45% $192,286 26.60% $205,039 27.87%
Tangible capital:
Capital level (3)... $ 97,200 15.48% $ 159,070 23.06% $ 170,157 24.28% $181,247 25.46% $194,000 26.77%
Requirement......... 9,418 1.50 10,346 1.50 10,512 1.50 10,678 1.50 10,870 1.50
-------- ------ --------- ------ --------- ------ -------- ------ -------- -----
Excess............ $ 87,782 13.98% $ 148,724 21.56% $ 159,645 22.78% $170,569 23.96% $183,130 25.27%
======== ====== ========= ====== ========= ====== ======== ====== ======== =====
Core capital:
Capital level (3)... $ 97,200 15.48% $ 159,070 23.06% $ 170,157 24.28% $181,247 25.46% $194,000 26.77%
Requirement (4)..... 18,835 3.00 20,691 3.00 21,024 3.00 21,356 3.00 21,739 3.00
-------- ------ --------- ------ --------- ------ -------- ------ -------- -----
Excess............ $ 78,365 12.48% $ 138,379 20.06% $ 149,133 21.28% $156,891 22.46% $172,261 23.77%
======== ====== ========= ====== ========= ====== ======== ====== ======== =====
Risk-based capital:
Capital level (3)(5) $100,401 26.48% $162,271 41.46% $173,358 44.04% $184,448 46.59% $197,201 49.50%
Requirement......... 30,324 8.00 31,314 8.00 31,492 8.00 31,669 8.00 31,873 8.00
-------- ------ --------- ------ --------- ------ -------- ------ -------- -----
Excess............ $ 70,077 18.48% $ 130,957 33.46% $ 141,886 36.04% $152,779 38.59% $165,328 41.50%
======== ====== ========= ====== ========= ====== ======== ====== ======== =====
- -------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market or general financial conditions following the commencement of the
Offering.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets. Pro forma total adjusted and risk-weighted assets
used for the capital calculations include the proceeds of the ESOP's
purchase of 4% of the Subscription Shares.
(3) Regulatory capital levels exclude $.2 million of net unrealized gains on
securities and intangible assets of $10.8 million.
(4) The current OTS core capital requirement for savings banks is 3% of total
adjusted assets. The OTS has proposed core capital requirements which would
require a core capital ratio of 3% of total adjusted assets for savings
banks that receive the highest supervisory rating for safety and soundness,
and a 4% to 5% core capital ratio requirement for all other savings banks.
See "Regulation--Federal Regulation of Savings Institution--Capital
Requirements."
(5) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weighting.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Subscription
Shares cannot be determined until the Offering is completed, it is presently
anticipated that the net proceeds will be between $147.7 million and $200.5
million (or $230.9 million if the Offering Range is increased by 15%), based
upon the assumptions set forth in "Pro Forma Data." The Company will be unable
to utilize any of the net proceeds of the Offering until the consummation of the
Conversion.
20
The Company will contribute to the Bank 50% of the net proceeds of the
Offering, which will be added to the Bank's general funds that management
currently intends to initially utilize for general corporate purposes, including
investment in one-to-four family residential real estate loans and other loans
and investment in short-term and intermediate-term securities and
mortgage-backed securities. The Company intends to use a portion of the net
proceeds to loan funds to the ESOP to enable the ESOP to purchase 4% of the
Subscription Shares issued in the Offering. To the extent the 1998 Recognition
Plan is not funded with authorized but unissued common stock of the Company, the
Company or Bank may use net proceeds from the Offering to fund the purchase of
stock to be awarded under such plan. See "Management of the Bank--Benefit
Plans".
Net Offering Proceeds, including proceeds retained by the Company and
proceeds contributed to the Bank, may also used to support the future expansion
of operations through branch acquisitions, the establishment of new branch
offices, and the acquisition of other financial institutions or diversification
into other banking related businesses. The Bank has acquired two financial
institutions since September 30, 1996, and the Company and the Bank intend to
actively explore additional acquisitions, although neither the Company nor the
Bank has any specific plans, arrangements or understandings regarding any
additional expansions or acquisitions at this time.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to repurchase stock, subject to statutory and
regulatory requirements. Unless approved by the OTS, the Company, pursuant to
OTS policy, will be prohibited from repurchasing any shares of the Common Stock
for three years except (i) for an offer to all stockholders on a pro rata basis,
or (ii) for the repurchase of qualifying shares of a director. Notwithstanding
the foregoing and except as provided below, beginning one year following
completion of the Conversion, the Company may repurchase its Common Stock so
long as: (i) the repurchases within the following two years are part of an
open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period; (ii) the repurchases do not cause the Bank
to become "undercapitalized" within the meaning of the OTS prompt corrective
action regulation; and (iii) the Company provides to the Regional Director of
the OTS no later than ten days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director.
Based upon facts and circumstances following the Conversion and subject
to applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
will not be limited to (i) market and economic factors such as the price at
which the stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to repurchase
stock, such repurchases may be made at market prices which may be in excess of
the Subscription Price in the Offering. To the extent that the Company
repurchases stock at market prices in excess of the per share book value, such
repurchases may have a dilutive effect upon the interests of existing
stockholders.
DIVIDEND POLICY
The Company intends to pay a quarterly cash dividend of $.025 per
share, or $.10 per share on an annual basis. The first dividend is expected to
be declared for the fiscal quarter ended June 30, 1998. Declarations of
dividends by the Company's Board of Directors will depend upon a number of
factors, including the amount of the net proceeds from the Offerings retained by
the Company, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operation, tax considerations and general
economic conditions. Consequently, 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. See "Market for the Common Stock."
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion and
Reorganization--Liquidation Rights." For information concerning federal and
state law and regulations which apply
21
to the Bank in determining the amount of proceeds which may be retained by the
Company and regarding a savings institution's ability to make capital
distributions including payment of dividends to its holding company, see
"Federal and State Taxation--Federal Taxation--Distributions" and
"Regulation--Federal Regulation of Savings Institutions--Limitation on Capital
Distributions."
Unlike the Bank, 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 dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Delaware law,
which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital (generally defined as the aggregate par
value of the outstanding shares of the Company's capital stock without par
value) or, if there is no such excess, to its net profits for the current and/or
immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and the
Bank have committed to the OTS that during the one-year period following the
consummation of the Conversion and the Reorganization, the Company will not take
any action to declare an extraordinary dividend to stockholders which would be
treated by recipient stockholders as a tax-free return of capital for federal
income tax purposes without prior approval of the OTS.
Since the completion of the first full fiscal quarter following the
August 1995 Reorganization and Minority Stock Offering, the Bank or the Mid-Tier
Holding Company have paid, in the aggregate, annual cash dividends of $.35 per
common share, which amounts to a quarterly dividend of $.0875 per share. The
Mid-Tier Holding Company intends to continue to pay regular quarterly dividends
through the fiscal quarter ended March 31, 1997.
MARKET FOR THE COMMON STOCK
There is an established market for Mid-Tier Common Stock which is
currently listed on the Nasdaq National Market under the symbol, "TSBS," and the
Mid-Tier Holding Company had 12 market makers as of September 30, 1997. As a
newly formed company, however, the Company has never issued capital stock and
consequently there is no established market for its Common Stock. It is expected
that the Common Stock will be more liquid than the Mid-Tier Common Stock since
there will be significantly more outstanding shares owned by the public.
However, there can be no assurance that an active and liquid trading market for
the Common Stock will develop, or if developed, will be maintained. Minority
Shares will automatically, without further action by the holders thereof, be
converted into and become a right to receive a number of shares of Company
Common Stock that is determined pursuant to the Exchange Ratio. See "The
Conversion and Reorganization--Share Exchange Ratio."
The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market under the Mid-Tier Holding Company's
previous symbol "TSBS." One of the requirements for continued quotation of the
Common Stock on the Nasdaq National Market is that there be at least two market
makers for the Common Stock. The Company will seek to encourage and assist at
least two market makers to make a market in its Common Stock. Making a market
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. Although not legally
or contractually required to do so, FBR has advised the Company that upon
completion of the Conversion, it intends to act as a market maker in the Common
Stock, depending upon the volume of trading and subject to compliance with
applicable laws and regulatory requirements.
Additionally, the development of a public market having the desirable
characteristics of depth, liquidity and orderliness depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. In the event that institutional
investors buy a relatively large proportion of the Offering, the number of
active buyers and sellers of the Common Stock at any particular time may be
limited. There can be no assurance that persons purchasing the Common Stock will
be able to sell their shares at or above the Subscription Price. Therefore,
purchasers of the Common Stock should have a long-term investment intent and
should recognize that a possibly limited trading market may make it difficult to
sell the Common Stock after the Conversion and may have an adverse effect on the
price of the Common Stock.
22
The following table sets forth the high and low bid quotes for the
Minority Shares since the completion of the Minority Stock Offering in which the
Minority Shares were sold for $10.00 per share, together with the cash dividends
declared subsequent thereto.
Cash
Fiscal Year Ended Dividends
December 31, 1995 High Low Declared
- ----------------- -------- ------- --------
Third quarter.................... $14 1/8 $11 $ .0575
Fourth quarter................... 13 3/4 12 7/8 .0875
Fiscal Year Ended
December 31, 1996
- -----------------
First quarter.................... 15 12 7/8 .0875
Second quarter................... 15 13 1/4 .0875
Third quarter.................... 15 1/8 13 1/4 .0875
Fourth quarter................... 16 3/8 14 .0875
Fiscal Year Ended
December 31, 1997
- -----------------
First quarter.................... 18 5/8 15 3/4 .0875
Second quarter................... 20 5/8 17 7/8 .0875
Third quarter.................... 33 1/2 19 1/8 .0875
Fourth quarter................... .0875
At August 7, 1997 (the day immediately preceding the public
announcement of the Conversion) and at February __, 1998, the last sale of
Minority Shares as reported on the Nasdaq National Market was at a price of $22
per share and $_____ per share, respectively. All Minority Shares, including
shares held by the Bank's officers and directors, will on the Effective Date be
automatically converted into and become the right to receive a number of shares
of Common Stock of the Company determined pursuant to the Exchange Ratio, and
options to purchase Minority Shares will be converted into options to purchase a
number of shares of Common Stock determined pursuant to the Exchange Ratio, for
the same aggregate exercise price. See "Beneficial Ownership of Common Stock.
23
CAPITALIZATION
The following table presents the historical consolidated capitalization
of the Mid-Tier Holding Company at September 30, 1997, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, based upon the assumptions set forth in the "Pro Forma Data"
section.
Pro Forma Consolidated Capitalization
Based Upon the Sale for $10.00 Per Share of
--------------------------------------------------------
Historical 14,961,058 17,601,341 20,241,623 23,277,802
Capitalization Shares Shares Shares Shares (1)
-------------- ------ ------ ------ ----------
(Dollars in Thousands)
Deposits (2) ............................................ $493,334 $493,334 $493,334 $493,334 $493,334
Borrowed funds .......................................... 30,000 30,000 30,000 30,000 30,000
-------- -------- -------- -------- --------
Total deposits and borrowed funds ....................... $523,334 $523,334 $523,334 $523,334 $523,334
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01 par value, 70,000,000
shares authorized; none to be issued (3) ............... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 1,000,000
shares authorized; shares to be issued
as reflected (3) ................................... 904 230 270 311 357
Additional paid-in capital (4) ........................ 30,495 178,740 205,102 231,464 261,780
Retained income (5) ................................... 77,592 77,592 77,592 77,592 77,592
Net unrealized holding gain on securities ............. 202 202 202 202 202
Less:
Unearned Mid-Tier Common Stock held by
1996 Recognition Plan ............................. 954 954 954 954 954
Common Stock acquired by ESOP ....................... -- 5,984 7,041 8,097 9,311
Common Stock acquired by 1998
Recognition Plan (6) .............................. -- 5,984 7,041 8,097 9,311
-------- -------- -------- -------- --------
Total stockholders' equity ........................ $108,239 $243,967 $268,265 $292,546 $320,480
======== ======== ======== ======== ========
Total stockholders' equity as a percentage of
pro forma total assets .............................. 16.9% 31.5% 33.6% 35.5% 37.7%
======== ======== ======== ======== ========
- ----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market or general financial conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) The Mid-Tier Holding Company has 10,000,000 authorized shares of preferred
stock, par value $.10 per share.
(4) Does not include proceeds from the Offering that the Company intends to
lend to the ESOP to enable it to purchase shares of Common Stock in the
Offering. No effect has been given to the issuance of additional shares of
Common Stock pursuant to the 1998 Stock Option Plan and 1998 Recognition
Plan expected to be adopted by the Company. If such plans are approved by
stockholders, an amount equal to 10% of the shares of Common Stock issued
in the Offering will be reserved for issuance upon the exercise of options
under the 1998 Stock Option Plan, and the 1998 Recognition Plan will
acquire an amount of Common Stock equal to 4% of the number of shares sold
in the Offering, either through open market purchases or from authorized
but unissued shares. No effect has been given to the exercise of options
currently outstanding. See "Management of the Bank--Benefits." The Mid-Tier
Holding Company has 30,000,000 authorized shares of Mid-Tier Common Stock,
par value $.10 per share.
(5) The retained income of the Bank will be substantially restricted after the
Conversion, see "The Conversion--Liquidation Rights" and "Regulation and
Supervision--Federal Regulations of Savings Institutions--Limitations on
Capital Distributions."
(6) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
Subscription Shares is purchased by the 1998 Recognition Plan through open
market purchases. The common stock to be purchased by the 1998 Recognition
Plan is reflected as a reduction of stockholders' equity. See "Risk
Factors--Possible Dilutive Effect of Issuance of Additional Shares," "Pro
Forma Data" and "Management of the Bank--Benefit Plans."
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock in the
Offering cannot be determined until the Conversion is completed. However, net
cash proceeds are currently estimated to be between $147.7 million and $200.5
million based upon the assumption that FBR receives a marketing fee of $1.0
million and that Conversion expenses, excluding FBR's marketing fee, are
$885,000.
24
Actual Conversion expenses may vary from those estimated, because the
fees paid will depend upon the percentages and total number of the shares sold
in the Offering and other factors. Under the Plan of Conversion, the Common
Stock must be sold in the Offering at an aggregate Subscription Price not less
than nor greater than the Offering Range, which is subject to adjustment. The
Offering Range, as established by the Board of Directors is between a minimum of
$149.6 million and a maximum of $202.4 million, with a midpoint of $176.0
million. This represents a range between a minimum of 14,961,058 shares and a
maximum of 20,241,623 shares, based upon the Subscription Price of $10.00 per
share. If the Offering Range is increased by up to 15% to reflect market or
general financial conditions following the commencement of the Offering, the
adjusted maximum number of shares of Common Stock to be issued would be
23,277,802, for estimated gross proceeds of $232.8 million.
Pro forma consolidated net income of the Company for the nine months
ended September 30, 1997 and for the fiscal year ended December 31, 1996 has
been calculated as if the Company had been in existence and estimated net
proceeds received by the Company and the Bank had been invested at an assumed
interest rate of 5.52% for the nine months ended September 30, 1997, and the
fiscal year ended December 31, 1996. The reinvestment rate was calculated based
on the one year U.S. Treasury bill rate (which, in light of changes in interest
rates in recent periods are deemed by the Company and the Bank to more
accurately reflect pro forma reinvestment rates than the arithmetic average
method). The effect of withdrawals from deposit accounts for the purchase of
Common Stock has not been reflected. The pro forma after-tax yield on the
estimated net proceeds is assumed to be 3.53% for the nine months ended
September 30, 1997, and 3.53% for the fiscal year ended December 31, 1996, based
on an effective tax rate of 36.0%. 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. No effect has been given in the pro
forma stockholders' equity calculations for the assumed earnings on the net
proceeds. It is assumed that the Company will retain 50% of the estimated
adjusted net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with generally accepted accounting principles
("GAAP"). The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
25
The following table summarizes historical data of the Bank and pro
forma data of the Company at or for the nine months ended September 30, 1997 and
for the year ended December 31, 1996, based on assumptions set forth above and
in the table and should not be used as a basis for projections of market value
of the Common Stock following the Conversion. No effect has been given in the
tables to the possible issuance of additional shares reserved for future
issuance pursuant to currently outstanding stock options or the 1998 Stock
Option Plan, nor does book value give any effect to the liquidation account to
be established in the Conversion or the bad debt reserve in liquidation. See
"The Conversion--Liquidation Rights," and "Management of the Bank--Directors'
Compensation," and "--Executive Compensation."
At or For the Nine Months Ended September 30, 1997
Based upon the Sale for $10.00 of
---------------------------------------------------------
14,961,058 17,601,341 20,241,623 23,277,802
Shares Shares Shares Shares (1)
----------- ----------- ----------- -----------
(Dollars and Number of Shares in Thousands)
Gross proceeds ..................................................... $ 149,611 $ 176,013 $ 202,416 $ 232,778
Expenses ........................................................... (1,935) (1,935) (1,935) (1,935)
--------- --------- --------- ---------
Estimated net proceeds ........................................... 147,676 174,078 200,481 230,843
Common stock purchased by ESOP (2) ............................... (5,984) (7,041) (8,097) (9,311)
Common stock purchased by 1998 Recognition Plan (3) .............. (5,984) (7,041) (8,097) (9,311)
--------- --------- --------- ---------
Estimated net cash proceeds .................................... $ 135,708 $ 159,996 $ 184,287 $ 212,221
========= ========= ========= =========
For the nine months ended September 30, 1997:
Net income:
Historical ....................................................... $ 5,898 $ 5,898 $ 5,898 $ 5,898
Pro forma adjustments:
Income on net proceeds ........................................... 3,593 4,238 4,879 5,619
ESOP (2) ......................................................... (239) (282) (324) (372)
1998 Recognition Plan (3) ........................................ (574) (676) (777) (894)
--------- --------- --------- ---------
Pro forma net income ........................................... $ 8,678 $ 9,176 $ 9,676 $ 10,251
========= ========= ========= =========
Net income per share (4):
Historical ....................................................... $ 0.26 $ 0.22 $ 0.20 $ 0.17
Pro forma adjustments:
Income on net proceeds ........................................... 0.16 0.16 0.16 0.16
ESOP (2) ......................................................... (0.01) (0.01) (0.01) (0.01)
1998 Recognition Plan (3) ........................................ (0.02) (0.02) (0.03) (0.03)
--------- --------- --------- ---------
Pro forma net income per share (4)(5) .......................... $ 0.39 $ 0.35 $ 0.32 $ 0.29
========= ========= ========= =========
Pro forma price to annualized earnings ............................. 19.23x 21.43x 23.44x 25.86x
========= ========= ========= =========
Number of shares used in calculating pro forma price
to annualized earnings ........................................... 22,389 23,340 30,291 34,835
========= ========= ========= =========
At September 30, 1997:
Stockholders' equity:
Historical ....................................................... $ 108,239 $ 108,239 $ 108,239 $ 108,239
Mutual Holding Company assets .................................... 21 21 21 21
Estimated net proceeds ........................................... 147,676 174,078 200,481 230,843
Less: Common stock acquired by ESOP (2) .......................... (5,984) (7,041) (8,097) (9,311)
Common Stock acquired by 1998 Recognition
Plan (3) .................................................. (5,984) (7,041) (8,097) (9,311)
--------- --------- --------- ---------
Pro forma stockholders' equity (6) .............................. 243,968 268,256 292,547 320,481
Intangible assets ............................................... (10,834) (10,834) (10,834) (10,834)
--------- --------- --------- ---------
Pro form tangible stockholders' equity .......................... $ 233,134 $ 257,422 $ 281,713 $ 309,647
========= ========= ========= =========
Stockholders' equity per share (7):
Historical ....................................................... $ 4.72 $ 4.01 $ 3.48 $ 3.03
Estimated net proceeds ........................................... 6.43 6.45 6.46 6.46
Less: Common stock acquired by ESOP (2) .......................... (0.26) (0.26) (0.26) (0.26)
Common Stock acquired by 1998
Recognition Plan (3) ....................................... (0.26) (0.26) (0.26) (0.26)
--------- --------- --------- ---------
Pro forma stockholders' equity per share (6) (7) ................ 10.63 9.94 9.42 8.90
Intangible assets per share .................................... (0.47) (0.41) (0.35) (0.30)
--------- --------- --------- ---------
Pro forma tangible stockholders' equity per share .............. $ 10.16 $ 9.53 $ 9.07 $ 8.67
========= ========= ========= =========
Number of shares used in calculating stockholders'
equity per share ................................................. 22,950 27,000 31,050 35,708
========= ========= ========= =========
Offering prices as a percentage of pro forma stockholders'
equity per share ................................................. 94.07% 100.60% 106.04% 111.48%
========= ========= ========= =========
Offering price as a percentage of pro forma tangible
stockholders' equity per share ................................... 98.43% 104.93% 110.25% 115.34%
========= ========= ========= =========
(Footnotes begin on next page)
26
At or For the Twelve Months Ended December 31, 1996
Based upon the Sale for $10.00 of
------------------------------------------------------------
14,961,058 17,601,341 20,241,623 23,277,802
Shares Shares Shares Shares (1)
----------- ----------- ----------- -----------
(Dollars and Shares in Thousands)
Gross proceeds ..................................................... $ 149,611 $ 176,013 $ 202,416 $ 232,778
Expenses ........................................................... (1,935) (1,935) (1,935) (1,935)
--------- --------- --------- ---------
Estimated net proceeds ........................................... 147,676 174,078 200,481 230,843
Common stock purchased by ESOP (2) ............................... (5,984) (7,041) (8,097) (9,311)
Common stock purchased by 1998 Recognition Plan (3) .............. (5,984) (7,041) (8,097) (9,311)
--------- --------- --------- ---------
Estimated net proceeds ....................................... $ 135,708 $ 159,996 $ 184,287 $ 212,221
========= ========= ========= =========
For the twelve months ended December 31, 1996:
Net income:
Historical ....................................................... $ 8,391 $ 8,391 $ 8,391 $ 8,391
Pro forma adjustments:
Income on adjusted net proceeds .................................. 4,790 5,648 6,505 7,491
ESOP (2) ......................................................... (319) (376) (432) (497)
1998 Recognition Plan (3) ........................................ (766) (901) (1,036) (1,192)
--------- --------- --------- ---------
Pro forma net income ......................................... $ 12,096 $ 12,762 $ 13,428 $ 14,193
========= ========= ========= =========
Net income per share (4):
Historical ....................................................... $ 0.37 $ 0.32 $ 0.28 $ 0.24
Pro forma adjustments:
Income on net proceeds ........................................... 0.21 0.21 0.21 0.21
ESOP (2) ......................................................... (0.01) (0.01) (0.01) (0.01)
1998 Recognition Plan (3) ........................................ (0.03) (0.04) (0.04) (0.03)
--------- --------- --------- ---------
Pro forma net income per share (4) (5) ......................... $ 0.54 $ 0.48 $ 0.44 $ 0.41
========= ========= ========= =========
Pro forma price to earnings ........................................ 18.52x 20.41x 22.22x 24.39x
========= ========= ========= =========
Number of shares used in calculating pro forma price
to earnings ...................................................... 22,402 26,359 30,308 34,854
========= ========= ========= =========
At December 31, 1996:
Stockholders' equity:
Historical ....................................................... $ 103,352 $ 103,352 $ 103,352 $ 103,352
Mutual Holding Company assets .................................... 21 21 21 21
Estimated net proceeds ........................................... 147,676 174,078 200,481 230,843
Less: Common stock acquired by ESOP (2) .......................... (5,984) (7,041) (8,097) (9,311)
Common Stock acquired by 1998
Recognition Plan (3) ...................................... (5,984) (7,041) (8,097) (9,311)
--------- --------- --------- ---------
Pro forma stockholders' equity (6) ................................. 239,081 263,369 287,660 315,594
Intangible assets ................................................ (9,164) (9,164) (9,164) (9,164)
--------- --------- --------- ---------
Pro forma tangible stockholders' equity .......................... $ 229,917 $ 254,205 $ 278,496 $ 306,430
========= ========= ========= =========
Stockholders' equity per share (7):
Historical ....................................................... 4.50 3.83 3.33 2.90
Estimated net proceeds ........................................... 6.44 6.45 6.46 6.46
Less: Common stock acquired by ESOP (2) .......................... (0.26) (0.26) (0.26) (0.26)
Common Stock acquired by 1998
Recognition Plan (3) ....................................... (0.26) (0.26) (0.26) (0.26)
--------- --------- --------- ---------
Pro forma stockholders' equity per share (6)(7) .................. 10.42 9.76 9.27 8.84
Intangible assets per share ...................................... (0.40) (.34) (.30) (.26)
--------- --------- --------- ---------
Pro forma tangible stockholders' equity per share ................ $ 10.02 $ 9.42 $ 8.97 $ 8.58
========= ========= ========= =========
Number of shares used in calculating stockholders'
equity per share ................................................. 22,950 27,000 31,050 35,708
========= ========= ========= =========
Offering price as a percentage of pro forma stockholders'
equity per share ................................................. 95.97% 102.46% 107.87% 113.12%
========= ========= ========= =========
Offering price as a percentage of pro forma tangible
stockholders' equity per share ................................... 99.80% 106.16% 111.48% 116.55%
========= ========= ========= =========
- ---------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market and financial conditions following the commencement of the
Offering.
(2) Assumes that 4% of shares of Common Stock sold in the Offering will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
net proceeds of the Offering retained by the Company. The Bank intends to
make annual contributions to the ESOP in an amount at least equal to the
principal of the debt. The Bank's total annual payments on the ESOP debt is
based upon 12 equal annual installments of principal. SOP 93-6 requires
that an employer record compensation expense in an amount equal to the fair
value of the shares committed to be released to employees. The pro forma
adjustments assume that the ESOP shares are allocated in equal annual
27
(footnotes continued)
installments based on the number of loan repayment installments assumed to
be paid by the Bank, and the fair value of the Common Stock remains at the
Subscription Price. The unallocated ESOP shares are reflected as a
reduction of stockholders' equity. No reinvestment is assumed on proceeds
contributed to fund the ESOP. The pro forma net income further assumes (i)
that 37,000, 44,000, 51,000 and 58,000 shares were committed to be released
with respect to the nine months ended September 31, 1997, and 50,000,
59,000, 67,000 and 78,000 shares were committed to be released with respect
to the fiscal year ended December 31, 1996, in each case at the minimum,
midpoint, maximum, and adjusted maximum of the Offering Range,
respectively, and (ii) in accordance with SOP 93-6, only the ESOP shares
committed to be released during the respective period were considered
outstanding for purposes of net income per share calculations. See
"Management of the Bank--Benefit Plans--Employee Stock Ownership Plan and
Trust."
(3) Subject to the approval of the Company's stockholders, the 1998 Recognition
Plan intends to purchase an aggregate number of shares of Common Stock
equal to 4.0% of the shares to be sold in the Offering. The shares may be
acquired directly from the Company, or through open market purchases. The
funds to be used by the 1998 Recognition Plan to purchase the shares will
be provided by the Bank or the Company. See "Management of the
Bank--Benefit Plans--1998 Recognition Plan." Assumes that the 1998
Recognition Plan acquires the shares through open market purchases at the
Subscription Price with funds contributed by the Bank, and that 15% of the
amount contributed to the 1998 Recognition Plan is amortized as an expense
during the nine months ended September 30, 1997, and 20% during the fiscal
year ended December 31, 1996.
(4) Per share figures include shares of Common Stock that will be exchanged for
Minority Shares in the Share Exchange. Net income per share computations
are determined by taking the number of subscription shares assumed to be
sold in the Offering and the number of Exchange Shares assumed to be issued
in the Share Exchange and, in accordance with SOP 93-6, subtracting the
ESOP shares which have not been committed for release during the respective
period. See Note 2 above. The number of shares of Common Stock actually
sold and the corresponding number of Exchange Shares may be more or less
than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the 1998 Stock Option Plan, which is expected to be
adopted by the Company following the Offering and presented to stockholders
for approval. If the 1998 Stock Option Plan is approved by stockholders, an
amount equal to 10% of the Common Stock sold in the Offerings will be
reserved for future issuance upon the exercise of options to be granted
under the 1998 Stock Option Plan. The issuance of authorized but previously
unissued shares of Common Stock pursuant to the exercise of options under
such plan would dilute existing stockholders' interests. Assuming
stockholder approval of the plan, that all the options were exercised at
the end of the period at an exercise price equal to the Subscription Price,
and that the 1998 Recognition Plan purchases shares in the open market at
the Subscription Price, (i) pro forma net income per share for the nine
months ended September 31, 1997 would be $0.36, $0.33, $0.30, and $0.28,
and pro forma stockholders' equity per share at September 31, 1997 would be
$10.34, $9.70, $9.23 and $8.82, in each case at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively, and (ii)
pro forma net income per share for the fiscal year ended December 31, 1996
would be $0.50, $0.45, $0.41 and $0.38, and the pro forma stockholders'
equity per share at December 31, 1996 would be $10.14, $9.54, $9.09, and
$8.70, in each case at the minimum, midpoint, maximum and adjusted maximum
of the Offering Range, respectively.
(6) The retained income of the Bank will be substantially restricted after the
Conversion. See "Dividend Policy," "The Conversion--Liquidation Rights" and
"Regulation and Supervision--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions."
(7) Per share figures include shares of Common Stock that will be exchanged for
Minority Shares in the Share Exchange. Stockholders' equity per share
calculations are based upon the sum of (i) the number of Subscription
Shares assumed to be sold in the Offering, and (ii) Exchange Shares equal
to the minimum, midpoint, maximum and adjusted maximum of the Offering
Range, respectively. The Exchange Shares reflect an Exchange Ratio of
2.4578, 2.8915, 3.3252, and 3.8240, respectively, at the minimum, midpoint,
maximum, and adjusted maximum of the Offering Range, respectively. The
number of Subscription Shares actually sold and the corresponding number of
Exchange Shares may be more or less than the assumed amounts.
28
PEOPLES BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME
September 30, December 31,
------------------- -----------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
(In Thousands Except Per Share Data)
Interest and dividend income:
Interest and fees on loans........................ $ 22,393 $ 18,085 $ 25,503 $ 22,347 $ 20,569
Interest on securities available for sale......... 5,825 3,594 4,762 4,484 5,058
Interest and dividends on investment securities
held to maturity................................ 3,992 4,464 5,861 5,183 3,485
Interest on federal funds sold.................... 406 519 777 1,504 355
-------- -------- -------- --------- ---------
Total interest income......................... 32,616 26,662 36,903 33,518 29,467
Interest expense on deposits (note 11)............... 14,734 12,865 17,941 17,010 12,851
Interest expense on borrowings (note 12)............. 1,489 -- -- -- --
-------- -------- -------- --------- ---------
Total interest expense........................ 16,223 12,865 17,941 17,010 12,851
-------- -------- -------- --------- ---------
Net interest income........................... 16,393 13,797 18,962 16,508 16,616
Provision for loan losses (note 8)................... 1,488 -- -- 150 180
-------- -------- -------- --------- ---------
Net interest income after provision for loan
losses...................................... 14,905 13,797 18,962 16,358 16,436
-------- -------- -------- --------- ---------
Other income:
Service fees on deposit accounts.................. 651 259 485 361 346
Fees and other income............................. 595 240 471 390 394
Net gain on sale of other real estate............. -- 23 23 2 3
Net gain on sale of securities (note 5)........... 2,923 2,189 2,839 4,193 2,406
-------- -------- -------- --------- ---------
Total other income............................ 4,169 2,711 3,818 4,946 3,151
-------- -------- -------- --------- ---------
Operating expense:
Salaries and employee benefits (note 15).......... 5,357 3,361 5,104 3,959 3,626
Net occupancy expense (note 9).................... 1,171 903 1,306 1,131 1,033
Equipment expense................................. 84 53 88 58 71
Data processing fees.............................. 392 302 416 346 334
Amortization of intangible assets................. 577 204 389 226 21
FDIC insurance premium (note 18).................. 39 232 233 492 873
FDIC special assessment........................... -- 177 177 -- --
Other operating expense........................... 2,224 1,202 1,956 1,580 1,517
-------- -------- -------- --------- ---------
Total operating expense....................... 9,844 6,434 9,669 7,792 7,475
-------- -------- -------- --------- ---------
Income before income taxes.................... 9,230 10,074 13,111 13,512 12,112
Income taxes (note 13)............................... 3,332 3,626 4,720 4,864 4,437
-------- -------- -------- --------- ---------
Net income.................................... $ 5,898 $ 6,448 $ 8,391 $ 8,648 $ 7,675
======== ======== ======== ========= =========
Earnings per common share............................ $ .65 $ .72 $ 0.94 -- --
======== ======== ======== ========= =========
Weighted average common shares outstanding........... 9,129 8,966 8,966 -- --
======== ======== ======== ========= =========
See accompanying notes to Consolidated Financial Statements
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The profitability of the Bank depends primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans and investment securities and
interest expense on interest-bearing deposits and borrowed funds. The Bank's net
income also is dependent, to a lesser extent, on the level of its other
operating income (including service charges and, when available, gains on sales
of securities) and operating expenses, such as salaries and employee benefits,
net occupancy expense, deposit insurance premiums, professional fees, goodwill
amortization, data processing and miscellaneous other expenses, as well as
federal and state income tax expenses.
Business Strategy
The Bank's current business strategy is to continue to serve its market
area as a community-oriented financial institution dedicated to financing home
ownership, commercial activity and providing financial services to its customers
in an efficient manner. The principal components of its strategy are discussed
below.
o Emphasizing Traditional Lending and Investment Activities. The Bank is a
community-oriented savings institution operating primarily in Mercer, Burlington
and Ocean counties, New Jersey. The Bank's current lending emphasis is the
origination of one- to four-family residential mortgage loans, multi-family and
commercial mortgage loans, home equity and property improvement loans,
commercial business loans and consumer loans. The Bank generally originates
loans for its own portfolio and, with limited exceptions, has not engaged in the
purchase or sale of loans. The Bank generally limits its lending activities to
Mercer and Burlington Counties, New Jersey, and Bucks County, Pennsylvania.
However, the Bank's asset-based lending subsidiary, TSBusiness Finance ("TSBF"),
provides funds to corporations in the entire State of New Jersey and the greater
Delaware Valley. The Bank does not engage in securities trading and limits its
investments to U.S. Treasury and federal government agency obligations,
mortgage-backed securities issued by federal government agencies or sponsored
corporations, municipal securities and corporate obligations which are rated A
or higher by a national rating agency. By investing in these types of assets,
the Bank's strategy has been to supplement its loan portfolio and reduce
significantly the credit and interest rate risk of its asset base in exchange
for lower rates of return than would typically be available through lending
activities. In addition, the Bank in January 1997 instituted an investment
leverage program by borrowing $30 million for reinvestment in federal agency
securities which are designated as available for sale.
o Complementing the Bank's Traditional Lending by Growing the Portfolio of
High-Yielding Loans. To complement the Bank's traditional emphasis on one- to
four-family residential real estate lending, the Bank has recently increased its
portfolio of higher-yielding loans. During the 21 months ended September 30,
1997, the Bank's portfolio of commercial business loans increased by $50.7
million, or 438%, to $62.2 million from $11.6 million, the Bank's portfolio of
commercial real estate and multifamily residential real estate loans increased
by $12.5 million, or 44.8%, to $40.3 million from $27.8 million, and the Bank's
portfolio of home equity loans increased by $12.1 million, or 55.3%, to $33.9
million from $21.8 million. This growth has resulted primarily from the Bank's
acquisition of Burlington County Bank, discussed below, and its establishment of
TSBF. Because the yields on these types of loans are generally higher than the
yields on one- to four-family residential real estate loans, the Bank's goal
over the next several years is to continue to increase its portfolio of such
loans in a controlled, safe and sound manner. Although management believes that
it can safely originate, service and monitor these loans, such loans generally
expose lenders to greater risk of loss than one- to four-family residential real
estate loans.
o Increasing the Bank's Fee Income. On September 8, 1997, the Bank completed the
acquisition of Manchester Trust Bank ("Manchester Trust"), Ocean County, New
Jersey, a trust services company with $140.1 million of assets under management
as of September 30, 1997. Manchester Trust, which is operated as a subsidiary of
the Bank, provides trust services primarily to retirees in Ocean County, New
Jersey. Management views this acquisition as the first step in a strategic
growth into the trust services business, and its goal over the next several
years is to increase
30
its total assets under management, and its noninterest income derived from
providing such services, by offering similar services in the other counties in
the Bank's market area.
o Strong Retail Deposit Base. The Bank has 12 full-service offices located in
Mercer and Burlington County and two full service offices located in limited
access retirement communities located in Ocean County, New Jersey. The Bank
believes it has a stable community retail deposit base. The Bank believes its
market share of deposits is approximately 4.7% in Mercer County, New Jersey and
3.4% in Burlington County, New Jersey. The Bank has recently introduced several
new products and services as part of a strategy of increasing its transaction
accounts and decreasing its reliance on certificates of deposit. As of September
30, 1997, transaction and savings accounts totaled $290.2 million, or 41.1% of
the Bank's total deposit. The Bank does not solicit for deposits outside its
primary market area and does not utilize the services of deposit brokers.
o Growth Through Acquisitions. A component of the Bank's operating strategy has
recently been and continues to be growth through acquisitions. The Bank believes
that assets and expertise acquired in whole-bank acquisitions can supplement the
Bank's internal growth in areas that have not traditionally been emphasized by
the Bank. Accordingly, the Bank's growth in its portfolio of higher yielding
loans was supplemented by its acquisition on September 30, 1996 of Burlington
County Bank ("BCB"), an $80.2 million commercial bank located in Burlington
Township, New Jersey, and the Bank's development of its trust services business
was the result of its acquisition of Manchester Trust with $140.1 million of
assets under management, and BCB with approximately $10 million of assets under
management at the time of the acquisition. Management's strategy is to continue
to grow these lines of business, as well as the Bank's deposits and portfolio of
other loans, through additional acquisitions and internal development. The
Company's ability to grow through selective acquisitions of other financial
institutions or branches of such institutions will depend on successfully
identifying, acquiring and integrating such institutions or branches. There can
be no assurance the Company will be able to generate internal growth or to
identify attractive acquisition candidates, acquire such candidates on favorable
terms or successfully integrate any acquired institutions or branches into the
Company. Neither the Company nor the Bank has any specific plans, arrangements
or understandings regarding any additional expansions or acquisitions at this
time. In addition, the Bank intends to grow internally through de novo
branching, and has received OTS approval to open a new branch in Bucks County,
Pennsylvania.
Asset and Liability Management
General. It is the objective of the Bank to minimize, to the degree
prudently possible, its exposure to interest rate risk, while maintaining an
acceptable interest rate spread. Interest rate spread is the difference between
the Bank's yield on its interest-earning assets and its cost of interest-bearing
liabilities. Interest rate risk is generally understood to be the sensitivity of
the Bank's earnings, net asset values, and stockholders' equity to changes in
market interest rates.
Changes in interest rates affect the Bank's earnings. The effect on
earnings of changes in interest rates generally depends on how quickly the
Bank's yield on interest-earning assets and cost of interest-bearing liabilities
react to the changes in market rates of interest. If the Bank's cost of deposit
accounts reacts more quickly to changes in market interest rates than the yield
on the Bank's mortgage loans and other interest-earnings assets, then an
increasing interest rate environment is likely to adversely affect the Bank's
earnings and a decreasing interest rate environment is likely to favorably
affect the Bank's earnings. On the other hand, if the Bank's yield on its
mortgage loans and other interest-earnings assets reacts more quickly to changes
in market interest rates than the Bank's cost of deposit accounts, then an
increasing interest rate environment is likely to favorably affect the Bank's
earnings and a decreasing interest rate environment is likely to adversely
affect the Bank's earnings. Interest rate sensitivity is managed by the
Asset/Liability Management Committee ("ALCO"). The principal objective of ALCO
is to maximize income within acceptable levels of established risk policy.
The table set forth below shows that the Bank's interest-bearing
liabilities which mature or reprice within short periods exceed its
interest-earning assets with similar characteristics. Accordingly, a material
and prolonged increasing interest rate environment generally would adversely
affect net interest income, while a material and prolonged decreasing interest
rate environment generally would have a positive effect on net interest income.
31
The Bank's current investment strategy is to maintain an overall
securities portfolio that provides a source of liquidity and that contributes to
the Bank's overall profitability and asset mix within given quality and maturity
considerations. The securities portfolio is concentrated in U.S. Treasury and
federal government agency securities providing high asset quality to the overall
balance sheet mix. Most securities recently purchased by the Bank have been
classified as available for sale to provide management with the flexibility to
make adjustments to the portfolio given changes in the economic or interest rate
environment, to fulfill unanticipated liquidity needs, or to take advantage of
alternative investment opportunities.
The following table presents the difference between the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1997
expected to reprice or mature, based on certain assumptions, in each of the
future time periods shown. This table does not necessarily indicate the impact
of general interest rate movements on the Bank's net interest income because the
repricing of certain assets and liabilities is subject to competitive and other
limitations. As a result, certain assets and liabilities indicated as maturing
or otherwise repricing within a stated period may in fact mature or reprice at
different times and at different volumes.
Within One to Three to Over
One Year Three Years Five Years Five Years Total
---------- ------------ ------------- ----------- ---------
Interest-earning assets:
Mortgage loans:
Fixed-rate........................... $ 13,384 $ 22,639 $ 14,401 $ 57,148 $ 107,572
Adjustable-rate...................... 81,249 56,105 33,460 4,293 175,107
Non-mortgage loans:
Fixed-rate........................... 9,230 18,444 9,193 13,504 50,371
Adjustable rate...................... 62,521 4,540 794 128 67,983
Securities available for sale: (1)
Debt securities...................... 41,853 65,890 3,511 680 111,934
Equity securities.................... 10 -- -- -- 10
Mortgage-backed securities........... 1,809 2,993 2,317 7,953 15,072
Securities held to maturity:
Debt securities...................... 25,234 3,349 235 2,340 31,158
Mortgage-backed securities........... 18,926 13,789 6,278 610 39,603
Federal Home Loan Bank stock......... -- -- -- 3,386 3,386
Federal funds sold....................... 2,300 -- -- -- 2,300
---------- ----------- ----------- ---------- ---------
Total interest-earning assets............ $ 256,516 $ 187,749 $ 70,189 $ 90,042 $ 604,496
---------- ----------- ----------- ---------- ---------
Interest-bearing liabilities:
Deposits:
Demand accounts...................... 39,285 21,405 7,732 37,753 106,175
Savings accounts..................... 16,478 13,677 10,684 56,091 96,930
Certificates of deposit.............. 218,046 68,098 4,078 7 290,229
Borrowings.......................... -- 30,000 -- -- 30,000
---------- ----------- ----------- ---------- ---------
Total interest-bearing liabilities. $ 273,809 $ 133,180 $ 22,494 $ 93,851 $ 523,334
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ (17,293) $ 54,569 $ 47,695 $ (3,809)
========== =========== =========== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ........... $ (17,293) $ 37,276 $ 84,971 $ 81,162
========== =========== =========== ==========
Cumulative ratio of excess (deficiency)
of interest-earning assets as a
percentage of total assets............. (2.7%) 5.8% 13.3% 12.7%
===== ==== ==== ====
- ----------------
(1) Debt securities available for sale are reflected in this table at amortized
cost, equity securities are reflected at estimated market value.
32
In preparing the table above, it has been assumed, in assessing the
interest rate sensitivity of the Bank, that: (i) mortgage loans will prepay at a
rate of 12.0% per year, (ii) fixed maturity deposits will not be withdrawn prior
to maturity; and (iii) Demand and Savings accounts will decay at the following
rates:
Over 1 Over 3
1 Year Through Through Over 5
or Less 3 Years 5 Years Years
------- ------- ------- ------
Demand accounts 37.0% 32.0% 17.0% 17.0%
Savings accounts 17.0% 17.0% 16.0% 14.0%
Certain shortcomings are inherent in the method of analysis presented
in the preceding table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. In addition, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Certain assets, such as adjustable-rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the assets. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to make payments on their adjustable-rate debt may decrease in the
event of an interest rate increase.
Net Portfolio Value. The OTS has adopted a final rule that incorporates
an interest rate risk ("IRR") component into the risk-based capital rules. 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 difference between discounted incoming and
outgoing cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated market value of its assets will require
the institution to deduct from its capital 50% of that excess change. The rule
provides that the OTS will calculate the IRR component quarterly for each
institution from the institution's Thrift Financial Reports. The following table
presents the Bank's NPV as of September 30, 1997, as calculated by the OTS,
based on information provided to the OTS by the Bank.
Change in Change in NPV
Interest Rates Net Portfolio Value as a percentage of
in Basis Points ------------------------------------- Estimated Market
(Rate Shock) Amount $ Change % Change Value of Assets
- --------------- -------- -------- -------- -----------------
(Dollars in Thousands)
400 $ 70,771 $ 37,887 34.90% (6.0%)
200 91,206 17,452 16.01 (2.8%)
Stat 108,658 -- -- --
(200) 121,742 13,084 12.00 2.1%
(400) 133,351 24,693 22.70 3.9%
As shown by the table above, increases in interest rates will result in
net decreases in the Bank's NPV, while decreases in interest rates will result
in smaller net increases in the Bank's NPV. The table suggests that in the event
of a 200 basis point change in interest rates, the Bank would experience a 2.8%
decrease in NPV in a rising interest rate environment, and a 2.1% increase in
NPV in a decreasing interest rate environment.
Certain shortcomings are inherent in the methodology used in the above
table. Modeling changes in NPV requires the making of certain assumptions that
may tend to oversimplify the manner in which actual yields and costs respond to
changes in market interest rates. First, the models assume that the composition
of the Bank's interest
33
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured. Second, the models assume that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements do provide an indication
of the Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to provide a precise forecast of the effect of
changes in market interest rates on the Bank's net interest income.
Comparison of Financial Condition
Total assets increased $37.9 million, or 6.3%, to $638.9 million at
September 30, 1997 from $601.0 million at December 31, 1996. Deposit growth from
the branch system and net earnings after dividend payments generated $7.1
million of asset growth. Deposits increased by $2.1 million, or .4%, to $493.3
million at September 30, 1997 from $491.2 million at December 31, 1996. Cash and
cash equivalents decreased by $7.7 million, or 36.9%, to $13.2 million on
September 30, 1997 from $20.9 million at December 31, 1996. Securities available
for sale increased $40.0 million, or 45.6%, to $127.7 million at September 30,
1997 from $87.6 million at December 31, 1996. Securities held to maturity
decreased $15.8 million or 18.2% to $70.8 million at September 30, 1997 from
$86.6 million at December 31, 1996. On January 4, 1997, the Bank instituted an
investment leverage program by borrowing $30 million for reinvestment in federal
agency securities which were designated as available for sale. Net loans
increased $17.6 million, or 4.6%, to $397.9 million at September 30, 1997 from
$380.3 million at December 31, 1996. The Bank's investment in Federal Home Loan
Bank ("FHLB") stock increased $297,000, or 9.6%, to $3.4 million at September
30, 1997 from $3.1 million at December 31, 1996, as the Bank's larger mortgage
loan portfolio permitted additional investment in FHLB stock.
Total assets increased $86.8 million, or 16.9%, to $601.0 million at
December 31, 1996 from $514.2 million at December 31, 1995. Deposit growth from
the branch system and net earnings after dividend payments generated $12.0
million of asset growth. The acquisition of BCB added an additional $74.8
million in assets. Deposits increased by $80.5 million, or 19.6%, to $491.2
million at December 31, 1996 from $410.8 million at December 31, 1995. Deposit
growth consisted of $7.3 million from the Bank's branch system and $73.2 million
from the acquisition of BCB. Cash and cash equivalents increased by $4.7
million, or 28.8%, to $20.9 million on December 31, 1996 from $16.3 million at
December 31, 1995. Securities available for sale increased $3.9 million, or
4.6%, to $87.6 million at December 31, 1996 from $83.8 million at December 31,
1995. Securities held to maturity decreased $4.6 million, or 5.0%, to $86.6
million at December 31, 1996 from $91.2 million at December 31, 1995. Net loans
increased $74.2 million, or 24.2%, to $380.3 million at December 31, 1996 from
$306.1 million at December 31, 1995. These portfolios also increased as loan and
mortgage backed securities principal payment, and deposit flows were reinvested
in these asset categories and as a result of the acquisition of BCB. The Bank's
investment in FHLB stock increased $225,000, or 7.9%, to $3.1 million at
December 31, 1996 from $2.9 million at December 31, 1995, as the Bank's larger
mortgage loan portfolio required additional investment in FHLB stock.
Stockholders' equity increased by $4.9 million, or 4.7%, to $108.2
million at September 30, 1997 from $103.4 million at December 31, 1996. The
increase was due to $5.9 million of net income combined with a $.7 million
amortization of unearned shares of Mid-Tier Common Stock under a restricted
stock plan, offset by a $.9 million decrease in unrealized gains on sales of
investments and $.9 million in dividends. The decrease in unrealized gains was
primarily attributable to the Bank's sale of equity securities to comply with
OTS requirements that the Bank divest its portfolio of equity securities.
Stockholders equity increased by $5.8 million, or 6.0%, to $103.4 million at
December 31, 1996 from $97.5 million at December 31, 1995. The increase in
stockholders equity was due to net income of $8.4 million, offset by $1.1
million of dividends and a decline in the net unrealized gain on sale of
securities of $1.6 million.
34
Average Balance Sheet
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. 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 daily average balances.
For the Nine Months Ended September 30,
At September 30, ------------------------------------------------------
1997 1997 1996
--------------- -------------------------- --------------------------
Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost(6) Balance Interest Cost(6)
------- ---- ------- -------- ------ ------- -------- -------
(Dollars in Thousands)
Assets: (1)
Interest-earning assets:
Mortgage loans.................... $282,679 7.43% $268,505 14,810 7.35% $263,421 $14,503 7.34%
Consumer loans.................... 56,245 8.10 56,946 3,335 7.81 45,012 2,669 7.91
Commercial business loans......... 62,245 8.54 62,867 4,248 9.01 13,497 913 9.02
Securities available for sale:(2)
Debt securities................... 127,006 6.55 117,810 5,764 6.51 72,540 3,462 6.36
Equity securities................. 10 -- 485 61 16.77 1,478 132 11.91
Investments held to maturity:
Debt securities and Federal Home
Loan Bank stock................. 34,544 6.06 39,562 1,787 6.02 40,924 1,967 6.41
Mortgage-backed securities........ 39,603 5.72 44,085 2,205 6.67 48,942 2,497 6.80
Federal funds sold.................. 2,300 6.25 9,181 406 5.90 13,035 519 5.31
-------- -------- ------ -------- -------
Total interest-earning assets .. 604,496 7.14 599,441 32,616 7.25 498,849 26,662 7.12
Non-interest earning assets (3) .... 34,446 29,750 19,293
-------- -------- --------
Total assets.................. $638,942 $629,191 $518,142
======== ======== ========
Liabilities and Stockholders' equity:
Certificates of deposits.......... $290,229 5.40% $289,656 11,611 5.34% 262,765 10,304 5.23%
Transaction and savings deposits. 203,105 2.16 196,854 3,123 2.12 149,635 2,561 2.28
Borrowed funds.................... 30,000 6.03 31,950 1,489 6.21 -- -- --
-------- -------- ------ -------- ------- -----
Total interest-bearing
liabilities................ 523,334 4.18 518,460 16,223 4.19 412,400 12,865 4.16
Non-interest bearing liabilities.... 7,369 6,809 5,924
-------- -------- --------
Total liabilities............. 530,703 525,269 418,324
-------- -------- --------
Stockholders' equity................ 108,239 103,922 99,818
-------- -------- --------
Total liabilities and stockholders'
equity........................... $638,942 $629,191 $518,142
======== ======== ========
Net interest income................. $16,393 $13,797
======= =======
Net interest spread (4)............. 2.96% 3.06% 2.96%
====== ====== =====
Net interest margin (5)............. 3.61% 3.65% 3.69%
====== ====== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities ...................... 115.63% 115.62% 120.96%
====== ====== ======
- ----------
(1) Average balances and rates include non-accrual loans.
(2) Securities available for sale are reflected in this table at amortized
cost.
(3) Includes market value adjustment on securities available for sale.
(4) Net interest spread represents the difference between the weighted average
rates earned on interest-earning assets and the weighted average rates paid
on interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
(6) Average Yields and cost have been reflected on an annualized basis.
35
Average Balance Sheet (continued)
Years Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
Assets:(1)
Interest-earning assets:
Mortgage loans........................... $264,984 $19,489 7.35% $251,520 $18,558 7.38% $247,697 $17,926 7.24%
Consumer loans........................... 47,823 3,727 7.79 35,662 2,866 8.04 23,885 1,789 7.49
Commercial business loans................ 24,973 2,287 9.16 9,861 922 9.35 10,486 854 8.14
Securities available for sale: (2)
Debt securities........................ 74,817 4,601 6.15 67,938 4,076 6.00 51,438 2,849 5.54
Equity securities...................... 1,367 161 11.78 4,944 409 8.27 9,861 684 6.94
Investments held to maturity:
Investment securities and Federal Home
Loan Bank stock....................... 40,858 2,627 6.43 29,331 1,910 6.51 42,994 2,849 6.63
Mortgage-backed securities............. 47,990 3,234 6.74 51,323 3,273 6.38 34,707 2,162 6.23
Federal funds sold....................... 14,650 777 5.30 25,175 1,504 5.97 8,533 355 4.16
-------- ------- -------- ------- -------- -------
Total interest-earning assets 517,462 36,903 7.13 475,754 33,518 7.05 429,601 29,468 6.86
------- ------- -------
Non-interest earning assets (3).......... 21,195 24,175 16,863
-------- -------- --------
Total assets..................... $538,657 $499,929 $446,464
======== ======== ========
Interest-bearing liabilities and retained
earnings:
Certificates of deposits............. $271,362 14,045 5.18 $251,932 13,006 5.16 $220,873 8,918 4.04
Transaction and savings deposits..... 160,576 3,896 2.43 164,213 4,004 2.44 160,265 3,933 2.45
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities. 431,938 17,941 4.15 416,145 17,010 4.09 381,138 12,851 3.37
------- ------- -------
Non-interest bearing liabilities......... 6,166 7,437 8,279
-------- -------- --------
Total liabilities................ 438,104 423,582 389,417
-------- -------- --------
Stockholders' equity..................... 100,553 76,347 57,047
-------- -------- -------
Total liabilities and stockholders' equity $538,657 $499,929 $446,464
======== ======== ========
Net interest income...................... $18,962 $16,508 $16,617
======= ======= =======
Net interest spread (4).................. 2.98% 2.96% 3.49%
===== ===== =====
Net interest margin (5).................. 3.66% 3.47% 3.87%
===== ===== =====
Ratio of average interest-earning assets to average
interest-bearing liabilities.......... 119.80% 114.32% 112.72%
====== ====== ======
- ----------
(1) Average balances and rates include non-accrual loans.
(2) Securities available for sale are reflected in this table at amortized
cost.
(3) Includes market value adjustment on securities available for sale.
(4) Interest rate spread represents the difference between the weighted average
rates earned on interest-earning assets and the weighted average rates paid
on interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
36
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Bank's interest income and expense during 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 (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated to the change due to volume.
Nine Months Ended September 30, Year Ended December 31,
------------------------------ ----------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
------------------------------ ------------------------------ ------------------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to Increase/(Decrease) Due to
------------------------------ ------------------------------ ------------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ------ ------- ------ ------ ------- ------ ------ -------
(In Thousands)
Interest-earning assets:
Mortgage loans................ $ 281 $ 26 $ 307 $1,006 $ (75) $ 931 $ 285 $ 347 $ 632
Consumer loans................ 711 (45) 666 950 (89) 861 946 131 1,077
Commercial business loans..... 3,336 (1) 3,335 1,384 (19) 1,365 (59) 127 68
Securities available for sale:
Debt securities............ 2,193 109 2,302 423 102 525 990 237 1,227
Equity securities.......... (143) 72 (71) (422) 174 (248) (406) 131 (275)
Securities held to maturity:
Debt securities and Federal
Home Loan Bank stock .... (20) (160) (180) 740 (23) 717 (887) (52) (939)
Mortgage-backed securities. (228) (64) (292) (224) 185 (39) 1,059 52 1,111
Federal funds sold............ (190) 77 (113) (558) (169) (727) 995 154 1,149
------ ------ ------- ------ ------ ------ ------ ------ -------
Total.................... 5,940 14 5,954 3,299 86 3,385 2,923 1,127 4,050
------ ------ ------- ------ ------ ------ ------ ------ -------
Interest-bearing liabilities:
Certificates of deposit....... 995 315 1,310 989 50 1,039 1,614 2,474 4,088
Interest-bearing savings
deposits................... 801 (239) 562 (92) (16) (108) 87 (16) 71
Borrowed funds................ 1,486 0 1,486 -- -- -- -- -- --
------ ------ ------- ------ ------ ------- ------ ------ -------
Total.................... 3,282 76 3,358 897 34 931 1,701 2,458 4,159
------ ------ ------- ------ ------ ------- ------ ------ -------
Net change in net interest
income...................... $2,658 $ (62) $ 2,596 $2,402 $ 52 $2,454 $1,222 $(1,331) $ (109)
------ ====== ======= ====== ====== ====== ====== ====== =======
Comparison of Result of Operations
General. The Bank reported net income of $5.9 million and $6.4 million
for the nine months ended September 30, 1997 and 1996, respectively, and $8.4
million, $8.6 million and $7.7 million for the years ended December 31, 1996,
1995 and 1994, respectively. Net income includes net gains from the sale of
equity securities of $2.9 million and $2.2 million for the nine months ended
September 30, 1997 and 1996, respectively, and $2.8 million, $4.2 million and
$2.4 million for the fiscal years ended December 31, 1996, 1995 and 1994,
respectively. Net income net of securities gains was $4.0 million and $5.0
million for the nine months ended September 30, 1997 and 1996, and $6.6 million,
$6.0 million and $6.2 million for the fiscal years ended December 31, 1996, 1995
and 1994, respectively. Net income net of securities gains decreased for the
nine months ended September 30, 1997 compared to the nine months ended September
30, 1996 primarily due to a $1.5 million increase in the provision for loan
losses.
Interest and Dividend Income. The Bank's net interest income is
determined by its interest rate spread (i.e., the difference between the yields
earned on its interest-earning assets and the rates paid on its interest-bearing
liabilities and borrowings) and the relative amounts of interest-earning assets
and interest-bearing liabilities and borrowings. Total interest income increased
by $6.0 million, or 22.3%, to $32.6 million for the nine months ended September
30, 1997 from $26.7 million for the nine months ended September 30, 1996, as the
Bank increased its interest income from all loan categories, debt securities
available for sale, investment securities and FHLB stock, which increases were
partially offset by decreases in interest income from equity securities
available for sale, federal funds sold, and mortgage-backed securities. The
increase in interest income resulted primarily from a $100.6 million, or 20.2%,
increase in average interest-earning assets to $599.4 million from $498.8
million and a 13 basis point increase in yield on the Bank's average
interest-earning assets to 7.25% from 7.12%. The increase in average
37
interest-earning assets resulted from the Bank's acquisition of BCB, the $30
million leverage program, and deposit inflows.
Interest income from mortgage loans increased by $307,000, or 2.1%, to
$14.8 million for the nine months ended September 30, 1997, from $14.5 million
for the nine months ended September 30, 1996. This increase was due to a $5.1
million, or 1.9%, increase in average mortgage loans to $268.5 million from
$263.4 million, combined with an increase in the yield on average mortgage loans
to 7.35% from 7.34%. Interest income from consumer loan increased by $666,000,
or 25.0%, to $3.3 million from $2.7 million as a result of a $11.9 million
increase in average consumer loans to $56.9 million from $45.0 million, which
was partially offset by a 10 basis point decrease in the yield on average
consumer loans. Interest income from commercial business loans increased by $3.3
million or 365.3%, to $4.2 million for the nine months ended September 30, 1997
from $913,000 for the nine months ended September 30, 1996. This increase was
due to a $49.4 million or a 365.8%, increase in average commercial business
loans to $62.9 million from $13.5 million which offset a 1 basis point decrease
in the yield on average commercial business loans to 9.01% from 9.02%. The
increase in average commercial business loan balances was due to the acquisition
of BCB and increased commercial business loan activity. Interest income from
debt securities available for sale increased by $2.3 million, or 66.49%, to $5.8
million from $3.5 million due to a 15 basis point increase in the yield on
average debt securities available for sale to 6.51% from 6.36%, and a $45.3
million, or 62.4%, increase in average debt securities available for sale to
$117.8 million from 72.5 million. The increase in average debt securities
available for sale was primarily attributable to the investment of funds for the
$30 million leverage program. Interest income from the mortgage-backed
securities held to maturity declined to $2.2 million, from $2.5 million or 11.7%
for the nine months ended September 30, 1996. The decrease in income was
primarily attributed to $4.9 million decrease in the average balance of
mortgage-backed securities to $44.1 million from $48.9 million combined with a
decrease in the yield on average mortgage-backed securities to 6.67% from 6.80%.
Income from equity securities available for sale decreased by $71,000,
or 53.8%, to $61,000 from $132,000 due to a $1.0 million, or 67.2%, decrease in
average equity securities available for sale to $.5 million from $1.5 million
which was partially offset by a 486 basis point increase in the yield on average
equity securities available for sale to 16.77% from 11.91%. The decrease in
average equity securities available for sale resulted from the Bank's
liquidation of this portfolio, as required in connection with the Bank's
conversion to a federally-chartered savings bank, while the increase in yield
resulted from the favorable market conditions for equity that existed during
1997.
Interest income from debt securities held to maturity and FHLB stock
decreased by $180,000, or 9.2%, to $1.8 million for the nine months ended
September 30, 1997 from $2.0 million for the nine months ended September 30,
1996 due to a $1.4 million, or 3.3%, decrease in the average balance of debt
securities to $39.6 million for the nine months ended September 30, 1997 from
$40.9 million for the nine months ended September 30, 1996. The decrease in
income was also attributed to a 39 basis point decrease in yield to 6.02% from
6.41%. Interest income from federal funds sold decreased $113,000 to $406,000
from $519,000 due to a $3.9 million decrease in average federal funds sold to
$9.2 million from $13.0 million, which offset a 59 basis point increase in the
yield on average federal funds sold to 5.90% from 5.31%.
The increase in the Bank's average balance of mortgage, commercial
loans, consumer loans, and debt securities available for sale, resulted from the
Bank's leverage program, the acquisition of BCB and internal loan growth. The
changes in yields on mortgage loans, consumer loans, commercial loans,
investment securities and federal funds sold resulted from the purchase of
interest-earning assets at 1997 market yields.
Total interest income increased by $3.4 million, or 10.1%, to $36.9
million for the year ended December 31, 1996 from $33.5 million for the year
ended December 31, 1995, as the Bank increased its interest income from all loan
categories, debt securities available for sale, investment securities and FHLB
stock, which increases were partially offset by decreases in interest income
from equity securities available for sale, federal funds sold, and
mortgage-backed securities. The increase in interest income resulted primarily
from a $41.7 million, or 8.8%, increase in average interest-earning assets to
$517.5 million from $475.8 million and an eight basis point increase in yield on
the Bank's average interest-earnings assets to 7.13% from 7.05%. The increase in
average interest-earning assets resulted from the Bank's acquisition of BCB and
deposit inflows.
38
Interest income from mortgage loans increased by $931,000, or 5.0%, to
$19.5 million for the year ended December 31, 1996, from $18.6 million for the
year ended December 31, 1995. This increase was due to a $13.5 million, or 5.4%,
increase in average mortgage loans to $265.0 million from $251.5 million, which
offset a decrease in the yield on average mortgage loans to 7.35% from 7.38%.
Interest income from consumer loans increased by $861,000, or 30.0%, to $3.7
million from $2.9 million as a result of a $12.2 million increase in average
consumer loans to $47.8 million from $35.7 million, which was partially offset
by a 25 basis point decrease in the yield on average consumer loans. Interest
income from commercial business loans increased by $1.4 million, or 148.0%, to
$2.3 million for the year ended December 31, 1996, from $922,000 for the year
ended December 31, 1995. This increase was due to a $15.1 million, or 153.3%
increase in average commercial business loans to $25.0 million from $9.9 million
which offset a 19 basis point decrease in the yield on average commercial
business loans to 9.16% from 9.35%. The increase in average commercial business
loan balances was due to the acquisition of BCB and increased commercial
business loan activity. Interest income from debt securities available for sale
increased by $525,000, or 12.9%, to $4.6 million from $4.1 million due to a 15
basis point increase in the yield on average debt securities available for sale
to 6.15% from 6.00%, and a $6.9 million, or 10.1%, increase in average debt
securities available for sale to $74.8 million from $67.9 million. Interest
income from mortgage-backed securities remained at $3.2 million, as a $3.3
million, or 6.5%, decrease in the average balance of mortgage-backed securities
to $48.0 million from $51.3 million was offset by an increase in the yield on
average mortgage-backed securities to 6.74% from 6.38%.
Income from equity securities available for sale decreased by $248,000,
or 60.6%, to $161,000 from $409,000 due to a $3.6 million, or 72.4%, decrease in
average equity securities available for sale to $1.4 million from $4.9 million,
partially offset by a 351 basis point increase in the yield on average equity
securities available for sale to 11.78% from 8.27%. The decrease in average
equity securities available for sale resulted from the Bank's continuing
strategy of liquidating such securities, as required in connection with the
Bank's conversion to a federally-chartered savings bank, while the increase in
yield resulted from the favorable market conditions for equities that existed
during 1996.
Interest income from debt securities held to maturity and FHLB stock
increased by $717,000, or 37.5%, to $2.6 million from $1.9 million due to an
$11.5 million, or 39.3% increase in the average balance of debt securities to
$40.9 million for 1996 from $29.3 million for 1995. This increase offset an 8
basis point decrease in yield to 6.43% from 6.51%. Interest income from federal
funds sold decreased $727,000 to $777,000 from $1.5 million due to a $10.5
million decrease in average federal funds sold to $14.7 million from $25.2
million, and a 67 basis point decrease in the yield on average federal funds
sold to 5.30% from 5.97%.
The increase in the Bank's average balance of mortgage, commercial
loans, consumer loans, debt securities available for sale, and investment
securities resulted from the acquisition of BCB and internal loan growth. The
decrease in yields on mortgage loan, consumer loans, commercial loans,
investment securities and federal funds sold resulted from the purchase of
interest-earning assets at market yields which were lower in 1996 than in 1995.
Total interest income increased by $4.1 million, or 13.7%, to $33.5
million for the year ended December 31, 1995 from $29.5 million for the year
ended December 31, 1994, as the Bank increased its interest income from mortgage
and consumer loans, debt securities available for sale, mortgage-backed
securities, and federal funds sold, which increases were partially offset by
decreases in interest income from equity securities available for sale, and
investment securities and FHLB stock. The increase in interest income resulted
primarily from a $46.2 million, or 10.7%, increase in average interest-earning
assets to $475.8 million from $429.6 million and a 19 basis point increase in
the yield on the Bank's average interest-earnings assets to 7.05% from 6.86%.
The increase in average interest-earning assets resulted from the Bank's
deployment of the $29.6 million of net proceeds from the Bank's August 1995
stock offering (the "Stock Offering"), assumption of $34.0 million of deposits
from the Resolution Trust Corporation (the "RTC"), and retained earnings over
the period.
Interest income from investment securities and FHLB stock decreased by
$939,000, or 33.0%, to $1.9 million in 1995 from $2.8 million in 1994 primarily
due to a decrease in average investment securities as a result of maturities of
such securities and the Bank's strategy of deploying the proceeds of such
maturities into higher-yielding assets. Interest income from federal funds sold
increased by $1.1 million, to $1.5 million in 1995 from $355,000
39
in 1994 due to a $16.6 million increase in average federal funds sold to $25.2
million from $8.5 million, and a 181 basis point increase in the yield on
average federal funds sold to 5.97% from 4.16%. The increase in federal funds
sold resulted from excess funds received from the oversubscription of the
initial public offering, which were invested in Federal funds awaiting refund to
subscribers.
Total Interest Expense. Total interest expense increased by $3.4
million, or 26.1%, to $16.2 million for the nine months ended September 30,
1997, from $12.9 million for the nine months ended September 30, 1996. The
increase was due to a $104.1 million, or 25.21%, increase in average
interest-bearing liabilities to $516.5 million from $412.4 million, and a 3
basis point increase in the average cost of the Bank's interest bearing
liabilities to 4.19% from 4.16%. The increase in average interest-bearing
liabilities resulted from the $30 million borrowing in January 1997 for the
Bank's leverage investment program combined with a $26.9 million, or 10.2%,
increase in average certificates of deposit and a $47.2 million, or 31.6
increase in average core deposits. The increase in interest-bearing liabilities
was largely the result of the acquisition of BCB. The increase in the average
rate paid for funds was attributed to the higher cost of monies for the Bank's
leverage program and the increased cost of certificates of deposit during 1997.
As a result of the foregoing, the Bank's net interest income was $16.4
million for the nine months ended September 30, 1997 compared to $13.8 million
for the nine months ended September 30, 1996. The Bank's interest rate spread
was 3.06% for the nine months ended September 30, 1997 compared to 2.96% for the
nine months ended September 30, 1996, as the yield on the Bank's
interest-earning assets increased more rapidly than the Bank's cost of
interest-bearing liabilities.
Total interest expense increased by $931,000, or 5.5%, to $17.9 million
for the year ended December 31, 1996, from $17.0 million for the year ended
December 31, 1995. The increase was due to a $15.8 million, or 3.8%, increase in
average interest-bearing liabilities to $431.9 million from $416.1 million, and
a 6 basis point increase in the average cost of the Bank's interest-bearing
liabilities to 4.15% from 4.09%. The increase in average interest-bearing
liabilities resulted from a $19.4 million, or 7.7%, increase in average
certificates of deposit which offset a $3.6 million, or 2.2% decrease in average
core deposits. The increase in interest-bearing liabilities was largely the
result of the acquisition of BCB. The increase in rates paid on deposits was
attributed to the effect of paying higher market rates on certificates of
deposit in 1996 and a slight decline in less expensive core deposits.
As a result of the foregoing, the Bank's net interest income was $19.0
million for 1996 compared to $16.5 million for 1995. The Bank's interest rate
spread was 2.98% for 1996 compared to 2.96% for 1995, as the yield on the Bank's
interest-earning assets increased more rapidly than the Bank's cost of
interest-bearing liabilities.
Total interest expense increased by $4.2 million, or 32.4%, to $17.0
million for the year ended December 31, 1995, from $12.9 million for the year
ended December 31, 1994. The increase was due to a $35.0 million, or 9.2%,
increase in average interest-bearing liabilities to $416.1 million from $381.1
million, and a 72 basis point increase in the average cost of the Bank's
interest-bearing liabilities to 4.09% from 3.37%. The increase in average
interest-bearing liabilities resulted from a $31.1 million, or 14.1%, increase
in average certificates of deposit, and a $3.9 million, or 2.5% increase in
average core deposits. The increase in interest-bearings liabilities was largely
the result of the assumption of $34.0 million of deposits form the RTC. The
increase in rates paid on deposits was attributed to the higher average cost of
the certificates of deposit purchased from the RTC, and the effect of paying
higher market rates on certificates of deposit in 1994 which continue until the
maturity of the certificates after 1995.
Provision for Loan Losses. The Bank's provision for loan losses
amounted to $1.5 million, $0, $0, $150,000 and $180,000 for the nine months
ended September 30, 1997 and 1996, and the years ended December 31, 1996, 1995
and 1994, respectively. Provisions for loan losses represent charges to income
in order to maintain the allowance for loan losses at a level deemed appropriate
by management based on historical experience, the volume and type of lending
conducted by the Bank, the amount of non-performing loans, general economic
conditions (particularly as they relate to the Bank's market area), and other
factors relating to the Bank's loan portfolio. During the third quarter of 1997
the bank increased its loan loss provision by $1.3 million, as compared to no
provision in the third quarter of 1996. This increase was primarily attributable
to a niche line of business that was inherited through the acquisition of
Burlington County bank. Management has made the decision to exit the automobile
dealer floorplan financing business and has made provisions for the
deterioration of this portfolio. Of the $1.3 million provision, $687 thousand
40
was immediately charged-off as the Bank expeditiously addressed the credit risk
in these loans and any potential losses associated with exiting this line of
business. Non-performing loans totaled $5.7 million at September 30, 1997
compared to $3.9 million at December 31, 1996. Non-performing assets as a
percentage of total assets increased to .91% at September 30, 1997 from .69% at
December 31, 1996. Based upon management's evaluation of the factors listed
above, management believes that the Bank's asset quality remains strong, and
that the allowance for loan losses as of September 30, 1997 is adequate to
provide for loan losses, although there can be no assurance that such losses
will not exceed estimated amounts. The Bank's allowance for loan losses as a
percentage of total loans outstanding increased to.80% at September 30,1997 from
.76% at December 31, 1996.
The decrease in the provisions to $0 in 1996 from $150,000 and $180,000
in 1995 and 1994, respectively, was based upon the Bank's analysis of the loan
portfolio, history of charge-offs, and strength of the Bank's coverage ratios.
The acquisition of BCB added $1.2 million, or 67.1%, to the Bank's loan loss
reserves, increasing the total loan loss reserves at December 31, 1996 to $2.9
million. Nonperforming loans totaled $3.9 million at December 31, 1996 compared
to $2.2 million at December 31, 1995, primarily as the result of the acquisition
of BCB's substantial commercial loan portfolio. Nonperforming assets as a
percentage of total assets increased from .43% at December 31, 1995 to .69% at
December 31, 1996.
Other Income. For the nine months ended September 30, 1997, the net
gain on security sales increased to $.7 million, or 33.5%, to $2.9 million,
compared to a net gain of $2.2 million for the nine months ended September 30,
1996. Service fees and other income increased $.7 million or 149.7% for the nine
months ended September 30, 1997 to $1.2 million from $.5 million for the nine
months ended September 30, 1996. The increase in fees is primarily attributable
to the acquisition of BCB deposits and loans which have higher fee generating
characteristics.
In 1996, the net gain on security sales decreased $1.4 million, or
32.3%, to $2.8 million, compared to a net gain in 1995 of $4.2 million.
Consequently, other income decreased $1.1 million for the year ended December
31, 1996 compared to the year ended December 31, 1995. Service fees and other
income increased $206,000 for fiscal 1996 compared to fiscal 1995.
Other income increased by $1.7 million, or 57.0%, to $4.9 million for
1995 compared to $3.2 million for 1994. The increase resulted primarily from a
$1.8 million increase in gain on sale of securities. In 1995, the Bank realized
a net gain on security sales of $4.2 million as compared to a net gain in 1994
of $2.4 million.
Operating Expenses. Total operating expenses increased by $3.4 million,
or 53.0%, to $9.8 million for the nine months ended September 30, 1997 as
compared to $6.4 million for the nine months ended September 30, 1996. Salaries
and employee benefits increased $2.0 million, or 59.4%, to $5.4 million for the
nine months ended September 30, 1997 from $3.4 million for the nine months ended
September 30, 1996, reflecting normal salary increases, management incentive
awards, and nine months additional salaries from the acquisition of BCB. During
the same period the amortization of intangible assets increased from $204,000 to
$577,000, reflecting the amortization of nine months of goodwill from the
acquisition of BCB. Net occupancy expenses increased $268,000, or 29.7%, due to
the addition of one branch as well as the acquisition of two BCB branches. Other
operating expenses increased $1.0 million, or 85.0%, to $2.2 million for the
nine months ended September 30, 1997 as compared to $1.2 million for the nine
months ended September 30, 1996, reflecting routine expense increases and nine
months of expenses from the acquisition of BCB. These expense increases were
offset by a $193,000 reduction in FDIC insurance premiums to $39,000 from
$232,000 for the nine months ended September 30, 1996. Included in the FDIC
premiums for the nine months ended September 30, 1996 was a special FDIC
assessment of $177,000 a result of legislation, enacted in September 1996, to
recapitalize the Savings Association Insurance Fund (the "SAIF") by a one-time
assessment on all SAIF-insured deposits held as of March 31, 1995. Although the
majority of the Bank's deposits are BIF- insured, in 1995 the Bank assumed
approximately $34.0 million of SAIF-insured deposits from the RTC. The
assessment was 65.7 basis points per $100 in deposits, payable on November 30,
1996. In addition, beginning January 1, 1997, interest payments on FICO bonds
issued in the late 1980's by the Financing Corporation to recapitalize the now
defunct Federal Savings and Loan Insurance Corporation will be paid jointly by
institutions such as the Bank that are insured by the BIF and SAIF-insured
institutions. The FICO assessment will be 1.29 basis points per $100 in BIF
41
deposits and 6.44 basis points per $100 in SAIF deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro-rata by banks and thrifts
based on deposits (approximately 2.4 basis points per $100 in deposits). The BIF
and SAIF will be merged on January 1, 1999, provided the bank and saving
association charters are merged by that date. In that event, pro-rata FICO
sharing will begin on January 1, 1999.
Total operating expenses increased by $1.9 million, or 24.0%, to $9.7
million in 1996 as compared to $7.8 million in 1995. Salaries and employee
benefits increased $1.1 million, or 28.9%, to $5.1 million in 1996 from $4.0
million in 1995, reflecting normal salary increases, management incentive
awards, and three months of additional salaries from the acquisition of BCB.
Amortization of intangible assets increased from $226,000 in 1995 to $389,000 in
1996, reflecting the amortization of three months of goodwill from the
acquisition of BCB. Net occupancy expenses increased $175,000, or 15.5%, due to
the addition of one branch as well as the acquisition of three BCB branches.
Other operating expenses increased $553,000, or 35.0%, to $2.1 million in 1996
as compared to $1.6 million in 1995, reflecting routine expense increases and
three months of expenses from the acquisition of BCB. These expense increases
were offset by a $259,000 reduction in FDIC insurance premiums.
Total operating expenses increased by $317,000, or 4.2%, to $7.8
million in 1995 as compared to $7.5 million in 1994. Salaries and employee
benefits increased $333,000, or 9.2%, to $4.0 million in 1995 from $3.6 million
in 1994 reflecting normal salary increases and staff enhancements. Amortization
of intangible assets increased from $21,000 in 1994 to $226,000 in 1995,
reflecting the amortization of the premium paid for the assumption of $34.0
million in deposits from the RTC in March 1995. Net occupancy expenses and other
operating expense increased $98,000, or 9.5%, and $75,000 or 4.1%, respectively,
reflecting routine expense increases. These expense increases were offset by a
$13,000 equipment expense reduction and a $381,000 reduction in FDIC insurance
premiums.
Income Taxes. For the nine months ended September 30, 1997, the income
tax expense amounted to $3.3 million compared to $3.6 million for the nine
months ended September 30, 1996, reflecting primarily the differences in income
before taxes. The effective tax rate remained consistent at 36.1% in 1997
compared to 36.0% in 1996.
Income tax expense amounted to $4.7 million, $4.9 million, and $4.4
million in 1996, 1995, and 1994, reflecting primarily the differences in income
before income taxes for such periods. The effective income tax rate remained
consistent in 1996, 1995 and 1994 at 36.0%, 36.0% and 36.6%, respectively.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings institution maintain
liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
At September 30, 1997, the Bank's liquidity, as measured for regulatory
purposes, was 28.83%, or $115.0 million in excess of the minimum OTS
requirement.
Cash was generated by the Bank's operating activities during the nine
months ended September 30, 1997 and 1996, and the years ended December 31, 1996,
1995 and 1994, primarily as a result of the acquisition of BCB, the assumption
of deposits, proceeds from the conversion, borrowings for a leverage program and
retained earnings. The adjustments to reconcile net income to net cash provided
by operations during the years presented consisted primarily of net gains from
sale of securities, the provision for loan losses, depreciation and amortization
expense, increases or decreases in accrued interest payable or receivable, and
increases or decreases in other assets and other liabilities. The primary
investing activity of the Bank is lending, which is funded with cash provided
from operations and financing activities including deposits, as well as proceeds
from amortization and prepayments on existing loans and proceeds from maturities
of mortgage-backed securities and other investment securities. For additional
information about cash flows from the Bank's operating, financing and investing
activities, see the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
42
At September 30, 1997, the Bank had outstanding $19.4 million in
commitments to originate and purchase loans, $5.5 million to purchase investment
securities and $28.3 million in commitments under unused lines of credit for
commercial business loans. At the same date, the total amount of certificates of
deposit which are scheduled to mature by September 30, 1998 was $218.0 million.
The Bank believes that it has adequate resources to fund commitments as they
arise and that it can adjust the rate on savings certificates to retain deposits
in changing interest rate environments. If the Bank requires funds beyond its
internal funding capabilities, advances from the FHLB of New York and borrowings
from correspondent banks are available as an additional source of funds.
The Bank is required to maintain specified amounts of capital pursuant
to federal law and regulations promulgated thereunder by the OTS. The capital
standards generally require the maintenance of regulatory capital sufficient to
meet a tangible capital requirement, a core capital requirement and a risk-based
capital requirement. At September 30, 1997, the Bank's tangible and core capital
totaled $97.2 million, or 15.5%, of adjusted total assets, which exceeded the
minimum requirements at that date by approximately $87.8 million and $78.4
million, respectively, or 14.0% and 12.5%, respectively, of adjusted total
assets. The Bank's risk-based capital totaled $100.4 million at September 30,
1997, or 26.5%, of risk-weighted assets, which exceeded the current requirement
of 8% by approximately $70.1 million, or 18.5%, of risk-weighted assets. See
"Historical and Pro Forma Capital Compliance."
Impact of New Accounting Standards
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. These standards are based on consistent application of a
financial-component approach and focuses on control. Under this approach, after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS is effective for transfers occurring after December 31, 1996
and has been applied prospectively.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," an amendment of
SFAS 125. SFAS 127 defers for one year the effective date of portions of SFAS
125 that address secured borrowings and collateral for all transactions.
Additionally, SFAS 127b defers for one year the effective date of transfers of
financial assets that are part of repurchase agreements, securities lending and
similar transactions. The adoption of SFAS 125 and SFAS 127 is not expected to
have a material effect on the Mid- Tier Holding Company's consolidated financial
statements.
Statement of Financial Accounting Standards No. 128, "Earnings per
share" (SFAS 128) establishes standards for computing and presenting earnings
per share (EPS) and applies to entities with publicly held common stock or
potential common stock. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. SFAS 128 requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the dilute EPS
computation. SFAS 128 is effective for financial statements issued for periods
ending after December 14, 1997, including interim periods, earlier application
is not permitted. SFAS 128 also requires restatement of all prior period EPS
data presented. SFAS 128 is not expected to have a material effect on the
Mid-Tier Holding Company's reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Mid-Tier Holding Company has not determined the impact that this
Statement will have on its reporting of operations.
43
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also established standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. This Statement is not expected to change the reporting
requirements of the Mid-Tier Holding Company.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
does the effect of inflation.
BUSINESS OF THE BANK
General
The Bank has traditionally operated as a community-oriented savings
institution providing mortgage loans and other traditional financial services to
its local community. The Bank is primarily engaged in attracting deposits from
the general public through its offices and using those funds to originate loans
secured by one- to four-family residences primarily located in Mercer and
Burlington Counties where the Bank's offices are located, as well as in
neighboring Bucks County, Pennsylvania. In recent years the Bank has
substantially increased its portfolio of mortgage loans secured by multi-family
and commercial real estate, commercial business loans, consumer loans and home
equity and property improvement loans. The Bank also has a securities portfolio
primarily consisting of U.S. Treasury and federal government agency obligations,
corporate and municipal bonds and mortgage-backed securities issued by federal
agencies.
Market Area
The Bank conducts business through its 14 branch offices located in the
central New Jersey counties of Mercer, Burlington and Ocean, and a trust
services subsidiary located in Ocean County, New Jersey. The Bank's market area
for loans includes neighboring Bucks County, Pennsylvania which borders to the
west of Mercer County, New Jersey. Lawrenceville, New Jersey, where the Bank is
headquartered, is located in Mercer County which had a population of
approximately 326,000 according to the 1990 Census. Population is forecasted to
be 368,000 by 1999.
The Bank's market area is both urban and suburban. Trenton, which is in
Mercer County, is the capital of the State of New Jersey. The two largest
employers in Mercer County are the State of New Jersey and Princeton University.
Other large employers in the Bank's market area include Lockheed Martin,
Princeton Medical Center, Bristol-Myers Squibb, N.J. Manufacturer, Helene Fuld
Medical and Educational Testing Services.
The economy in the Bank's market area economy has remained relatively
stable in recent years. The unemployment rates in Mercer and Burlington Counties
were 5.7% and 5.2%, respectively during 1996.
44
Lending Activities
Loan Portfolio Composition. The principal components of the Bank's loan
portfolio are mortgage loans secured by one- to four-family residential,
commercial, and multi-family residential real estate. In addition, the Bank's
loan portfolio includes non-mortgage loans which include home equity loans,
commercial business loans, and other consumer loans. At September 30, 1997, the
Bank's total loans receivable totaled $401.0 million, of which $242.4 million,
or 60.4%, were one- to four-family residential real estate mortgage loans, $40.3
million, or 10.1%, were commercial and multifamily residential real estate
loans, $33.9 million, or 8.5%, were home equity loans, $62.2 million, or 15.5%,
were commercial business loans, and $22.2 million, or 5.5%, were other consumer
loans.
As a federally chartered savings bank, the Bank has general authority
to originate and purchase loans secured by real estate located throughout the
United States. Notwithstanding this nationwide lending authority, the mortgage
loans of the Bank are primarily secured by properties located in Mercer,
Burlington and Ocean Counties, New Jersey, and Bucks County, Pennsylvania.
45
Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio by type of loan at the
dates indicated.
At September 30,
1997
-----------------
Amount Percent
-------- -------
(Dollars In Thousands)
Mortgage loans:
One- to four-family real estate.. $242,374 60.4%
Commercial and multi-family
residential real estate........ 40,305 10.1
-------- -----
Total mortgage loans......... 282,679 70.5%
Non-mortgage loans:
Home equity loans (1)............ 33,914 8.5%
Commercial business loans........ 62,245 15.5
Other consumer loans (2)......... 22,195 5.5
-------- -----
Total non-mortgage loans..... 118,354 29.5
Total loans................ 401,033 100.0%
=====
Net deferred costs (fees)........ 18
Premiums (discounts)............. 17
Allowance for possible
loan losses.................... (3,202)
Net loans.................... $397,866
========
At December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars In Thousands)
Mortgage loans:
One- to four-family real estate.. $239,470 62.5% $227,717 74.0% $228,133 78.3% $206,585 80.2% $163,322 80.3%
Commercial and multi-family
residential real estate........ 53,415 14.0 27,827 9.0 23,833 8.2 18,972 7.4 12,732 6.3
-------- ----- --------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans......... 292,885 76.5 255,544 83.0 251,966 86.5 225,557 87.6 176,054 86.6
Non-mortgage loans:
Home equity loans (1)............ 28,138 7.3 21,833 7.1 22,043 7.6 19,117 7.4 16,673 8.2
Commercial business loans........ 34,486 9.0 11,573 3.8 8,998 3.1 7,300 2.9 8,023 4.0
Other consumer loans (2)......... 27,478 7.2 18,783 6.1 8,256 2.8 5,513 2.1 2,488 1.2
-------- ---- -------- ----- -------- ----- -------- ----- -------- -----
Total non-mortgage loans..... 90,102 23.5 52,189 17.0 39,297 13.5 31,930 12.4 27,184 13.4
Total loans................ 382,987 100.0% 307,733 100.0% 291,263 100.0% 257,487 100.0% 203,328 100.0%
===== ===== ===== ===== =====
Net deferred costs (fees)........ 226 104 (117) 360 715
Premiums (discounts)............. (24) 23 -- -- --
Allowance for possible
loan losses.................... (2,901) (1,767) (1,642) 1,471 634
-------- -------- -------- --------
Net loans.................... $380,288 $306,093 $289,504 $255,656 $201,889
======== ======== ======== ======== ========
- ----------
(1) Includes home equity credit lines and second mortgages.
(2) Includes student loans, installment loans and auto loans.
46
Contractual Principal Repayments and Interest Rates. The following
table sets forth the maturity of the Bank's loan portfolio at September 30,
1997. Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less.
Due Within Due 1-3 Due 3-5 Due 5-10 Due 10+
One Year Years Years Years Years Total
---------- ------- ------- -------- ------- -------
(In Thousands)
Total mortgage loans........................ $12,602 $14,354 $44,479 $68,862 $142,382 $282,679
Total non-mortgage loans.................... 53,025 13,747 32,359 10,754 8,469 118,354
------- ------- ------- ------- -------- --------
Total loans................................. $65,627 $28,101 $76,838 $79,616 $150,851 $401,033
======= ======= ======= ======= ======== ========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth the dollar amount of total loans due after one year from September 30,
1997 which have fixed interest rates or which have floating or adjustable
interest rates.
Fixed Adjustable
Rates Rates Total
----------- ---------- ----------
(In Thousands)
Mortgage loans............. $ 102,287 $ 167,790 $ 270,077
Non-mortgage loans......... 49,179 16,150 65,329
----------- --------- ----------
Total loans................ $ 151,466 $ 183,940 $ 335,406
=========== ========= ==========
Scheduled contractual amortization of loans does not reflect the
anticipated actual term of the Bank's loan portfolio. The average life of loans
is substantially less than their contractual terms because of prepayments and
due on sale clauses, which give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that borrower
sells the real property subject to the mortgage.
Loan Originations and Underwriting. The lending activities of the Bank
are subject to written, non-discriminatory, underwriting standards and the loan
origination procedures established by the Bank's Board of Directors. Loan
originations are obtained by a variety of sources, including referrals from real
estate brokers, developers, builders, existing customers, newspaper, radio,
periodical advertising and walk-in customers. Loan applications are taken by
lending personnel, and the loan department supervises the obtainment of credit
reports, appraisals and other documentation involved with a loan. Property
valuations are performed by one of a list of licensed independent certified
appraisers approved annually by the Board of Directors. The Bank requires title
insurance on nearly all first mortgage loans secured by real estate. Hazard
insurance is also required on all secured property and flood insurance is
required if the property is within a designated flood plain.
The Bank's loan approval process assesses the borrower's ability to
repay the loan and the adequacy of the value of the property that will secure
the loan. A loan application file is first reviewed by a loan officer of the
Bank and then is submitted for approval to an officer with specific delegated
authority from the Board of Directors to approve that type of loan up to a
certain amount. The legal lending limit of the Bank at September 30, 1997 was
$16.2 million. In March of 1996, the Board of Directors approved an increase in
the internal lending limit to one borrower to $5.0 million from $2.5 million,
and an increase in the maximum non-commercial mortgage loan limit to $1.0
million from $500,000. In general, the maximum home equity loan the Bank will
make is $100,000 and the maximum installment (automobile) loan the Bank will
make is $50,000. The Bank can exceed these limitations on a case-by-case basis
and intends to reevaluate the limitations after the completion of the
Conversion.
47
The following table shows loans originated, purchased, loan reductions
and the net change in the Bank's loan portfolio during the periods indicated.
Nine Months Ended
September 30, Years Ended December 31,
------------------ ----------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars In Thousands)
Loans receivable at beginning of period..... $382,987 $307,733 $307,733 $291,263 $257,487
Originations:
Residential............................... 16,875 36,159 42,318 23,363 54,777
Commercial real estate and multifamily.... 11,610 2,585 4,142 8,811 8,025
Commercial business loans................. 25,311 11,142 14,474 5,307 6,131
Home equity............................... 9,290 8,321 11,578 6,662 10,055
Other..................................... 9,903 14,238 16,787 16,375 6,555
-------- -------- -------- -------- --------
Total originations...................... 72,989 72,445 89,299 60,518 85,543
Purchased residential mortgage loans........ -- 1,534 1,534 5,038 --
Loans acquired.............................. -- -- 48,229 -- --
Transfer of mortgage loans to foreclosed
real estate............................... (274) (89) (682) -- (77)
Repossession of assets in lieu of loans..... (100) (21) (41) (34) --
Net charge offs............................. (1,187) (26) (52) (25) (9)
Repayments.................................. (53,382) (44,280) (63,033) (49,027) (51,681)
-------- -------- -------- -------- --------
Net loan activity........................... 18,046 29,563 75,254 16,470 33,776
-------- -------- -------- -------- --------
Total loans receivable at end of period $401,033 $337,296 $382,987 $307,733 $291,263
======== ======== ======== ======== ========
One- to Four-Family Real Estate Loans. The primary lending activity of
the Bank is the origination of loans secured by first mortgage liens on one- to
four-family residences. At September 30, 1997, $242.4 million, or 60.4%, of the
Bank's total loan portfolio consisted of one- to four-family real estate loans.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible under regulations in accordance with sound practices,
market conditions and underwriting standards established by the Bank. The Bank's
lending policies on one- to four-family owner occupied real estate loans
generally limit the maximum loan-to-value ratio to 80% of the lesser of the
appraised value or purchase price of the property and 75% of the appraised value
or purchase price on condominiums.
As of September 30, 1997, the Bank offered 30-year fixed and adjustable
rate mortgage loans on one- to four-family residences. The Bank began to
originate 30-year fixed-rate mortgage loans in early 1996. All residential
mortgage loans are amortized on a monthly basis with principal and interest due
each month. These loans include "due on sale" clauses, which are provisions
giving the Bank the right to declare a loan immediately due and payable in the
event the borrower sells or otherwise disposes of the real property subject to
the mortgage. The Bank enforces due on sale clauses to the extent permitted
under applicable laws. Substantially all of the Bank's residential mortgage loan
portfolio consists of conventional loans.
The Bank offers adjustable rate one- to four-family real estate loans,
originated directly, which are fully amortizing loans with contractual
maturities of up to 30 years. These loans have interest rates which are
scheduled to adjust in accordance with designated indices. Initial rates are
fixed for one, three, five or seven years before adjusting annually. The Bank
currently offers its adjustable rate mortgage loans with a 2% cap on the rate
adjustment per year and a 6% rate adjustment cap over the life of the loan. The
Bank's underwriting standards for one year adjustable rate mortgages requires
that it assess a potential borrower's ability to make principal and interest
payments based on the initial note rate or the current index rate, whichever is
greater at the time of application. Adjustable rate mortgages with initial
payment periods greater than one year utilize the initial note rate. The Bank's
adjustable rate mortgage loans are not convertible by their terms into fixed
rate loans, do not contain prepayment penalties and do not produce negative
amortization.
48
Commercial and Multi-family Residential Real Estate Mortgage Loans. At
September 30, 1997, $40.3 million, or 10.1%, of the Bank's total loan portfolio
consisted of loans secured by multi-family and commercial real estate. The
Bank's multi-family and commercial mortgage loans include primarily loans
secured by apartment buildings, small office buildings and small retail
establishments. Substantially all of the Bank's multi-family and commercial
mortgage loans are secured by properties located in the Bank's primary market
area. Management believes that multi-family and commercial mortgage loans will
continue to be an integral component of the Bank's loan portfolio. Originations
of multi-family and commercial mortgage loans amounted to $11.6 million, $4.1
million, $8.8 million and $8.0 million, or 12.0%, 4.6%, 14.6% and 9.4% of total
loan originations during the nine months ended September 30, 1997 and during
fiscal 1996, 1995 and 1994, respectively.
The Bank originates both fixed and adjustable rate multi-family and
commercial mortgage loans. The Bank currently offers multi-family and commercial
mortgage loans with terms generally up to ten years amortizing over no more than
a 20-year period, with no more than five years at a fixed rate of interest.
Pursuant to the Bank's underwriting standards, it offers multi-family and
commercial mortgage loans with loan-to-value ratios generally up to 70% of the
lower of the purchase price or an independent appraisal. Those standards also
require that the cash flow from the collateral, after consideration of expense
and vacancy assumptions, be generally at least 120% of the debt service.
The Bank requires appraisals of substantially all properties securing
multi-family and commercial real estate loans. All appraisals are performed by
an independent licensed appraiser from a list of appraisers approved by the
Bank. In originating multi-family and commercial mortgage loans, the Bank
considers the value of the property, the credit history of the borrower, cash
flow of the project, location of the real estate and the quality of management
involved with the property. Multi-family and commercial mortgage loans to
corporations are generally guaranteed by the principals. The Bank may also
require an environmental audit on such loans.
Multi-family and commercial mortgage lending is generally considered to
involve a higher degree of credit risk than one- to four-family residential
lending. Such lending typically involves large loan balances concentrated in a
single borrower or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions in the real estate
market or in the economy generally.
The Bank also offers construction loans on commercial real estate
properties. Construction financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate because of the uncertainties of construction, including the possibility
of costs exceeding the initial estimates. Construction lending is generally
limited to the Bank's primary lending area. Construction loans are structured to
be converted to permanent loans at the end of the construction phase, which
typically is no more than nine months. Construction loans have terms which
generally match the non-construction loans then offered by the Bank except that
during the construction phase the borrower only pays interest on the loan.
Home Equity Loans. The Bank offers home equity fixed rate, home equity
credit line and FHA Title I property improvement loans. The home equity
portfolio amounted to $33.9 million, or 8.5%, of the total loan portfolio as of
September 30, 1997. Of this amount, $24.2 million, or 71.3%, were in the form of
home equity fixed rate loans; $8.2 million, or 24.3% were in the form of home
equity credit lines; and $1.5 million, or 4.4% were in the form of second
mortgages. FHA Title I property improvement loans amounted to $217,000.
The home equity fixed rate loan is available on any owner-occupied one-
to four-family home, townhouse, or condominium in the Bank's lending area. It is
a fixed-rate mortgage which is based on the equity in the home, and is generally
secured by a first or second mortgage on the residence. Loan amounts generally
range from $5,000 to $100,000 (up to 75% of the appraised value of the home less
any outstanding senior mortgage/lien). The current maximum term is 180 months.
The home equity credit line is available on any owner-occupied one- to
four-family home, townhouse, or condominium in the Bank's lending area. It is a
variable rate mortgage which is based on the equity in the home, and
49
is generally secured by a first or second mortgage on the residence. Loan
amounts generally range from $5,000 to $100,000 (up to 75% of the appraised
value of the home less any outstanding senior mortgage/lien).
The FHA Title I property improvement loan is a fixed-rate installment
loan available on any owner-occupied one- to four-family home in the Bank's
lending area. Under the Title I program, the Bank makes loans from their own
funds to eligible borrowers to finance property improvements, and the U.S.
Department of Housing and Urban Development ("HUD") insures the Bank against
loss if the borrower(s) defaults. Title I loans are not government loans or
grants, and are not low interest-rate loans. HUD does not lend money or regulate
interest rates. Currently, the maximum loan amount is $25,000, and the maximum
term is 180 months. Any loan amount over $7,500 is secured by a mortgage on the
property. The Bank conducts an on-site inspection on any property improvement
loan where the principal obligation is $7,500 or more, and where the borrower(s)
fails to submit a completion certificate.
The second mortgage portfolio consists of purchased notes secured by
second mortgages on real estate located throughout New Jersey. The purchases
occurred between 1983 and 1991; however, the consumer lender is still servicing
the portfolio, pursuant to the original agreement. The portfolio is 100%
guaranteed by the consumer lender.
Other Consumer Loans. Subject to the restrictions contained in federal
laws and regulations, the Bank also is authorized to make loans for a wide
variety of personal or consumer purposes. As of September 30, 1997, $22.2
million, or 5.5%, of the Bank's total loan portfolio, consisted of consumer
loans (this figure does not include home equity fixed-rate, home equity credit
line, FHA Title I home improvement loans and second mortgage loans). The primary
component of the Bank's consumer loan portfolio was $20.3 million of indirect
and direct automobile loans which are no longer being originated and are being
allowed to mature. The servicer of these loans established dealer agreements,
application processing and credit underwriting, documentation and legal support,
loan billing and accounting, customer service, full collection support, and
management reporting. The servicer made preliminary underwriting decisions and
made recommendations according to the Bank's underwriting criteria and the final
credit decision was made by the Bank.
Automobile loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness, and
personal bankruptcy. In many cases, any repossessed collateral resulting from a
defaulted consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of depreciation and improper repair and
maintenance of the underlying security. See "Management's Discussion and
Analysis of Results of Operations--Comparison of Results of Operation--Provision
for Loan Losses."
The Bank also has collateral loans secured by deposits, which as of
September 30, 1997 amounted to $1.1 million. The collateral deposit loans are
originated through the branches. The minimum loan amount is $1,000, and the
maximum loan-to-value is 90% of the principal deposit balance. The loan is
priced at 3% over the savings instrument rate. Deposit loans are payable on
demand. However, payment of interest is due quarterly and payment to the loan
principal can be made at any time provided the quarterly interest has been paid.
The Bank also has personal loans (secured and unsecured) and overdraft
protection accounts, which as of September 30, 1997 totaled $321,000.
Commercial Business Loans. Commercial business loans are generally
provided to various types of closely held businesses located principally in the
Bank's primary market area. The Bank's commercial business loans may be
structured as short-term self-liquidating time notes, revolving credits, and
term loans. Time notes generally have terms of less than one year to accommodate
seasonal peaks and valleys in the borrower's business cycle. Commercial business
term loans generally have terms of seven years or less and interest rates which
float in accordance with the prime rate, although the Bank also originates
commercial business loans with fixed rates of interest. The Bank's commercial
loans generally are secured by equipment, machinery or other corporate assets
including real estate and receivables but may be unsecured. The Bank generally
obtains personal guarantees from the principals of the borrower with respect to
all commercial business loans.
50
The Bank, through its subsidiary, TSBusiness Finance Corporation
("TSBF"), provides secured lines of credit for businesses where conventional
financing is unavailable or inadequate. TSBF's borrowing relationships include
companies involved in manufacturing, wholesaling, distribution and service
companies. Credit accommodations range from $500,000 to $5,000,000 for
businesses in New Jersey and the greater Delaware Valley.
Commercial business loans generally are deemed to entail significantly
greater credit risk than that which is involved with residential real estate
lending. The repayment of commercial business loans typically is dependent on
the successful operations and income of the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial business
lending generally requires substantially greater oversight efforts compared to
residential real estate lending.
As of September 30, 1997, the Bank had $62.2 million or 15.5% of the
total loan portfolio secured by commercial business loans outstanding.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank generally receives loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan. In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as an
adjustment to the yield of such loans over their contractual life. The increase
in net deferred costs is a result of substantial originations of auto loans
which have a net cost associated with their origination and minimal loan points
being generated from mortgage loans.
Asset Quality
Delinquent Loans. The following table sets forth information regarding
number and total balance of loans delinquent 30 days to 59 days, 60 days to 89
days and 90 days or more as of September 30, 1997.
Commercial
Mortgage Business Consumer Total Loans
--------------- --------------- --------------- ---------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Loans delinquent for:
30-59 days..................... 26 $1,774 51 $1,382 74 $ 360 151 $3,516
60-89 days..................... 7 500 15 660 18 61 40 1,221
90 days and over............... 48 2,788 38 1,166 7 109 93 4,063
----- ------ ----- ------ ----- ------ ----- ------
Total delinquent loans....... 81 $5,062 104 $3,208 99 $ 530 284 $8,800
===== ====== ===== ====== ===== ====== ===== ======
Non-Performing Assets. The loan portfolio is reviewed on a regular
basis by management and, in addition, the commercial business loan portfolio is
reviewed periodically by an independent loan review consulting firm. The loans
are placed on a non-accrual status when, in the opinion of management, there is
reasonable probability of loss or principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, the
Bank's loans are placed on a non-accrual status when a default of principal or
interest has existed for a period of 90 days except when, in the opinion of
management, the collection of the principal or interest is reasonably
anticipated or adequate collateral exists. In addition, the Bank places any loan
on non-accrual if any part of it is classified as doubtful or loss or if any
part has been charged to the allowance for loan losses. When a loan is placed on
non-accruing status, total interest accrued and unpaid to date is reversed.
Real estate owned consists of property acquired through formal
foreclosures and acquired by deed in lieu of foreclosure, and is recorded at the
lower of cost or fair value. Write-downs from cost to fair value which are
required at the time of foreclosure are charged to the allowance for loan
losses. After transfer, the property is carried at the lower of cost or fair
value as determined by an independent appraisal, less estimated selling
expenses. Adjustments to the carrying value of such properties that result from
subsequent declines in value are charged to operations in the period in which
the declines occur. At September 30, 1997, the Bank had one property classified
as real estate owned.
51
As part of the acquisition of BCB, the Bank acquired BCB's loan
portfolio. BCB's underwriting standards and related risk characteristics of the
loan portfolio differed from those of the Bank. The addition of this portfolio
has increased the Bank's non-performing portfolio and negatively effected
certain coverage ratios. However, management believes that the Bank's overall
asset quality remains strong. Management believes that the allowance for loan
losses is adequate based on historical experience, the volume and type of
lending conducted by the Bank, the amount of non-performing loans, general
economic conditions and other factors relating to the Bank's loan portfolio.
However, there can be no assurance that actual losses will not exceed estimated
amounts.
The following table sets forth information as of September 30, 1997,
December 31, 1996, 1995 and 1994 concerning non-performing assets in dollar
amounts and as a percentage of the Bank's net loans and total assets.
At September
1997 1996 1995 1994
------- ------- ------- -------
(Dollars In Thousands)
Non-accruing loans less than 90 days delinquent
Mortgage.......................................... 200 -- -- --
Non-mortgage...................................... 1,237 -- -- --
Non-accruing loans 90 days or more delinquent:
Mortgage loans.................................... 2,055 1,756 1,008 994
Non-mortgage loans................................ 985 1,195 114 31
Troubled debt restructured loans.................... 192 206 1,052 1,044
Accruing loans 90 days or more delinquent:
Mortgage loans.................................... 733 602 10 448
Commercial business loans......................... 287 151 -- --
Consumer loans.................................... 3 -- -- --
------- ------- ------- -------
Total non-performing loans.......................... 5,692 3,910 2,184 2,517
Foreclosed assets................................... 142 253 34 77
------- ------- ------- -------
Total non-performing assets......................... $ 5,834 $ 4,163 $ 2,218 $ 2,594
======= ======= ======= =======
Total non-performing loans as a percentage
of net loans...................................... 1.43% 1.03% 0.71% 0.87%
======= ======= ======= =======
Total non-performing assets as a percentage
of total assets................................... 0.91% 0.69% 0.43% 0.59%
======= ======= ======= =======
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of some
loss. An asset classified loss is considered uncollectible and of such little
value that continuance as an asset of the institution is not warranted. Another
category designated "special mention," although not a "classification," also
must be established and maintained for assets which do not currently expose an
insured institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. General loss allowances established
to cover possible losses related to assets classified substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses do not qualify as regulatory
capital. Federal examiners may disagree with an insured institution's
classifications and amounts reserved and have the authority to require a savings
institution to classify additional assets, or to change the classification of
existing classified assets, and, if appropriate, to establish additional
reserves. At September 30, 1997, the Bank had $3.3 million of loans criticized
as special mention, $6.4 million classified as substandard and $.6 million
classified as doubtful or loss. As of September 30, 1997, total classified
assets, which includes repossessed assets, amounted to 7.1 million or 1.09% of
total assets.
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated loan losses based upon an assessment (1) in the case of
residential loans, management's review of delinquent loans, loans in
52
foreclosure and market conditions, (2) in the case of commercial business loans
and commercial mortgage loans, when a significant decline in value can be
identified and (3) in the case of consumer loans, based on the assessment of
risks inherent in the loan portfolio. Although management uses available
information to make such determinations, future adjustments to allowances may be
necessary based on economic and market conditions and as a result of future
examinations by regulatory authorities, and net earnings could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations. At September 30, 1997, the Bank's allowance
for loan losses, which includes a general valuation allowance, amounted to $3.2
million compared to $2.9 million at December 31, 1996.
The following table sets forth an analysis of the Bank's allowance for
loan losses during the periods indicated.
At and for the Nine At and for
Months Ended September 30, the Year Ended December 31,
-------------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- -------- -------- -------- -------- --------
(Dollars In Thousands)
Total loans outstanding..... $ 401,033 $ 337,296 $382,987 $307,733 $291,263 $257,487 $203,238
========= ========= ======== ======== ======== ======== ========
Average loans outstanding... $ 388,318 $ 321,930 $337,780 $297,043 $282,068 $231,375 $187,839
========= ========= ======== ======== ======== ======== ========
Balance at beginning of
period.................... 2,901 $ 1,767 $ 1,767 $ 1,642 $ 1,471 $ 634 $ 100
Charge-offs:
Mortgage loans............ (80) (57) (67) -- -- -- --
Consumer loans............ (164) (9) (34) (32) (23) -- --
Commercial business loans. (1,069) (9) (9) -- -- (43) --
Recoveries.................. 126 49 58 7 14 -- 14
--------- --------- -------- -------- -------- -------- --------
Net charge-offs............. (1,187) (26) (52) (25) (9) (43) 14
Provision for loan losses... 1,488 -- -- 150 180 880 520
Acquired allowance.......... -- -- 1,186 -- -- -- --
--------- --------- -------- -------- -------- ======== ========
Balance at end of period.... $ 3,202 $ 1,741 $ 2,901 $ 1,767 $ 1,642 $ 1,471 634
========= ========= ======== ======== ======== ======== ========
Allowance for loan losses
as a percentage of total
loans outstanding........ 0.80% 0.52% 0.76% 0.57% 0.56% 0.57% 0.31%
========= ========= ======== ======== ========= ========= ========
Net charge-offs as a
percentage of average
loans outstanding......... 0.41% 0.01% 0.02% 0.01% 0.00% 0.02% 0.00%
========= ========= ======== ======== ======== ======== ========
Allowance for loan losses
to non-performing loans... 56.25% 109.15% 74.19% 80.91% 65.24% 80.65% 38.35%
========= ========= ======== ======== ======== ======== ========
53
The following table sets forth the allocation of allowance for loan
losses by loan category for the periods indicated.
At September 30, At December 31,
---------------- ----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------------- -------------- -------------- -------------- -------------- --------------
% of % of % of % of % of % of
Total Total Total Total Total Total
Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1)
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Balance at end of period
applicable to:
Mortgage loans............. $ 758 70.5% $ 906 76.5% $ 591 83.0% $ 593 86.5% $ 519 87.6% $ 223 86.6%
Consumer loans............. 959 14.0 877 14.5 610 13.2 453 10.4 369 9.5 159 9.4
Commercial business loans.. 1,260 15.5 813 9.0 116 3.80 90 3.1 73 2.9 32 4.0
Unallocated................ 225 -- 305 -- 450 -- 506 -- 510 -- 220 --
------ ------ ----- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for loan
losses................. $3,202 100.0% $2,901 100.0% $1,767 100.0% $1,642 100.0% $1,471 100.0% $ 634 100.0%
====== ====== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- ----------
(1) Represents percentage of loans in each category to total loans.
54
Investment Activities
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally insured banks and savings institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities and mutual funds, the
assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. In addition, the Bank
has certain additional investment authority under OTS regulations as a result of
certain grandfathered powers permitted under the terms of the approval of its
conversion from state to federal charter.
The following table sets forth certain information relating to the
Bank's investment securities and mortgage-backed securities held to maturity and
securities available for sale at the dates indicated.
At September 30, At December 31,
---------------- -------------------------------
1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- ------- --------- -------
(In Thousands)
Investments and mortgage-backed
securities held to maturity:
United States Government Agency
obligations............................. $ 14,350 $ 14,321 $ 17,042 $ 16,907 $ 24,934 $ 24,928 $ 5,826 $ 5,666
Obligations of State and political
subdivisions............................ 2,293 2,412 3,400 3,497 1,055 1,156 1,055 1,081
Federal Home Loan Bank stock.............. 3,386 3,386 3,089 3,089 2,864 2,864 2,495 2,495
Mortgage-backed securities................ 39,603 39,650 48,618 48,587 54,316 55,032 35,087 34,096
Other corporate bonds..................... 14,515 14,539 17,493 17,521 10,955 11,041 20,136 19,991
-------- -------- -------- -------- -------- -------- -------- --------
Total investments held to maturity
including Federal Home Loan Bank stock.. 74,147 74,308 89,642 89,601 94,124 95,021 64,599 63,329
-------- -------- -------- -------- -------- -------- -------- --------
Securities available for sale: (1)
United States Treasury securities......... 51,320 51,444 65,336 65,507 -- -- -- --
United States Government and Agency
obligations............................. 46,067 46,386 9,924 9,767 75,955 76,653 51,958 50,866
Equity securities......................... 10 10 894 3,201 2,536 7,123 8,375 14,095
Mortgage-backed securities................ 15,072 15,221 -- -- -- -- -- --
Other bonds............................... 14,547 14,590 9,151 9,172 -- -- -- --
-------- -------- -------- -------- ------- -------- -------- --------
Total securities available for sale..... 127,016 127,651 85,305 87,647 78,491 83,776 60,333 64,961
-------- -------- -------- -------- -------- -------- -------- --------
Total investments......................... $201,163 $201,959 $174,947 $177,248 $172,615 $178,797 $124,932 $128,290
======== ======== ======== ======== ======== ======== ======== ========
- ----------
(1) The Bank adopted FASB No. 115 "Accounting for Investments" as of January 1,
1994 and transferred certain securities held to maturity to available for
sale. See the notes to the audited financial statements.
As of September 30, 1997, the Bank's investment securities held to maturity
portfolio had a carrying value of $74.1 million, of which $14.4 million were
securities issued by U.S. Agencies and other governmental subdivisions and $16.8
million were corporate and municipal bonds. As of that same date, the Bank's
securities available for sale portfolio had an estimated market value of $127.7
million, of which $97.8 million were securities issued by the U.S.
Treasury and federal government agencies, and $14.6 million were other bonds.
At September 30, 1997, $16.8 million, or 22.7%, of the $74.1 million of
total securities held to maturity by the Bank were scheduled to mature within
one year and had a weighted average yield of 5.79%. At September 30, 1997, $32.5
million, or 25.5%, of the $127.7 million of securities available for sale by the
Bank were scheduled to mature within one year and had a weighted average yield
of 5.85%.
55
The following table sets forth the scheduled maturities, carrying
values, amortized cost, market values and weighted average yields for the Bank's
investment portfolio at September 30, 1997.
At September 30, 1997
-----------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years More than Ten Years
------------------ ------------------ ------------------ -------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities.......... $ 5,540 5.6% $ 21,884 6.7% $ -- --% $ 12,179 7.4%
Federal Home Loan Bank stock........ -- -- -- -- -- -- 3,386 --
United States Agency obligations.... 350 4.7 14,000 6.0 -- -- -- --
Obligations of State and political
subdivisions...................... 909 6.2 418 6.7 199 6.9 766 10.5
Other bonds......................... 10,009 5.9 3,156 6.3 1,349 7.5 -- --
------- -------- -------- --------
Total investments held to maturity $16,808 $39,458 $1,548 $16,331
======= ======= ====== =======
Securities available for sale:
Mortgage-backed securities.......... $ -- --% $ -- --% $ -- --% $ 15,071 7.4%
United States Treasury
securities........................ 26,186 5.8 25,134 6.0 -- -- -- --
United States agency obligations 300 5.1 299 7.4 45,468 7.2 -- --
Equity securities................... -- -- -- -- -- -- 10 --
Other bonds......................... 6,011 6.1 7,659 6.3 877 6.6 -- --
------- ------- ------- -------
Total securities available for sale $32,497 $33,092 $46,345 $15,081
======= ======= ======= =======
At September 30, 1997
--------------------------
Total
--------------------------
Weighted
Amortized Market Average
Cost Value Yield
--------- ------ --------
(Dollars in Thousands)
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities.......... $39,603 $39,650 6.72%
Federal Home Loan Bank stock........ 3,386 3,386 --
United States Agency obligations.... 14,350 14,320 5.97
Obligations of State and political
subdivisions...................... 2,292 2,411 7.81
Other bonds......................... 14,514 14,539 6.12
------- -------
Total investments held to maturity $74,145 $74,308
======= =======
Securities available for sale:
Mortgage-backed securities.......... $15,071 $ 15,221 7.40%
United States Treasury
securities........................ 51,320 51,444 5.91
United States agency obligations 46,067 46,386 7.14
Equity securities................... 10 10 --
Other bonds......................... 14,547 14,589 6.24
------- --------
Total securities available for sale $127,015 $127,651
======== ========
56
Cash and Cash Equivalents. The Bank also had cash and cash equivalents
consisting primarily of cash due from banks and federal funds sold totaling
$20.9 million, and $13.2 million at December 31, 1996 and September 30, 1997,
respectively.
Mortgage-Backed Securities
The Bank has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae.
Mortgage-backed securities increase the liquidity and the quality of the Bank's
assets by virtue of their greater liquidity compared to individual mortgage
loans, the guarantees that back the securities themselves and their ability to
be used to collateralize borrowings or other obligations of the Bank, including
repurchase agreements. In addition, at September 30, 1997, 20.3% of the Bank's
mortgage-backed securities portfolio consisted of pools of adjustable rate
mortgages. Mortgage-backed securities of this type serve to reduce the interest
rate risk associated with changes in interest rates. Also, 48.2% of the Bank's
mortgage-backed securities consist of five- to seven-year balloon maturities,
providing further protection against interest rate increases.
At September 30, 1997, the Bank's mortgage-backed securities in the
held to maturity category had a carrying value and estimated market value of
$39.6 million. Of the $53.8 million portfolio, $27.4 million was scheduled to
mature in five years or less and $27.3 million was scheduled to mature after ten
years. Due to prepayments of the underlying loan, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities. The mortgage-backed securities held to maturity include a valuation
allowance of $169,000 at September 30, 1997. These securities were designated as
available for sale portfolio on January 1, 1994 upon the adoption of SFAS No.
115 and were subsequently transferred to held to maturity on October 1, 1994.
The October 1, 1994 transfer was designed to more accurately reflect the Bank's
then current intent to hold these securities to maturity. The unrealized loss at
the time of the October 1, 1994 transfer is being amortized to equity over the
estimated life of the related mortgage-backed securities.
The $27.4 million of mortgage-backed securities which were scheduled to
mature in five years or less at September 30, 1997 qualify for regulatory
liquidity and have fixed interest rates. Of the Bank's total investment in
mortgage-backed securities at September 30, 1997, $38.1 million consisted of
Freddie Mac certificates, $1.5 million consisted of Ginnie Mae certificates and
$15.2 million consisted of Fannie Mae certificates.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of funds
from other sources. They may also be used on a longer term basis for specific
leverage investment programs.
Deposits. The Bank's deposits are attracted principally from within the
Bank's primary market area through the offering of a broad selection of deposit
instruments, money market accounts, regular savings accounts, and term
certificate accounts. Deposit account terms vary, with the principal differences
being the minimum balance required, the time periods the funds must remain on
deposit and the interest rate.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations. The Bank does
not advertise for deposits outside its primary market area and does not utilize
the services of deposit brokers.
57
The following table sets forth the amount, percentage of total deposits
and the change in dollar amounts of the various types of deposit accounts
offered by the Bank between the dates indicated.
At At December 31,
September 30, ---------------------------------------------------------------------
1997 1996 1995 1994
------------------------ ------------------------ ------------------------ ---------------
Amount Percent $ Change Amount Percent $ Change Amount Percent $ Change Amount Percent
------ ------- -------- ------ ------- -------- ------ ------- -------- ------ -------
(Dollars in Thousands)
Certificates of deposit:
Maturing within 12 months ...... $218,046 44.2% $29,302 $188,744 38.4% $ 5,086 $183,658 44.7% $57,884 $125,774 33.3%
Maturing within 13-24 months ... 47,621 9.6 7,818 39,803 8.2 11,883 27,920 6.7 (8,517) 36,437 9.7
Maturing within 25-36 months ... 20,474 4.2 176 20,298 4.1 (7,455) 27,753 6.8 (2,341) 30,094 8.0
Maturing beyond 36 months ...... 4,088 0.8 (43,613) 47,701 9.7 25,235 22,466 5.5 (9,747) 32,213 8.5
-------- ----- ------- -------- ----- ------- -------- ----- ------- -------- -----
Total certificates of deposit . 290,229 58.8 (6,317) 296,546 60.4 34,749 261,797 63.7 37,279 224,518 59.5
-------- ----- ------- -------- ----- ------- -------- ----- ------- -------- -----
Transaction accounts:
NOW ............................ 14,955 3.0% (1,476) 16,431 3.3 6,876 9,555 2.3 38 9,517 2.5
Noninterest-bearing demand ..... 27,982 5.7 2,616 25,366 5.2 14,566 10,800 2.6 1,405 9,395 2.5
Passbook statement ............. 95,132 19.3 (9,078) 104,210 21.2 11,464 92,746 22.6 (6,694) 99,440 26.3
Club accounts .................. 1,069 0.2 800 269 0.1 50 219 0.1 7 212 0.1
Money market demand deposits ... 58,394 11.8 13,600 44,794 9.1 11,899 32,895 8.0 1,349 31,546 8.3
Other .......................... 5,573 1.2 1,943 3,630 0.7 872 2,758 0.7 (173) 2,931 0.8
-------- ----- ------- -------- ----- ------- -------- ----- ------- -------- -----
Total transaction accounts .... 203,105 41.2 8,405 194,700 39.6 45,727 148,973 36.3 (4,068) 153,041 40.5
-------- ----- ------- -------- ----- ------- -------- ----- ------- -------- -----
Total deposits .............. $493,334 100.0% $ 2,088 $491,246 100.0% $80,476 $410,770 100.0% $33,211 $377,559 100.0%
======== ===== ======= ======== ===== ======= ======== ===== ======= ======== =====
The following table shows the interest rate and maturity information
for the Bank's certificates of deposit at September 30, 1997.
Over 1 Over 2
1 Year Through Through Over 3
Interest Rate or Less 2 Years 3 Years Years Total
- ------------- ------- ------- ------- ------ -----
(Dollars in Thousands)
3-4%................. $ 3,624 $ 46 $ -- $ -- $ 3,670
4.01-5%.............. 40,463 3,366 5 7 43,841
5.01-6%.............. 166,700 42,069 7,107 4,053 219,929
6% and above......... 7,259 2,140 13,362 28 22,789
-------- ------- ------- ------ --------
Total.............. $218,046 $47,621 $20,474 $4,088 $290,229
======== ======= ======= ====== ========
The following table sets forth the scheduled maturities of the Bank's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1997.
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
Three months or less...................... $ 7,183
Over three through six months............. 6,576
Over six through twelve months............ 6,802
Over twelve months........................ 6,137
-------
Total................................... $26,698
=======
58
The following table sets forth the savings activities of the Bank
during the periods indicated.
September 30, Year Ended December 31,
------------- -------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(In Thousands)
Net decrease before interest credited
and assumption of liabilities $(10,460) $(10,642) $(17,773) $(19,132)
Deposit liabilities acquired................ -- 73,177 33,974 --
Interest credited........................... 12,548 17,941 17,010 12,851
-------- -------- -------- --------
Net (decrease) increase in deposits......... $ 2,088 $ 80,476 $ 33,211 $ (6,281)
======== ======== ======== ========
The following table sets out the average balances in the main
categories of the Bank's deposit base, for the periods indicated.
December 31,
----------------------------------------------------
September 30, 1997 1996 1995 1994
------------------ ---------------- ---------------- ----------------
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
(In Thousands)
Average certificates of deposit....... $289,656 5.35% $271,362 5.18% $251,932 5.16% $220,873 4.04%
-------- -------- -------- --------
Interest-bearing savings deposits..... 99,857 2.20 94,569 2.54 112,269 2.59 106,435 2.50
Money market accounts................. 50,134 3.29 33,841 3.54 28,162 3.09 32,466 3.26
Demand deposit accounts............... 27,387 1.23 16,971 1.74 12,479 1.85 12,221 1.50
Other deposit accounts................ 19,476 0.00 15,195 -- 11,303 -- 9,143 --
-------- -------- -------- --------
Average core deposits................. 196,854 2.12 160,576 2.43 164,213 2.44 160,265 2.44
-------- -------- -------- --------
Total average deposits.............. $486,510 4.05% $431,938 4.15% $416,145 4.09% $381,138 3.37%
======== ======== ======== ========
Borrowings. The Bank may obtain advances from the FHLB of New York upon
the security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending and investment.
In January of 1997, the Board of Directors approved a specific borrowing in the
amount of $30 million for reinvestment in federal agency securities. This
leverage borrowing was affected through a repurchase agreement with a major Wall
Street Broker and Dealer. Management may periodically recommend to the Board
similar borrowing opportunities.
Competition
The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, commercial banks and credit
unions located in central New Jersey, including many large financial
institutions which have greater financial and marketing resources available to
them. The Bank has eight branches in Mercer County, four in Burlington County
and two in Ocean County. In addition, the Bank has faced additional competition
for investors' funds from short-term money market securities and corporate
stocks and bonds. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank competes for loans principally from other savings
institutions, commercial banks, and mortgage banking companies. The Bank
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers. TSBF
also markets asset-based lending products within the same geographic areas.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
59
As of June 30, 1996, 27 commercial banks, 69 credit unions, and 59
savings institutions maintained 568 branch offices in the Bank's market area.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, other savings
associations, and credit unions in its market area. The Bank expects continued
strong competition from such financial institutions in the foreseeable future,
including increased competition from "super-regional" banks entering the market
by purchasing large banks and savings banks, as well as institutions marketing
"non-traditional" investments. Many of these regional institutions have greater
financial and marketing resources available to them than does the Bank. As of
June 30, 1996, the Bank held approximately 1.4% of all deposits held by
commercial banks, credit unions, and savings associations in the Bank's market
area. The Bank competes for savings deposits by offering depositors a high level
of personal service and a wide range of competitively priced financial services.
The competition for real estate and other loans comes principally from
commercial banks, other savings institutions, and mortgage banking companies.
The Bank is one of a large number of institutions that compete for real estate
loans in the Bank's market area. This competition for loans has increased
substantially in recent years. Many of the Bank's competitors have substantially
greater financial and marketing resources available to them than does the Bank.
The Bank competes for real estate loans primarily through the interest rates and
loan fees it charges and advertising.
Properties
At September 30, 1997, the Bank conducted its business from its
corporate center in Lawrenceville, New Jersey, 14 full service branch offices
located in Mercer, Burlington and Ocean Counties, New Jersey and a trust office
in Ocean County, New Jersey. The aggregate net book value of the Bank's premises
and equipment was $6.8 million as of September 30, 1997. The following table
sets forth certain information regarding such offices at September 30, 1997.
Year Leased Lease Expiration
Description/Address Opened Owned Date
- ------------------- ------ ------ ----------------
Administrative Office
134 Franklin Corner Road 1993 Owned
Lawrenceville, New Jersey
Branch Offices
Trenton Branch 1994 Leased July 31, 1999
33 West State Street Three 5-year options
Trenton, New Jersey
Ewing Branch 1976 Leased August 31, 2006
1980 North Olden Avenue One 10-year option
Trenton, New Jersey
Hamilton Branch 1977 Leased April 30, 2007
2465 South Broad Street One 10-year option
Trenton, New Jersey
Robbinsville Branch 1980 Owned
2371 Route 33 & 526
Robbinsville, New Jersey
Lawrenceville Branch 1990 Leased January 31, 2000
2495 Brunswick Avenue Two 5-year options
Lawrenceville, New Jersey
60
Pennington Branch 1991 Owned
2583 Pennington Road
Pennington, New Jersey
Burlington Branch 1983 Owned
332 High Street
Burlington, New Jersey
Mt. Holly Branch 1989 Leased December 20, 2004
501 High Street Three 5-year options
Mt. Holly, New Jersey
Mercerville Branch 1991 Leased March 31, 2001
1750 Whitehorse-Mercerville Road One 5-year option
Mercerville, New Jersey
Leisure Village East 1995 Leased June 30, 2005
1 Dumbarton Drive Two 5-year options
Lakewood, NJ 08701
West Windsor Branch 1996 Leased August 31, 2006
1349 Princeton-Highstown Road Three 5-year options
Cranbury, NJ 08512
Burlington Branch 1988 Owned
1660 Beverly Road
Burlington, NJ 08016
Delanco Branch 1989 Leased August 31, 1999
Burlington Avenue & Coopertown Road Three 5-year options
Delanco, NJ 08075
Leisure Village West Branch 1997 Leased February 28, 2007
3-C Buckingham Drive Two 5-year options
Lakehurst, NJ 08733
Manchester Trust 1997 Leased May 31, 2000
2002 Route 70
Lakehurst, NJ 08733
Legal Proceedings
There are various claims and lawsuits in which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
Personnel
The Bank and its subsidiaries, TSBF and Manchester Trust had 128
full-time employees and 27 part-time employees at September 30, 1997. None of
these employees is party to a collective bargaining agreement, and the Bank
believes that it enjoys good relations with its personnel.
61
REGULATION
As a federally chartered BIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. 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 insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the BIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Holding Company and the Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus plans and an additional 10% of unimpaired capital and
surplus, if such loan is secured by readily- marketable collateral, which is
defined to include certain financial instruments and bullion. The OTS by
regulation has amended the loans to one borrower rule to permit savings
associations meeting certain requirement to extend loans to one borrower in
additional amounts under circumstances limited essentially to loans to develop
or complete residential housing units.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by qualifying
under the Code as a "domestic building and loan association." the Bank is a
domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At September 30, 1997, under the
expanded QTL test, approximately 73.6% of the Bank's portfolio assets were
qualified thrift investments.
Limitation on Capital Distributions. 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, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could,
62
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 earnings 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 earnings for the previous four quarters; provided that the
institution would not be undercapitalized, as that term is defined in the OTS
Prompt Corrective Action regulations, following the capital distribution. Any
additional capital distributions would require prior regulatory approval. In the
event the Bank's capital fell below its fully-phased in requirement or the OTS
notified it that it was in need of more than normal s supervision, the Bank's
ability to make capital distributions could be restricted. 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.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity ratio for the quarter ended September
30, 1997 was 28.8%, which exceeded the then applicable requirements. The Bank
has never been subject to monetary penalties for failure to meet its liquidity
requirements.
Community Reinvestment Act and Fair Lending Laws. Savings association
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received an
outstanding CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and any non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
63
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted a final regulation and Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") to implement the
safety and soundness standards required under the FDI Act. The Guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest that risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million an risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed the date that the component will first
be deducted from an institution's total capital to provide it with an
opportunity to review the interest rate risk approaches taken by the other
federal banking agencies.
64
At September 1997, the Bank met each of its capital requirements, in
each case on a fully phased -in basis. See "Historical and Pro Forma Capital
Compliance" for a table which sets forth in terms of dollars and percentages the
OTS tangible, leverage and risk-based capital requirements, the Bank's
historical amounts and percentages at September 30, 1997, and pro forma amounts
and percentages based upon the issuance of the shares within the Offering Range
and assuming that a portion of the net proceeds are retained by the Company.
Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on development
of a common charter for federal savings association and commercial banks; and,
in the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single deposit insurance fund
on that date. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect the Bank and the Company.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk- based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such e action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. As of September 30, 1997, the Bank was in
compliance with this requirement.
65
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $49.3 million, the reserve requirement is $1.5
million (subject to adjustment by the Federal Reserve Board between 8% and 14%)
against that portion of total transaction accounts in excess of $49.3 million.
The first $4.4 million of otherwise reservable balances (subject to adjustments
by the Federal Reserve Board) are exempted from the reserve requirements. The
Bank is in compliance with the foregoing requirements. The balances maintained
to meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.
Holding Company Regulation
The Company. The Company will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
See "--Federal Regulation of Savings Institutions--Qualified Thrift Lender Test"
for a discussion of the QTL requirements. Upon any non-supervisory acquisition
by the Company of another savings association, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject
to the prior approval of the OTS, and to other activities authorized by OTS
regulation. Recently proposed legislation would treat all savings and loan
holding companies as bank holding companies and limit the activities of such
companies to those permissible for bank holding companies. See "Risk
Factors--Regulatory Oversight and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
66
The Mid-Tier Holding Company and the Mutual Holding Company. The Mutual
Holding Company and the Mid-Tier Holding Company are non-diversified mutual
savings and loan holding companies within the meaning of the HOLA, as amended.
As such, the Mutual Holding Company and the Mid-Tier Holding Company are
registered with the OTS and are subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Mutual Holding Company and the Mid-Tier Holding Company and
any non- savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution.
Pursuant to Section 10(o) of the HOLA and OTS regulations and policy, a
mutual holding company and a federally chartered mid-tier holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company; one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
The HOLA prohibits a savings and loan holding company, including the
Mid-Tier Holding Company and the Mutual Holding Company, directly or indirectly,
or through one or more subsidiaries, from acquiring another savings institution
or holding company thereof, without prior written approval of the OTS. It also
prohibits the acquisition or retention of, with certain exceptions, more than 5%
of a non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. It is
the OTS' recent practice to review dividend waiver notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the
67
savings association determines that the payment of such dividend to the mutual
holding company is probable, an appropriate dollar amount is recorded as a
liability; (iv) the amount of any waived dividend is considered as having been
paid by the savings association in evaluating any proposed dividend under OTS
capital distribution regulations; and (v) in the event the mutual holding
company converts to stock form, the appraisal submitted to the OTS in connection
with the conversion application takes into account the aggregate amount of the
dividends waived by the mutual holding company.
Federal Securities Laws
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended ("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 restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
TAXATION
Federal Income Taxes
General. The Mid-Tier Holding Company and the Bank are, and the Company
will be subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Bank.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of September 30, 1997, was approximately
$2.5 million
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a 8 bank
charter.
68
At September 30, 1997, the Bank's total federal pre-1988 reserve was
approximately $3.5 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 1997, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.
State and Local Taxation
State of New Jersey. The Bank files New Jersey income tax returns. For
New Jersey income tax purposes, savings institutions are presented taxed at a
rate equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey income tax returns.
The Company will be required to file a New Jersey income tax return
because it will be doing business in New Jersey. For New Jersey tax purposes,
regular corporations are presently taxed at a rate equal to 9% of taxable
income. For this purpose, "taxable income" generally means Federal taxable
income subject to certain adjustments (including addition of interest income on
state and municipal obligation). However, if the Company meets certain
requirements, it may be eligible to elect to be taxed as a New Jersey Investment
Company at a tax rate presently equal to 2.25% (25% of 9%) of taxable income.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
69
MANAGEMENT OF THE COMPANY
The Boards of Directors of the Company and the Mid-Tier Holding Company
are divided into three classes and are elected by the stockholders of the
Mid-Tier Holding Company and the Company, respectively, for staggered three year
terms, or until their successors are elected and qualified. One class of
directors, consisting of directors Breithaupt, Longstreth, Stokes and Truesdell
have terms of office expiring in 1998; a second class, consisting of directors
Pruitt, Reinhard and Trainer have terms of office expiring in 1999; and a third
class, consisting of director Sill have terms of office expiring in 2000. Their
names and biographical information are set forth under "Management of the
Bank--Directors."
The following individuals hold positions as executive officers of the
Company and the Mid-Tier Holding Company as is set forth below opposite their
names.
Name Position With the Company
---- -------------------------
Wendell T. Breithaupt.................... Director, President and Chief
Executive Officer
Leo J. Bellarmino........................ Executive Vice President Officer
Richard L. Gallaudet..................... Vice President
Dean H. Lippincott....................... Vice President
Robert Russo............................. Vice President and Treasurer
Robert C. Hollenbeck..................... Vice President and Corporate Secretary
The executive officers of the Mid-Tier Holding Company and 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.
Since the formation of the Mid-Tier Holding Company and the Company,
none of the executive officers, directors or other personnel has received
remuneration from the Mid-Tier Holding Company or the Company. Information
concerning the principal occupations, employment and compensation of the
directors and officers of the Mid-Tier Holding Company and the Company during
the past five years is set forth under "Management of the Bank."
MANAGEMENT OF THE BANK
Directors
The Bank's Board of Directors is composed of eight members. Directors
of the Bank are generally elected to serve for a three year period or until
their respective successors shall have been elected and shall qualify. The
following table sets forth certain information regarding the composition of the
Bank's Board of Directors as of September 30, 1997, including the terms of
office of Board members.
70
Positions
Held in the Director Current Term
Name Age Bank Since (1) to Expire
---- --- ------------ --------- ---------
John B. Sill, Jr. 75 Chairman 1977 2000
Wendell T. Breithaupt 64 Director, President and 1979 1998
Chief Executive Officer
Peter S. Longstreth 53 Director 1992 1998
George A. Pruitt 51 Director 1991 1999
George W. Reinhard 65 Director 1983 1999
Charles E. Stokes, III 67 Director 1978 1998
Raymond E. Trainer 50 Director 1986 1999
Miles W. Truesdell, Jr. 54 Director 1992 1998
-------------------------
(1) Reflects initial appointment to the Board of Directors of the Bank's mutual
predecessor.
Executive Officers Who Are Not Directors
The following table sets forth information regarding the executive
officers of the Bank who are not also directors.
Positions
Held in the
Name Age Bank
---- --- --------
Leo J. Bellarmino 49 Executive Vice President
Richard L. Gallaudet 53 Vice President and Senior Lending Officer
Dean H. Lippincott 45 Vice President
Robert Russo 43 Vice President and Treasurer
Robert C. Hollenbeck 52 Vice President and Corporate Secretary
The principal occupation during the past five years of each director
and executive officer of the Bank is set forth below. All directors have held
their present positions for five years unless otherwise stated.
John B. Sill, Jr. is President of Ivins & Taylor, Inc., funeral
directors located in Trenton, New Jersey.
Wendell T. Breithaupt is President and Chief Executive Officer of the
Bank and serves also as a Director. He has served as President since 1981 and as
Chief Executive Officer since 1982. He has been a Director since 1979. He is a
Director, Chairman of the Executive Committee, and Chairman of the Mercer County
Chamber of Commerce. He is a member of the Mercer County Economic Development
Commission and serves as a trustee of the Drumthwacket Foundation, Inc. and
serves as a member of the Banking Advisory Board of the State of New Jersey. Mr.
Breithaupt serves as a director of RSI Retirement Systems, a New York
corporation.
Peter S. Longstreth is Managing Partner of Aegis Property Group, Ltd.,
a real estate development and project management company.
George A. Pruitt is President of Thomas A. Edison State College.
George W. Reinhard is President of Lester Fellows Co., Inc., an
interstate trucking firm.
Charles E. Stokes, III is the retired President of The Home Rubber
Company, which manufactures mechanical rubber goods, hoses, etc.
Raymond E. Trainer is Chairman of General Sullivan Group, which is an
industrial distribution holding company. He also is a director and secretary of
the TRAF Group which owns a medical collection agency.
71
Miles W. Truesdell, Jr. is a Director and Partner of Truetech Controls,
Inc., which operates as a specialty distributor that services the industrial
market with process control instrumentation.
Executive Officers Who Are Not Directors. Set forth below is a brief
description of the background of each person who serves as an executive officer
of the Bank and who is not a director of the Bank. Unless otherwise noted, all
executive officers who are not directors have held their present position for
five years.
Leo J. Bellarmino is Executive Vice President, responsible for the
Bank's Human Resources, Marketing, Branch Network, Project Planning, Information
Services, Loan Operations, Staff Services and Corporate Finance. He joined the
Bank in October of 1995. He was a former Senior Vice President with CoreStates
New Jersey National Bank where he served in various management capacities,
including division manager of their 140 New Jersey branch offices.
Richard L. Gallaudet is Vice President and Senior Lending Officer,
responsible for the direct management of all the Bank's lending activities. He
joined the Bank in 1990, prior to which he held a number of management positions
with other banks, including three years of service (1986-1989) as President and
Chief Executive Officer of Cherry Hill National Bank and thirteen years of
service (1973-1986) as a Senior Vice President with MidLantic National
Bank/South (formerly Heritage Bank).
Dean H. Lippincott has been Vice President in charge of the Bank's
Mortgage Department since 1988 and has served the Bank in a number of other
capacities since joining it in 1970. His responsibilities include home mortgage
loan originations. He participates as a member of The West Ward Community
Partnership Corp.
Robert Russo is Vice President and Treasurer, responsible for all bank
operations, financial reporting, and accounting systems. He joined the Bank in
1985 as an Assistant Vice President. He has held other positions in the thrift
industry since 1978.
Robert C. Hollenbeck is Vice President and Corporate Secretary
responsible for investor relations, bank investments, budgeting and corporate
regulatory matters. He joined the Bank in November 1994. He has 28 years of
banking experience including 11 years as Executive Vice President and Director
of New Brunswick Savings Bank and five years as Executive Vice President of
Constellation Bank.
Directors Compensation
Fees. Each member of the Board of Directors of the Bank, except Mr.
Breithaupt, is paid a fee of $650 per Board meeting attended and $500 for
attending meetings of the Executive, Examining (Audit) and Emergency Operations
Committees. Directors attending Loan Committee meetings receive $300 per
meeting, directors attending Benefits and Compensation Committee meetings
receive $250 per meeting. The Chairman of the Board receives $900 per meeting of
the Board of Directors and Executive Committee, and the Chairman of the
Examining (Audit) Committee receives $700 per meeting of the Examining (Audit)
Committee. In addition, non-officer directors other than the Chairman are paid
an annual retainer of $5,000, and the Chairman is paid an annual retainer of
$12,000.
1996 Option Plan. During 1996 the Bank and the Mutual Holding Company
adopted the Trenton Savings Bank and Peoples Bancorp, MHC 1996 Stock Option Plan
(the "1996 Option Plan"), which was approved by the Bank's stockholders. Under
the 1996 Option Plan, Directors Sill, Stokes, Reinhard, Trainer, Pruitt,
Longstreth and Truesdell each received options to purchase 12,000 shares of Bank
Common Stock with an exercise price per share for each option equal to the fair
market value of the Bank Common Stock on the date the option was granted, or
$13.50 per share. Of such options, 33,600 options vested during the nine months
ended September 30, 1997. The awards become fully vested upon a director's
disability, death, retirement or following termination of service in connection
with a change in control of the Bank or the Mutual Holding Company. All options
granted under the 1996 Option Plan expire upon the earlier of ten years
following the date of grant or, generally, nine years following the date the
optionee ceases to be a director.
72
1996 Recognition Plan. During 1996 the Bank adopted the Trenton Savings
Bank and Peoples Bancorp, MHC 1996 Recognition and Retention Plan (the "1996
Recognition Plan"), which was approved by the Bank's stockholders. During 1996,
9,364 shares of Bank Common Stock were awarded under the plan to Directors Sill,
Stokes, Reinhard and Trainer, 7,491 shares were awarded to Director Pruitt, and
7,257 shares were awarded to Directors Longstreth and Truesdell. Such
participants vested in 3,746, 2,996, and 2,903 of such shares of Restricted
Stock, respectively, during the nine months ended September 30, 1997. Awards
become fully vested upon a director's disability, death, retirement or following
termination of service in connection with a change in control of the Bank or the
Mutual Holding Company. Unvested shares of Restricted Stock are forfeited by a
non-employee director upon failure to seek reelection, failure to be reelected,
or resignation from the Board. Prior to vesting, recipients of awards under the
1996 Recognition Plan receive dividends and may vote the shares of Restricted
Stock allocated to them.
Executive Compensation
Summary Compensation Table. The following table sets forth for the
years ended December 31, 1996, 1995, and 1994, certain information as to the
total remuneration paid by the Bank to the Chief Executive Officer and executive
officers whose salary and bonuses exceeded $100,000 in 1996 ("Named Executive
Officers").
Long-Term Compensation
---------------------------------
Annual Compensation Awards
----------------------------------- -----------------------
Year Other Restricted Shares All
Name and Ended Annual Com- Stock Underlying LTIP Other
Principal Position(1) Dec. 31, Salary(2) Bonus(3) pensation(4) Awards(5) Options(6) Payouts Compensation(7)
- ---------------------- -------- --------- -------- ------------ --------- ---------- ------- ---------------
Wendell T. Breithaupt... 1996 $187,425 50,000 -- $560,426 78,00 -- 80,712
President and Chief.. 1995 178,500 50,000 -- -- -- -- 80,231
Executive Officer.... 1994 170,000 45,000 -- -- -- -- 78,238
Leo J. Bellarmino....... 1996 $140,000 $10,000 -- -- 34,000 -- $1,713
1995 $ 25,846 -- -- -- -- -- --
- ------------------------------------
(1) No other executive officer received salary and bonuses that in the
aggregate exceeded $100,000.
(2) Includes amounts deferred at the election of the named executive officer
pursuant to the Bank's 401(k) Plan.
(3) Includes amounts earned during the year and awarded pursuant to the Bank's
Profit Sharing Plan. Payments pursuant to the Profit Sharing Plan are
reflected in the year earned, rather than the year in which the payment is
received.
(4) The Bank provides certain members of senior management with the use of an
automobile and other personal benefits which have not been included in the
table. The aggregate amount of such other benefits did not exceed the
lesser of $50,000 or 10% of each Named Executive Officer's cash
compensation.
(5) Includes awards of 41,513 shares of restricted stock to Mr. Breithaupt,
16,605 shares of which vested during the nine months ended September 30,
1997. The value of the awards is based on the last sale price of the Bank
Common Stock on the date of the award. Dividends are paid to the holder of
the restricted stock. As of December 31, 1996, the fair market value of the
shares of restricted stock held by Mr. Breithaupt was $664,208.
(6) Of such options held by Mr. Breithaupt and Bellarmino, 31,200 and 13,600
options, respectively, vested during the nine months ended September 30,
1997.
(7) Includes the Bank's contribution to the 401(k) Plan and the Bank's
Supplemental Executive Retirement Plan, and insurance premiums paid by the
Bank on behalf of Named Executive Officers.
Benefit Plans
1996 Stock Option Plan. The Bank's 1996 Option Plan is available to
directors and officers and other employees of the Bank and its affiliates. The
plan is administered by a committee of outside directors. The plan authorizes
the grant of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 (the "Code"), "non-statutory options," which do
not qualify as incentive stock options, and certain "Limited Rights,"
exercisable only upon a change in control of the Bank or the Mutual Holding
Company. The following table sets forth certain information regarding awards
under the 1996 Option Plan and information regarding the shares acquired and the
value realized during 1996 by Named Executive Officers upon exercise of options
and the number of shares of Bank Common Stock underlying options and the value
of options held by Named Executive Officers at December 31, 1996.
73
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
at Assumed Annual Rates
Individual Grants of Stock Price Appreciation
for Option Term
- -----------------------------------------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted to
Underlying Employees in FY Exercise or Expiration
Name Options 1996 Base Price Date 5 10
- -----------------------------------------------------------------------------------------------------------------------------
Wendell T. Breithaupt 78000 52.0% $13.50 August 2006 $979,680 $2,183,990
Leo J. Bellarmino 34000 22.7% $13.50 August 2006 $427,040 $952,000
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of Securities
Shares Value Underlying Unexercised Value of Unexercised In-
Name Acquired Realized Options at The-Money Options at
Upon Exercise Fiscal Year-End Fiscal Year-End (1)
--------------- -------------------
Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
Wendell T. Breithaupt -- -- 0/78,000 $ 0/195,000
Leo J. Bellarmino -- -- 0/34,000 $ 0/85,000
(1) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Bank Common Stock that
would be received upon exercise, assuming such exercise occurred on
December 31, 1996, on which date the last sale of the Bank Common Stock was
at a price of $16.00.
Employment Memoranda. Mr. Breithaupt is a party to a memorandum
relating to compensation authorized by the Board of Directors and executed by
the then members of the Compensation Committee and Mr. Breithaupt dated August
27, 1994. The memorandum provides for employment by Mr. Breithaupt at the Bank
through December 31, 1999, with compensation continued through date. Pursuant to
that memorandum, provided performance is satisfactory, Mr. Breithaupt is
guaranteed a base salary of at least $170,000 per annum during this period plus
an annual payment, intended to be invested by him to supplement his retirement
income, of $70,000 per annum payable prior to each January 30 following the
completion of each year of service or, at his option, in monthly installments.
In addition, the memorandum also contemplates eligibility for an annual bonus of
up to $50,000 depending on obtaining strategic and operational goals. Bonuses,
if earned and awarded, are to be paid no later than ninety days following
conclusion of each fiscal year during this period. The memorandum will be
superseded by an employment agreement that will be entered into in connection
with the Reorganization. See "--Employment Agreements."
Retirement Plan. The Bank maintains a defined benefit pension plan
("Retirement Plan") for all employees who have attained the age of 21 and have
completed one year of service with the Bank. In general, the Retirement Plan
provides for annual benefits payable monthly upon retirement at age 65 in an
amount equal to 1.65% of the "Average Compensation" of the employee (which is
equal to the average of the total compensation paid to him or her during the 60
consecutive calendar months within the final 120 consecutive calendar months of
service affording the highest average), for each year of service, plus, if
applicable, 0.65% of Average Compensation in excess of an employee's average
social security taxable wage base for each year of the 35 year period ending
with the employee's social security retirement age, multiplied by his or her
years of service, not in excess of 25 years.
Under the Retirement Plan, an employee's benefits are unvested prior to
the completion of five years of service and are fully vested after five years of
service. A year of service is any year in which an employee works a minimum of
1,000 hours. The Retirement Plan provides for an early retirement option with
reduced benefits for
74
participants who are age 55 and who have 15 years of service. The
Bank's contribution for the Retirement Plan for 1996 was $188,285, 1995 was
$168,308, and for 1994 was $115,000.
The following table illustrates annual pension benefits for retirement
at age 65 under various levels of compensation and years of service. The figures
in the table assume that the Retirement Plan continues in its present form, that
the participants retire at age 65 and that the participants elect a straight
life annuity form of benefit.
Five Year
Average 10 Years of 15 Years of 20 Years of 25 Years of
Compensation Service Service Service Service
- ------------ ------- ------- ------- -------
$ 40,000 $ 7,295 $ 10,942 $ 14,590 $ 18,238
50,000 9,595 14,392 19,190 23,988
60,000 11,895 17,842 23,790 29,738
70,000 14,195 21,292 28,390 35,488
80,000 16,495 24,742 32,990 41,238
90,000 18,795 28,192 37,590 46,988
100,000 21,095 31,642 42,190 52,738
110,000 23,395 35,092 46,790 58,488
120,000 25,695 38,542 51,390 64,238
130,000 27,995 41,992 55,990 69,988
140,000 30,295 45,442 60,590 75,738
150,000 32,595 48,892 65,190 81,488
160,000 34,895 52,342 69,780 87,238
The maximum annual compensation which may be taken into account under
the Code (as adjusted from time to time by the IRS) for calculating
contributions under qualified defined benefit plans is currently $160,000, and
the maximum annual benefit permitted under such plan is currently $125,000.
At September 30, 1997, Mr. Breithaupt had 18 years of service under the
Retirement Plan, and his five-year average compensation was $160,000 (as limited
by the tax law requirements).
Employee Stock Ownership Plan and Trust. The Bank has established an
Employee Stock Ownership Plan and Related Trust ("ESOP") for eligible employees
in connection with the Offering. Messrs. Breithaupt and Bellarmino have
voluntarily agreed not to participate in the ESOP. The ESOP is a tax-qualified
plan subject to the requirements of the Employee Retirement Income Security Act
of 1974 ("ERISA") and the Code. Employees with a 12-month period of employment
with the Bank during which they worked at least 1,000 hours and who have
attained age 21 are eligible to participate. As part of the Offering, the ESOP
plans to borrow funds from the Company and use the funds to purchase up to 4% of
the Common Stock to be issued in the Offering. Collateral for the loan will be
the Common Stock purchased by the ESOP. The loan will be repaid principally from
the Bank's contributions to the ESOP over a period of at least twelve years. The
interest rate for the loan will be the prime rate. Shares purchased by the ESOP
will be held in a suspense account for allocation among participants as the loan
is repaid.
Contributions to the ESOP and shares released from the suspense account
in an amount proportionate to the repayment of the ESOP loan will be allocated
among participants on the basis of compensation in the year of allocation, up to
an annual adjusted maximum level of compensation. Benefits generally become 100%
vested after five years of credited service or upon death, retirement, early
retirement, disability or in the event of a change in control of the Bank or the
Company. A participant who terminates employment before becoming fully vested
will forfeit the nonvested portion of their account balance. Forfeitures will be
reallocated among remaining participating employees in the same proportion as
contributions. The Bank's contributions to the ESOP are discretionary, subject
to the loan terms and tax law limits and, therefore, benefits payable under the
ESOP cannot be estimated.
75
In connection with the establishment of the ESOP, a committee will be
selected by the Bank to administer the ESOP (the "ESOP Committee"). In addition,
a trustee for the ESOP will be appointed. The trustee may be an unrelated
corporate trustee or may consist of nonemployee directors of the Bank. The ESOP
trustee will vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees, and unallocated shares and shares
held in the suspense account in a manner calculated to most accurately reflect
the instructions the ESOP trustee has received from participants regarding the
allocated stock, subject to and in accordance with the fiduciary duties under
ERISA owed by the ESOP trustee to the ESOP participants. Under ERISA, the
Secretary of Labor is authorized to bring an action against the ESOP trustee for
the failure of the ESOP trustee to comply with its fiduciary responsibilities.
Such a suit could seek to enjoin the ESOP trustee from violating its fiduciary
responsibilities and could result in the imposition of civil penalties or
criminal penalties if the breach is found to be willful.
1998 Stock Option Plan. At a meeting of the Company's shareholders to
be held at least six months after the completion of the Offering, the Board of
Directors intends to submit for shareholder approval the 1998 Stock Option Plan
for directors and officers of the Bank and of the Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10% of the shares
sold in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the 1998 Stock Option Plan. Ten
percent of the shares sold in the Offering would amount to 1,496,106 shares,
1,760,134 shares, 2,024,162 shares or 2,327,780 shares at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively. No options
would be granted under the 1998 Stock Option Plan until the date on which
shareholder approval is received.
The exercise price of the options granted under the 1998 Stock Option
Plan will be equal to the fair market value of the shares on the date of grant
of the stock options. If the 1998 Stock Option Plan is adopted within one year
following the Offering, options will become exercisable at a rate of 20% at the
end of each twelve months of service with the Bank after the date of grant,
subject to early vesting in the event of death or disability. Options granted
under the 1998 Stock Option Plan would be adjusted for capital changes such as
stock splits and stock dividends. Notwithstanding the foregoing, awards will be
100% vested upon termination of employment due to death or disability, and if
the 1998 Stock Option Plan is adopted more than 12 months after the Offering,
awards would be 100% vested upon normal retirement or a change in control of the
Bank or the Company. Under OTS rules, if the 1998 Stock Option Plan is adopted
within the first 12 months after the Offering, no individual officer can receive
more than 25% of the awards under the plan, no outside director can receive more
than 5% of the awards under the plan, and all outside directors as a group can
receive no more than 30% of the awards under the plan in the aggregate.
The 1998 Stock Option Plan would be administered by a Committee of
non-employee members of the Company's Board of Directors. Options granted under
the 1998 Stock Option Plan to employees could be "incentive" stock options
designed to result in a beneficial tax treatment to the employee but no tax
deduction to the Company. Non-qualified stock options could also be granted
under the 1998 Stock Option Plan, and will be granted to the non-employee
directors who receive grants of stock options. In the event an option recipient
terminated his employment or service as an employee or director, the options
would terminate during certain specified periods.
1998 Recognition Plan. At a meeting of the Company's shareholders to be
held at least six months after the completion of the Offering, the Board of
Directors also intends to submit a Recognition and Retention Plan (the "1998
Recognition Plan") for shareholder approval. The 1998 Recognition Plan will
provide the Bank's directors and officers an ownership interest in the Company
in a manner designed to encourage them to continue his or her service with the
Bank. The Bank will contribute funds to the1998 Recognition Plan from time to
time to enable it to acquire an aggregate amount of Common Stock equal to up to
4% of the shares of Common Stock sold in the Offering, either directly from the
Company or in open market purchases. Four percent of the shares sold in the
Offering would amount to 598,442 shares, 704,054 shares, 809,665 or 931,112
shares at the minimum, midpoint, maximum and adjusted maximum of the Offering
Range, respectively. In the event that additional authorized but unissued shares
would be acquired by the 1998 Recognition Plan after the Offering, the interests
of existing shareholders would be diluted. The executive officers and directors
will be awarded Common Stock under the 1998 Recognition Plan without having to
pay cash for the shares. No awards under the 1998 Recognition Plan would be made
until the date the 1998 Recognition Plan is approved by the Company's
shareholders.
76
Awards under the 1998 Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. If the 1998 Recognition Plan is adopted within one year following the
Offering, the shares which are subject to an award would vest and be earned by
the recipient at a rate of 20% of the shares awarded at the end of each full 12
months of service with the Bank after the date of grant of the award. Awards
would be adjusted for capital changes such as stock dividends and stock splits.
Notwithstanding the foregoing, awards would be 100% vested upon termination of
employment or service due to death or disability, and if the 1998 Recognition
Plan is adopted more than 12 months after the Offering, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
If employment or service were to terminate for other reasons, the award
recipient would forfeit any nonvested award. If employment or service is
terminated for cause (as would be defined in the 1998 Recognition Plan), shares
not already delivered under the 1998 Recognition Plan would be forfeited. Under
OTS rules, if the 1998 Recognition Plan is adopted within the first 12 months
after the Offering, no individual officer can receive more than 25% of the
awards under the plan, no outside director can receive more than 5% of the
awards under the plan, and all outside director as a group can receive no more
than 30% of the awards under the plan in the aggregate.
When shares become vested under the 1998 Recognition Plan, the
participant will recognize income equal to the fair market value of the Common
Stock earned, determined as of the date of vesting, unless the recipient makes
an election under ss. 83(b) of the Code to be taxed earlier. The amount of
income recognized by the participant would be a deductible expense for tax
purposes for the Company. If the 1998 Recognition Plan is adopted within one
year following the Offering, dividends and other earnings will accrue and be
payable to the award recipient when the shares vest. If the 1998 Recognition
Plan is adopted within one year following the Offering, shares not yet vested
under the 1998 Recognition Plan will be voted by the trustee of the 1998
Recognition Plan, taking into account the best interests of the recipients of
the 1998 Recognition Plan awards. If the 1998 Recognition Plan is adopted more
than one year following the Offering, dividends declared on unvested shares will
be distributed to the participant when paid, and the participant will be
entitled to vote the unvested shares.
Employment Agreements. Upon completion of the Offering, it is
anticipated that the Bank will enter into substantially identical employment
agreements with Messrs. Breithaupt and Bellarmino. Each of the agreements will
have a term of 36 months. On each anniversary date, the agreement may be
extended for an additional twelve months, so that the remaining term shall be 36
months. If the agreement is not renewed, the agreement will expire 36 months
following the anniversary date. Under the agreements, the current Base Salaries
for Messrs. Breithaupt and Bellarmino will be $196,800 and $140,000,
respectively. The Base Salary may be increased but not decreased. In addition to
the Base Salary, the agreement provides for, among other things, participation
in retirement plans and other employee and fringe benefits applicable to
executive personnel. The agreement provides for termination by the Bank for
cause at any time. In the event the Bank terminates the executive's employment
for reasons other than for cause, or in the event of the executive's resignation
from the Bank upon (i) failure to re-elect the executive to his current offices,
(ii) a material change in the executive's functions, duties or responsibilities,
or relocation of his principal place of employment by more than 30 miles, (iii)
liquidation or dissolution of the Bank, (iv) a breach of the agreement by the
Bank, or (v) following a change in control of the Bank or the Company, the
executive, or in the event of death, his beneficiary, would be entitled to
severance pay in an amount equal to three times (or, in the event of a change in
control, 2.99 times) the average of the five preceding years. Base Salary,
including bonuses and any other taxable compensation and the amount of any
contributions made to any employee benefit plan. The Bank would also continue
the executive's life, health, dental and disability coverage for 36 months from
the date of termination. In the event the payments to the executive would
include an "excess parachute payment" as defined by Code Section 280G (relating
to payments made in connection with a change in control), the payments would be
reduced in order to avoid having an excess parachute payment.
Upon the executive's retirement, he will be entitled to all benefits
available to him under any retirement or other benefit plan maintained by the
Bank. In the event of the executive's disability for a period of six months, the
Bank may terminate the agreement provided that the Bank will be obligated to pay
him his Base Salary, including bonuses and other cash compensation paid to the
Executive during such period, for the remaining term of the agreement or one
year, whichever is longer, reduced by any benefits paid to the executive
pursuant to any disability insurance policy or similar arrangement maintained by
the Bank. In the event of the executive's death, the Bank will pay his Base
Salary to his named beneficiaries for one year following his death, and will
also continue medical, dental,
77
and other benefits to his family for one year. The employment agreement provides
that, following his termination of employment for reasons unrelated to a change
in control, the executive will not compete with the Bank for a period of one
year.
Severance Agreements. Upon completion of the Offering, it is
anticipated that the Bank will enter into Severance Agreements (the "Severance
Agreements") with certain executives of the Bank which would provide certain
benefits in the event of a change in control of the Bank or the Company. The
Severance Agreements would provide for up to a one-year term. Commencing on each
anniversary date, the Board of Directors may extend any Severance Agreement for
an additional year. The Severance Agreements would enable the Bank to offer to
designated officers certain protections against termination without cause in the
event of a change in control. These protections against termination without
cause in the event of a change in control are frequently offered by other
financial institutions, and the Bank may be at a competitive disadvantage in
attracting and retaining key employees if it does not offer similar protections.
Although the Severance Agreements may have the effect of making a takeover more
expensive to an acquiror, the Bank believes that the benefits of enhancing the
Bank's ability to attract and retain qualified management persons by offering
the Severance Agreements outweighs any disadvantage of such agreements.
Following a change in control of the Company or the Bank, an officer
would be entitled to a payment under the Severance Agreement if the officer
voluntarily or involuntarily terminates employment during the term of such
agreement, other than for cause, as defined. In the event that an officer who is
a party to a Severance Agreement is entitled to receive payments pursuant to the
Severance Agreement, he would receive a cash payment up to a maximum of three
times the average of the three preceding years' annual base salary and bonuses.
In addition to the severance payment, each covered officer would be entitled to
receive life, health, dental and disability coverage for a period of up to 12
months from the date of termination. Notwithstanding any provision to the
contrary in the Severance Agreement, payments under the Severance Agreements are
limited so that they will not constitute an excess parachute payment under
Section 280G of the Internal Revenue Code.
Indebtedness of Management
All loans made by the Bank to the Bank's directors, executive officers,
and members of such persons' families were made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of collectibility or
present other unfavorable factors. All such loans comply with federal
regulations relating to loans to such persons.
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Mid-Tier Common Stock
The following table includes, as of December 1, 1997, certain
information as to the Mid-Tier Common Stock beneficially owned by (i) the only
persons or entities, including any "group" as that term issued in Section
13(d)(3) of the Exchange Act, who or which was known to the Mid-Tier Holding
Company to be the beneficial owner of more than 5% of the issued and outstanding
Mid-Tier Common Stock, (ii) the directors of the Mid-Tier Holding Company and
the Bank, (iii) certain executive officers of the Mid-Tier Holding Company and
the Bank, and (iv) all directors and executive officer of the Bank as a group.
For information concerning proposed subscriptions by directors and executive
officers and the anticipated ownership of Common Stock by such persons upon
consummation of the Conversion, see "--Subscriptions by Executive Officers and
Directors."
78
Name of Beneficial Amount and Nature Percent of
Ownership or Number of Beneficial Ownership Mid-Tier
of Persons in Group (1)(2)(3)(4)(5) Common Stock
------------------- --------------- ------------
Peoples Bancorp, MHC............................... 5,796,000 64.1
134 Franklin Corner Road
Trenton, New Jersey
John B. Sill, Jr................................... 21,664 *
Wendell T. Breithaupt.............................. 72,389 *
Peter S. Longstreth................................ 35,057 *
George A. Pruitt................................... 12,547 *
George W. Reinhard................................. 120,864 1.3
Charles E. Stokes, III............................. 18,164 *
Raymond E. Trainer................................. 44,770 *
Miles W. Truesdell, Jr............................. 32,057 *
Leo J. Bellarmino.................................. 13,870 *
Richard L. Gallaudet............................... 15,146 *
Dean H. Lippincott................................. 16,169 *
Robert Russo....................................... 9,094 *
Robert C. Hollenbeck............................... 10,532 *
---------- -----
All directors and executive officers as a group (13 persons) 422,323 4.7%
========== =====
* Less than 1%
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. In accordance with Rule 13d-3
under the Exchange Act, a person is deemed to be the beneficial owner for
purposes of this table, of any shares of common stock if he has shared
voting or investment power with respect to such security, or has a right to
acquire beneficial ownership at any time within 60 days from the date as to
which beneficial ownership is being determined. As used herein, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares.
Includes all shares held directly as well as by spouses and minor children,
in trust and other indirect ownership, over which shares the named
individuals effectively exercise sole or shared voting and investment
power.
(2) The executive officers and directors of the Bank and the Mid-Tier Holding
Company are also executive officers and directors of Peoples Bancorp,
M.H.C.
(3) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Mid-Tier Common Stock which may be acquired
within 60 days of the date as of which beneficial ownership is being
determined pursuant to the exercise of outstanding stock options. Shares of
Mid-Tier Common Stock which are subject to stock options are deemed to be
outstanding for the purpose of computing the percentage of outstanding
Mid-Tier Common Stock owned by such person or group but not deemed
outstanding for the purpose of computing the percentage of Mid-Tier Common
Stock owned by any other person or group.
(4) Includes the following amounts of unvested shares of restricted stock
awarded under the 1996 Recognition Plan which may be voted by the recipient
pending vesting and distribution: Mr. Sill 5,618 shares; Mr. Breithaupt
24,907 shares; Mr. Longstreth 4,353 shares; Mr. Pruitt 4,494 shares; Mr.
Reinhard 5,618 shares; Mr. Stokes 5,618 shares; Mr. Trainer 5,618 shares;
Mr. Truesdell 4,353 shares; Mr. Gallaudet 2,931 shares; Mr. Lippincott
3,019 shares; Mr. Russo 2,664 shares; and Mr. Hollenbeck 2,399 shares.
Includes the following number of shares of Mid-Tier Common Stock underlying
options that are exercisable within 60 days of the date of which beneficial
ownership is being determined: Mr. Sill 4,800 shares; Mr. Breithaupt 23,793
shares; Mr. Longstreth 4,800 shares; Mr. Pruitt 4,800 shares; Mr. Reinhard
4,800 shares; Mr. Stokes 4,800 shares; Mr. Trainer 4,800 shares; Mr.
Truesdell 4,800 shares; Mr. Bellarmino 11,544 shares; Mr. Gallaudet 4,000
shares; and Mr. Russo 3,200 shares.
79
Subscriptions by Executive Officers and Directors
The following table sets forth, for each of the Company's directors and
executive officers and for all of the directors and executive officers as a
group, (i) the number of Exchange Shares to be held upon consummation of the
Conversion, based upon their beneficial ownership of the Mid-Tier Common Stock
as of October 31, 1997, (ii) the proposed purchases of Subscription Shares,
assuming sufficient shares are available to satisfy their subscriptions, and
(iii) the total amount of Common Stock to be held upon consummation of the
Conversion in each case assuming that Subscription Shares are sold at the
midpoint of the Offering Range.
Proposed Purchases of Total Common Stock
Number of Conversion Stock (1) To Be Held
--------------------- ------------------------
Exchange Shares Number Number Percentage
To be Held(2)(3) Amount of Shares of Shares of Total
---------------- ------ --------- --------- --------
John B. Sill, Jr............... 62,652 $ 60,000 6,000 68,652 0.3%
Wendell T. Breithaupt.......... 209,349 -- -- 209,349 0.8%
Peter S. Longstreth............ 101,385 -- -- 101,385 0.4%
George A. Pruitt............... 36,286 -- -- 36,286 0.1%
George W. Reinhard............. 349,539 400,000 50,000 389,539 1.4%
Charles E. Stokes, III......... 52,530 -- -- 52,530 0.2%
Raymond E. Trainer............. 129,475 180,000 18,000 147,475 0.6%
Miles W. Truesdell, Jr......... 92,709 100,000 10,000 102,709 0.4%
Leo J. Bellarmino.............. 40,112 -- -- 40,112 0.2%
Richard L. Gallaudet........... 43,802 10,000 1,000 44,802 0.2%
Dean H. Lippincott............. 46,761 -- -- 46,761 0.2%
Robert Russo................... 26,300 10,000 1,000 27,300 0.1%
Robert C. Hollenbeck........... 30,459 -- -- 30,459 0.1%
--------- -------- --------- --------- --------
Total..................... 1,221,358 $760,000 76,000 1,297,358 4.8%
========= ======== =========
- ----------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription order by the ESOP. Intended purchases by the ESOP are expected
to be 4% of the shares issued in the Offering. P
(2) Includes shares underlying options that may be exercised within 60 days of
the date as of which ownership is being determined, and vested and unvested
shares of restricted stock. See "--Beneficial Ownership of Mid-Tier Common
Stock."
(3) Does not include stock options and awards that may be granted under the
Company's 1998 Stock Option Plan and 1998 Recognition Plan if such plans
are approved by stockholders at an annual meeting or special meeting of
shareholders at least six months following the Conversion. See "Management
of the Bank--New Benefits Plans."
THE CONVERSION
THE BOARD OF DIRECTORS OF THE MUTUAL HOLDING COMPANY, AND THE OTS, HAVE
APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE
MUTUAL HOLDING COMPANY ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH AGENCY.
General
On September 24, 1997, the Board of Directors of the Mutual Holding
Company adopted the Plan of Conversion, pursuant to which the Mutual Holding
Company will be converted from a federally chartered mutual holding company to
the Company, a Delaware stock corporation. It is currently intended that all of
the capital stock of the Bank will be held by the Company. The Plan was approved
by the OTS, subject to, among other things, approval of the Plan by the Mutual
Holding Company's members. The Special Meeting of Members has been called for
this purpose.
As part of the Conversion each of the Minority Shares shall
automatically, without further action by the holder thereof, be converted into
and become a right to receive a number of shares of Common Stock determined
pursuant to the Exchange Ratio described herein. See "--Share Exchange Ratio."
Pursuant to the Plan of Conversion, the
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Conversion will be effected as follows or in any other manner that is consistent
with applicable federal law and regulations and the intent of the Plan of
Conversion. Except for step (i), each of the following steps in the Conversion
will be completed contemporaneously on the Effective Date.
(i) The Bank will establish the Company as a first-tier Delaware chartered
stock holding company subsidiary.
(ii) The Company will charter an interim federal association ("Interim").
(iii)The Mutual Holding Company will merge with and into the Mid-Tier
Holding Company (the "MHC Merger"), shares of Mid-Tier Common Stock
held by the Mutual Holding Company will be canceled and each Eligible
Account Holder and Supplemental Eligible Account Holder will receive
an interest in a Liquidation Account of the Mid-Tier Holding Company
in exchange for such person's interest in the Mutual Holding Company.
(iv) The Mid-Tier Holding Company will merge with and into the Bank (the
"Mid-Tier Merger") with the Bank as the resulting entity and (i)
Minority Stockholders will constructively receive shares of Bank
Common Stock in exchange for their Mid-Tier Common Stock and (ii) each
Eligible Account Holder and Supplemental Eligible Account Holder will
receive an interest in a Liquidation Account of the Bank in exchange
for such person's interest in the Mid-Tier Holding Company.
(v) Contemporaneously with the Mid-Tier Merger, Interim will merge with
and into the Bank with the Bank as the surviving entity (the "Bank
Merger"). Constructive shareholders of the Bank (i.e., Minority
Stockholders immediately prior to the Conversion) will exchange the
shares of Bank Common Stock that they constructively received in the
Mid-Tier Merger for Common Stock pursuant to the Exchange Ratio.
(vi) Contemporaneously with the Bank Merger, the Company will sell the
Subscription Shares in the Offering.
The Company expects to receive the approval of the OTS to become a
savings and loan holding company and to own all of the common stock of the Bank.
The Company intends to contribute at least 50% of the net proceeds of the
Offering to the Bank. The Conversion will be effected only upon completion of
the sale of all of the shares of Common Stock to be issued pursuant to the Plan.
The Plan provides generally for consummation of the Conversion in
accordance with the steps set forth above. As part of the Conversion the Company
will offer shares of Common Stock for sale in the Subscription Offering to
Eligible Account Holders, the Bank's ESOP and 401(k) Plan. Supplemental Eligible
Account Holders and Other Members. Subject to the prior rights of these holders
of subscription rights, the Company will offer Common Stock for sale in a
concurrent Community Offering to certain members of the general public, with a
preference given to Minority Stockholders and then to natural persons residing
in the Community. The Bank has the right to accept or reject, in whole or in
part, any orders to purchase shares of the Common Stock received in the
Community Offering. The Community Offering must be completed within 45 days
after the completion of the Subscription Offering unless otherwise extended by
the OTS. See "--Community Offering."
The number of shares of Common Stock to be issued in the Offering will
be determined based upon an independent appraisal of the estimated pro forma
market value of the Common Stock of the Company. All shares of Common Stock to
be issued and sold in the Offering will be sold at the same price. The
Independent Valuation will be updated and the final number of the shares to be
issued in the Offering will be determined at the completion of the Offering. See
"--Stock Pricing and Number of Shares to be Issued" for more information as to
the determination of the estimated pro forma market value of the Common Stock.
This summary of the Conversion is qualified in its entirety by
reference to the provisions of the Plan of Conversion. A copy of the Plan of
Conversion is available for inspection at each branch of the Bank and at the
81
Northeast Region and Washington, D.C. offices of the OTS. The Plan of Conversion
is also filed as an Exhibit to the Application to Convert from Mutual to Stock
Form of which this Prospectus is a part, copies of which may be obtained from
the OTS. See "Additional Information."
Purposes of Conversion
The Board of Directors unanimously determined to conduct the Conversion
because it believed that the market for equity securities in financial services
companies was at an unprecedented level and that the Bank (together with the
Company, the "Converted Institution") could raise substantial funds from such a
transaction. The Board of Directors believed that maximizing such proceeds is in
the best interests of the Converted Institution because such proceeds can be
used to increase the net income of the Converted Institution though investment
and eventual leveraging of the proceeds, and support the possible expansion of
the Bank's existing franchise through internal growth or the acquisition of
branch offices or other financial institutions. Management believed that
acquisition opportunities would increase as a result of the Conversion because
the Converted Institution would have substantially more capital following the
Conversion. The Bank has acquired two financial institutions since September 30,
1996, and the Company and the Bank intend to actively explore additional
acquisitions, although neither the Company nor the Bank has any specific plans,
arrangements or understandings regarding any additional expansions or
acquisitions at this time, nor have criteria been established to identify
potential candidates for acquisition. In addition, the Board considered that
there was no assurance that the pricing for financial services stocks would
continue at such favorable levels, and that if the market were to become less
favorable, the amount of capital that could be raised in the Conversion might be
substantially reduced. See "Risk Factors--Potential Low Return on Equity" and "
Uncertainty as to Future Growth Opportunities."
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and regulatory approval of an offering, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present time,
the Company has no plans with respect to additional offerings of securities,
other than the issuance of additional shares upon exercise of stock options.
Following the Conversion, the Company will also be able to use stock-related
incentive programs to attract and retain executive and other personnel for
itself and its subsidiaries.
Approvals Required
The affirmative vote of a majority of the total eligible votes of the
members of the Mutual Holding Company at the Special Meeting of Members is
required to approve the Plan of Conversion. By their approval of the Plan of
Conversion the members of the Mutual Holding Company will also be deemed to
approve the mergers that are incident to the Conversion. The affirmative vote of
the holders of (i) at least two-thirds of the outstanding common stock of the
Mid-Tier Holding Company and (ii) a majority of the Minority Shares at the
Special Meeting of Stockholders is required to approve the Plan of Conversion.
Consummation of the Conversion is also subject to the approval of the OTS.
Share Exchange Ratio
OTS regulations and policy provide that in a conversion of a mutual
holding company to stock form, stockholders other than the mutual holding
company will be entitled to exchange their shares of subsidiary savings bank (or
mid-tier holding company) common stock for common stock of the converted holding
company, provided that the bank and the mutual holding company demonstrate to
the satisfaction of the OTS that the basis for the exchange is fair and
reasonable. The Boards of Directors of the Bank and the Company have determined
that each Minority Share will on the Effective Date be automatically converted
into and become the right to receive a number of Exchange Shares determined
pursuant an exchange ratio (the "Exchange Ratio") which was established as the
ratio that ensures that after the Conversion, subject to the Dividend Waiver
Adjustment described below and a slight adjustment to reflect the receipt of
cash in lieu of fractional shares, the percentage of the to-be outstanding
shares of Common Stock issued to Minority Stockholders in exchange for their
Minority Shares will be equal to the percentage of the Mid-Tier Common
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Stock held by Minority Stockholders immediately prior to the Conversion. The
total number of shares held by Minority Stockholders after the Conversion would
also be affected by any purchases by such persons in the Offering.
The Dividend Waiver Adjustment affects the percentage of the to-be
outstanding shares of Common Stock issued in exchange for Minority Shares to
reflect (i) the aggregate amount of dividends waived by the Mutual Holding
Company and (ii) assets other than Mid-Tier Common Stock held by the Mutual
Holding Company. Pursuant to the Dividend Waiver Adjustment, the percentage of
the to-be outstanding shares of Common Stock issued to Minority Stockholders in
exchange for their Minority Shares (the "Adjusted Minority Ownership
Percentage") is equal to the percentage of the Mid-Tier Common Stock held by
Minority Stockholders multiplied by the Dividend Waiver Fraction. The Adjusted
Majority Ownership Percentage is equal to the Adjusted Minority Ownership
Percentage. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Mid-Tier Holding Company's
stockholders' equity at the time of the Conversion less the aggregate amount of
dividends waived by the Mutual Holding Company and the denominator is equal to
the Mid-Tier Holding Company's stockholders' equity at the time of the
Conversion, and (b) a fraction, of which the numerator is equal to the appraised
pro forma market value of the Common Stock minus the value of the Mutual Holding
Company's assets other than Mid-Tier Common Stock and the denominator is equal
to the pro forma market value of the Common Stock. FinPro determined the value
of the Mutual Holding Company's assets other Mid-Tier Common Stock to be
insignificant and not require and adjustment.
Based on the 35.9% of the outstanding shares of the Mid-Tier Common
Stock held by Minority Stockholders as of December 1, 1997, the $3.9 million of
dividends waived by the Mutual Holding Company as of December 1, 1997, the
$21,000 of assets other than Mid-Tier Common Stock held by the Mutual Holding
Company as of December 1, 1997, and the Independent Valuation, the following
table sets forth, at the minimum, midpoint, maximum, and adjusted maximum of the
Offering Range, the following: (i) the total number of Subscription Shares and
Exchange Shares to be issued in the Conversion, (ii) the percentage of Common
Stock outstanding after the Conversion that will be sold in the Offering and
issued in the Share Exchange, and (iii) the Exchange Ratio.
Subscription Shares Exchange Shares Total Shares
to be Issued to be Issued of Common
------------ ------------ Stock to be Exchange
Amount Percent Amount Percent Outstanding Ratio
------ ------- ------ ------- ----------- -----
Minimum.................... 14,961,058 65.2% 7,988,942 34.8% 22,950,000 2.4578
Midpoint................... 17,601,341 65.2% 9,398,659 34.8% 27,000,000 2.8915
Maximum.................... 20,241,623 65.2% 10,808,377 34.8% 31,050,000 3.3252
Adjusted maximum........... 23,277,802 65.2% 12,429,698 34.8% 35,707,500 3.8240
Options to purchase Minority Shares will also be converted into and
become options to purchase Common Stock. As of December 1, 1997, there were
outstanding options to purchase 294,637 Minority Shares. The number of shares of
Common Stock to be received upon exercise of such options will be determined
pursuant to the Exchange Ratio. The aggregate exercise price, duration, and
vesting schedule of such options will not be affected. If all such options to
purchase Minority Shares are exercised prior to the Effective Date, then there
will be an increase in the h number of shares of Common Stock issued to Minority
Stockholders in the Share Exchange, and a decrease in the Exchange Ratio.
Executive officers and directors of the Bank do not intend to exercise options
prior to the Effective Date. The Bank has no plans to grant additional stock
options prior to the Effective Date.
The final Exchange Ratio will be calculated at the conclusion of the
Conversion and will be affected by any additional waivers of dividends by the
Mutual Holding Company, any change in the Mutual Holding Company's assets other
than Mid-Tier Common Stock, and any options exercised subsequent to December 1,
1997.
83
Effect of the Conversion on Minority Stockholders
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
Conversion will increase the stockholders' equity of Minority Stockholders. At
September 30, 1997, the stockholders' equity per share was $11.97 for each share
of the Mid-Tier Common Stock outstanding, including shares held by the Mutual
Holding Company. 7 Based on the pro forma information set forth in "Pro Forma
Data," assuming the sale of 17,601,341 shares of 7 Common Stock at the midpoint
of the Offering Range, the pro forma stockholders' equity per share of Common
Stock 7 was $9.94, and the aggregate pro forma stockholders' equity for the
Exchange Shares to be received for each Minority7 Share was $28.74. The pro
forma stockholders' equity for the aggregate number of Exchange Shares to be
received for each Minority Share was $26.15, $31.35 and $34.34 at the minimum,
maximum, and adjusted maximum of the Offering Range.
Effect on Earnings per Share of the Shares Exchanged. The Conversion
will also affect Minority Stockholders' pro forma earnings per share. For the
nine months ended September 30, 1997, and the fiscal year ended December 31,
1996, the earnings per share was $.65 and $.94, respectively, for each share of
Mid-Tier Common Stock outstanding, including shares held by the Mutual Holding
Company. Based on the pro forma information set forth in "Pro Forma Data,"
assuming the sale of 17,601,341 shares of Common Stock at the midpoint of the
Offering Range, the pro forma earnings per share of Common Stock was $.34 and
$.49, respectively, for such periods, and the aggregate pro forma earnings for
the number of Exchange Shares to be received for each Minority Share was $.98
and $1.42, respectively. For the nine months ended September 30, 1997, the
aggregate pro forma earnings for the number of Exchange Shares to be received
for each Minority Share was $.93, $1.03 and $1.11 at the minimum, maximum, and
adjusted maximum of the Offering Range. For the fiscal year ended December 31,
1996, the aggregate pro forma earnings for the number of Exchange Shares to be
received for each Minority Share was $1.20, $1.63 and $1.87 at the minimum,
maximum, and adjusted maximum of the Offering Range.
Effect on Dividends per Share. The Company's Board of Directors
anticipates declaring and paying quarterly cash dividends of $.025, or $.10 per
share of Common Stock on an annual basis, or an aggregate annual dividend of
$.25, $.29, $.34 and $.38 for the number of Exchange Shares received for each
Minority Share, at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range, respectively. The Bank, or the Mid-Tier Holding Company, have
paid quarterly cash dividends of $.0875 per Minority Share, or $.35 per Minority
Share on an annual basis, for each of the full fiscal quarters since the
Minority Stock Offering in August 1995. See "Market for Common Stock." The
Mid-Tier Holding Company intends to continue to pay a quarterly cash dividend of
$.0875 per share through the fiscal quarter ended March 31, 1998. Dividends,
when and if paid, will be subject to determination and declaration by the Board
of Directors in its discretion, which will take into account the Company's
consolidated financial condition and results of operations, tax considerations,
industry standards, economic conditions, regulatory restrictions on dividend
payments by the Bank to the Company, general business practices and other
factors. See "Dividend Policy."
Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate Subscription Price of the shares of Common Stock received in exchange
for each Minority Share is $24.58, $28.92, $33.25, and $38.24 at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range. The last trade of
the Bank's common stock on August 7, 1997, the day preceding the announcement of
the Conversion, was $22 per share, and the price at which the Common Stock last
traded on February __, 1998, was $__________ per share.
Dissenters' and Appraisal Rights. Under OTS regulations, Minority
Stockholders will not have dissenters' rights or appraisal rights in connection
with the exchange of Minority Shares for shares of Common Stock of the Company.
Effects of Conversion on Depositors, Borrowers and Members
General. Each depositor in the Bank has both a deposit account in the
Bank and a pro rata ownership interest in the net worth of the Mutual Holding
Company based upon the balance in his or her account, which interest may only be
realized in the event of a liquidation of the Mutual Holding Company and the
Bank. However, this ownership interest is tied to the depositor's account and
has no tangible market value separate from such deposit account. Any
84
depositor who opens a deposit account obtains a pro rata ownership interest in
the Mutual Holding Company which owns a majority of the common stock of the Bank
without any additional payment beyond the amount of the deposit. A depositor who
reduces or closes his account receives a portion or all of the balance in the
account but nothing for his ownership interest in the net worth of the Mutual
Holding Company, which is lost to the extent that the balance in the account is
reduced or closed.
Consequently, depositors in a stock subsidiary of a mutual holding
company normally have no way of realizing the value of their ownership interest,
which has realizable value only in the unlikely event that the Mutual Holding
Company and the Bank are liquidated. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual surplus and reserves
of the Mutual Holding Company after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual holding company converts to stock form, permanent
nonwithdrawable capital stock is created in the stock holding company to
represent the ownership of the subsidiary institution's net worth. The Common
Stock is separate and apart from deposit accounts and cannot be and is not
insured by the FDIC or any other governmental agency. Certificates are issued to
evidence ownership of the capital stock. The stock certificates are
transferable, and therefore the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in the Bank.
Continuity. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
OTS and the FDIC. After the Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff. The Directors serving the Bank at the time of the
Conversion will serve as Directors of the Bank after the Conversion. The
Directors of the Company will consist of individuals currently serving on the
Board of Directors of the Mid-Tier Holding Company.
Effect on Deposit Accounts. Under the Plan of Conversion, each
depositor in the Bank at the time of the Conversion will automatically continue
as a depositor after the Conversion, and each such deposit account will remain
the same with respect to deposit balance, interest rate and other terms. Each
such account will be insured by the FDIC to the same extent as before the
Conversion. Depositors will continue to hold their existing certificates,
passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by
the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors of the
Bank are members of, and have voting rights in, the Mutual Holding Company as to
all matters requiring membership action. Upon completion of the Conversion,
depositors will cease to be members of the Mutual Holding Company and will no
longer be entitled to vote at meetings of the Mutual Holding Company. Upon
completion of the Conversion, all voting rights in the Bank will be vested in
the Company as the sole shareholder of the Bank. Exclusive voting rights with
respect to the Company will be vested in the holders of Common Stock. Depositors
of the Bank will not have voting rights after the Conversion except to the
extent that they become stockholders of the Company through the purchase of
Common Stock.
Tax Effects. The Bank will receive an opinion of counsel with regard to
federal and state income taxation to the effect that the adoption and
implementation of the Plan of Conversion will not be taxable for federal or
state income tax purposes to the Bank, the Mid-Tier Holding Company, the Mutual
Holding Company, the Minority Stockholders, members of the Mutual Holding
Company, eligible account holders or the Company. See "--Tax Aspects."
Effect on Liquidation Rights. Were the Bank to liquidate prior to the
Conversion, all claims of creditors of the Bank, including those of depositors
to the extent of their deposit balances, would be paid first. Thereafter, if
there were any assets of the Bank remaining, such assets would be distributed to
the Mid-Tier Holding Company, to the extent of its stock ownership interest in
the Bank. Were the Mutual Holding Company to liquidate, all claims of
85
creditors would be paid first. Thereafter, if there were any assets of the
Mutual Holding Company remaining, members of the Mutual Holding Company would
receive such remaining assets, pro rata, based upon the deposit balances in
their deposit account in the Bank immediately prior to liquidation. In the
unlikely event that the Bank were to liquidate after Conversion, all claims of
creditors (including those of depositors, to the extent of their deposit
balances) would also be paid first, followed by distribution of the "liquidation
account" to certain depositors (see, "Liquidation Rights"), with any assets
remaining thereafter distributed to the Company as the holder of the Bank's
capital stock. Pursuant to the rules and regulations of the OTS, a
post-conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be assumed by the surviving institution.
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion and Federal regulations require that the
aggregate purchase price of the Common Stock in the Offering must be based on
the appraised pro forma market value of the Common Stock, as determined by an
independent valuation (the "Independent Valuation"). The Bank and the Company
have retained FinPro, Inc. ("FinPro") to make such valuation. For its services
in making such appraisal, FinPro will receive a fee of $13,500 (which amount
does not include a fee of $11,000 to be paid to FinPro for assistance in
preparation of a business plan). The Bank, the Mid-Tier Holding Company, the
Mutual Holding Company and the Company have agreed to indemnify FinPro and its
employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where FinPro's liability results from its
negligence or bad faith.
The Independent Valuation was prepared by FinPro in reliance upon the
information contained in the Prospectus, including the Consolidated Financial
Statements. FinPro also considered the following factors, among others: the
present and projected operating results and financial condition of the Company
and the Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other information relating to
the Bank; a comparative evaluation of the operating and financial statistics of
the Bank with those of other publicly traded savings institutions located in the
mid-Atlantic region and on a national basis; the aggregate size of the Offering;
the impact of the Conversion on the consolidated stockholders' equity and
earnings potential; the proposed dividend policy of the Company; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities.
The Independent Valuation was prepared based on the assumption that the
aggregate amount of Common Stock sold in the Offering would be equal to the
estimated pro forma market value of the Company multiplied by the Adjusted
Minority Ownership Percentage. The Independent Valuation states that as of
December 17, 1997, the estimated pro forma market value of the Company ranged
from a minimum of $229,500,000 to a maximum of $310,500,000 with a midpoint of
$270,000,000 (the "Valuation Range"). The Board of Directors determined to offer
the Subscription Shares for $10.00 per share (the "Subscription Price"). The
aggregate offering price of the Subscription Shares offered in the Offering will
be equal to the Valuation Range multiplied by the Adjusted Minority Ownership
Percentage. The number of Subscription Shares offered in the Offering will be
equal to the aggregate offering price of the Subscription Shares divided by the
Subscription Price. The number of Subscription Shares offered in the Offering
and/or the aggregate of the offering price of the Subscription Shares are
referred to herein as the "Offering Range." Based on the Valuation Range, the
Adjusted Minority Ownership Percentage and the Subscription Price, the minimum
of the Offering Range will be 14,961,058 Subscription Shares, the midpoint of
the Offering Range will be 17,601,341 Subscription Shares, and the maximum of
the Offering Range will be 20,241,623 Subscription Shares.
The Board of Directors reviewed the Independent Valuation and, in
particular, considered (i) the Mid-Tier Holding Company financial condition and
results of operations for the months ended September 30, 1997, and the year
ended December 31, 1996, (ii) financial comparisons of the Mid-Tier Holding
Company in relation to financial institutions of similar size and asset quality,
(iii) stock market conditions generally and in particular for financial
institutions, and (iv) the historical trading price of the Minority Shares, all
of which are set forth in the Independent Valuation. The Board also reviewed the
methodology and the assumptions used by FinPro in preparing the Independent
Valuation. The Valuation Range may be amended with the approval of the OTS (if
required), if
86
necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally. In the event the Independent
Valuation is updated to amend the pro forma market value of the Company to less
than $229,500,000 or more than $357,075,000, such appraisal will be filed with
the Securities and Exchange Commission by post-effective amendment.
The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. FinPro did not independently verify the Consolidated Financial
Statements and other information provided by the Bank, nor did FinPro value
independently the assets or liabilities of the Bank. The Independent Valuation
considers the Bank as a going concern and should not be considered as an
indication of the liquidation value of the Bank. Moreover, because such
valuation 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 such shares in the Offering will thereafter be
able to sell such shares at prices at or above the Subscription Price.
Following commencement of the Subscription Offering, the maximum of the
Valuation Range may be increased by up to 15% to up to $357,075,000, which will
result in a corresponding increase of up to 15% in the maximum of the Offering
Range to 23,277,802 shares, to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Valuation Range and the minimum of the Offering Range may not be decreased
without a resolicitation of subscribers. The Subscription Price of $10.00 per
share will remain fixed. See "--Limitations on Common Stock Purchases" as to the
method of distribution and allocation of additional shares that may be issued in
the event of an increase in the Offering Range to fill unfilled orders in the
Subscription and Community Offerings.
If the update to the Independent Valuation at the conclusion of the
Offering results in an increase in the maximum of the Valuation Range to more
than $357,075,000 and a corresponding increase in the Offering Range to more
than 23,277,802 shares, or a decrease in the minimum of the Valuation Range to
less than $229,500,000 and a corresponding decrease in the Offering Range to
fewer than 14,961,058 shares, then the Company, after consulting with the OTS,
may terminate the Plan of Conversion and return all funds promptly with interest
at the Bank's passbook rate of interest on payments made by check, certified or
teller's check, bank draft or money order, extend or hold a new Subscription
Offering, Community Offering, or both, establish a new Offering Range, commence
a resolicitation of subscribers or take such other actions as permitted by the
OTS in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the OTS
for periods of up to 90 days not to extend beyond March __, 2000.
An increase in the number of shares to be issued in the Offering would
decrease both a subscriber's ownership interest and the Company's pro forma
earnings and stockholders equity on a per share basis while increasing pro forma
earnings and stockholder's equity on an aggregate basis. A decrease in the
number of shares to be issued in the Offering would increase both a subscriber's
ownership interest and the Company's pro forma earnings and stockholder's equity
on a per share basis while decreasing pro forma net income and stockholder's
equity on an aggregate basis. For a presentation of the effects of such changes,
see "Pro Forma Data."
Copies of the appraisal report of FinPro and the detailed memorandum of
the appraiser setting forth the method and assumptions for such appraisal are
available for inspection at the main office of the Bank and the other locations
specified under "Additional Information."
Exchange of Stock Certificates
Until the Effective Date, Minority Shares will continue to be available
for trading on the Nasdaq National Market. The conversion of the Mid-Tier Common
Stock into Common Stock will occur automatically on the Effective Date. After
the Effective Date, former holders of the Mid-Tier Common Stock will have no
further equity interest in the Mid-Tier Holding Company or the Bank (other than
as stockholders of the Company) and there
87
will be no further transfers of the Mid-Tier Common Stock on the stock transfer
records of the Mid-Tier Holding Company.
As soon as practicable after the Effective Date, the Company, or a bank
or trust company designated by the Company, in the capacity of exchange agent
(the "Exchange Agent"), will send a transmittal form to each Minority
Stockholder. The transmittal forms are expected to be mailed within five
business days after the Effective Date and will contain instructions with
respect to the surrender of certificates representing the Mid-Tier Common Stock,
or Certificates formerly representing shares of Bank Common Stock that were not
replaced with Certificates representing the Mid-Tier Common Stock into which
such shares were converted in the Two-Tier Reorganization ("Converted Bank
Common Stock Certificates"). It is expected that certificates for shares of the
Company's Common Stock will be distributed within five business days after the
receipt of properly executed transmittal forms and other required documents.
THE MID-TIER HOLDING COMPANY'S STOCKHOLDERS SHOULD NOT FORWARD STOCK
CERTIFICATES TO THE BANK OR THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED
TRANSMITTAL FORMS.
Until the certificates representing the Mid-Tier Common Stock and/or
Converted Bank Common Stock Certificates are surrendered for exchange after
consummation of the Conversion, upon compliance with the terms of the
transmittal form, holders of such certificates will not receive the shares of
the Company's Common Stock and will not be paid dividends on the Common Stock
into which such shares have been converted. When such certificates are
surrendered, any unpaid dividends will be paid without interest. For all other
purposes, however, each certificate which represents shares of the Mid-Tier
Common Stock outstanding at the Effective Date and/or Converted Bank Common
Stock Certificates will be deemed to evidence ownership of the shares of the
Company's Common Stock into which those shares have been converted by virtue of
the Conversion.
All shares of Common Stock issued upon conversion of shares of the
Mid-Tier Common Stock shall be deemed to have been issued in full satisfaction
of all rights pertaining to Common Stock, subject, however, to the Company's
obligation to pay any dividends or make any other distributions with a record
date prior to the Effective Date which may have been declared or made by the
Mid-Tier Holding Company on or prior to the Effective Date and which remain
unpaid at the Effective Date.
No fractional shares of the Common Stock will be issued to any Minority
Stockholder upon consummation of the Conversion. For each fractional share that
would otherwise be issued, the Company will pay by check an amount equal to the
product obtained by multiplying the fractional share interest to which such
holder would otherwise be entitled by the Subscription Price. Payment for
fractional shares will be made as soon as practicable after the receipt by the
Exchange Agent of surrendered stock certificates.
If a certificate for the Mid-Tier Common Stock and/or Converted Bank
Common Stock Certificates has been lost, stolen or destroyed, the Exchange Agent
will issue the consideration properly payable upon receipt of appropriate
evidence as to such loss, theft or destruction, appropriate evidence as to the
ownership of such certificate by the claimant, and appropriate and customary
indemnification.
Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock in the Subscription Offering have been granted under
the Plan of Conversion in the following order of descending priority. All
subscriptions received will be subject to the availability of Common Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering and to the maximum, minimum, and overall purchase
limitations set forth in the Plan of Conversion and as described below under
"--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each depositor with aggregate
savings account balances of $50 or more (a "Qualifying Deposit") as of August
31, 1996 (the "Eligibility Record Date," and such account holders, "Eligible
88
Account Holders") will receive, without payment therefor, nontransferable
subscription rights to subscribe in the Subscription Offering for a number of
Subscription Shares equal to up to the greater of 60,000 shares, .10% of the
total offering of shares, or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the aggregate number of Exchange Shares
and Subscription Shares issued in the Conversion by a fraction of which the
numerator is the amount of the Eligible Account Holder's Qualifying Deposit and
the denominator is the total amount of Qualifying Deposits of all Eligible
Account Holders, in each case on the Eligibility Record Date, subject to the
overall purchase limitation and exclusive of shares purchased by the ESOP from
any increase in the shares offered pursuant to an increase in the maximum of the
Offering Range. See "--Limitations on Common Stock Purchases." If there are not
sufficient shares available to satisfy all subscriptions, shares first will be
allocated so as to permit each subscribing Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
100 shares or the number of shares for which he subscribed. Thereafter,
unallocated shares (except for additional shares issued to the ESOP upon an
increase in the maximum of the Offering Range) will be allocated to each
subscribing Eligible Account Holder whose subscription remains unfilled in the
proportion that the amount of his aggregate Qualifying Deposit bears to the
total amount of Qualifying Deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. If an amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated among those Eligible Account Holders whose subscriptions
are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his Order Form all deposit accounts in which he has an ownership
interest on the Eligibility Record Date. Failure to list an account could result
in fewer shares being allocated than if all accounts had been disclosed. The
subscription rights of Eligible Account Holders who are also directors or
officers of the Bank or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the twelve months preceding the Eligibility Record
Date.
Priority 2: Employee Plans. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP and 401(K) Plan will receive, without payment therefor,
nontransferable subscription rights to purchase Common Stock in the Offering on
behalf of ESOP and 401(K) participants subject to the purchase limitations
described herein. The ESOP intends to subscribe for up to 4% of the Common Stock
issued in the Offering, including 4% of the total number of shares, if any,
issued if the maximum of the Offering Range is increased. The 401(K) Plan may
purchase up to 200,000 shares of the Common Stock issued in the Offering. The
401(k) will purchase shares only at the direction of individual Participants.
Additional shares issued in the event the maximum of the Offering Range is
increased will be sold first to the ESOP and the 401(K) Plan.
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and the ESOP, each depositor with a Qualifying Deposit
as of December 31, 1997 (the "Supplemental Eligibility Record Date") who is not
an Eligible Account Holder ("Supplemental Eligible Account Holder") will
receive, without payment therefor, nontransferable subscription rights to
subscribe in the Subscription Offering for a number of Subscription Shares equal
to the greater of 60,000 shares, .10% of the total offering of shares, or
fifteen times the product (rounded down to the next whole number) obtained by
multiplying the aggregate number of Exchange Shares and Subscription Shares
issued in the Conversion, by a fraction of which the numerator is the amount of
the Supplemental Eligible Account Holder's Qualifying Deposit and the
denominator is the total amount of Qualifying Deposits of all Supplemental
Eligible Account Holders, in each case on the Supplemental Eligibility Record
Date, subject to the overall purchase limitation. See "--Limitations on Common
Stock Purchases." If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make his total allocation equal to the lesser of 100 shares or the number of
shares for which he subscribed. Thereafter, unallocated shares will be allocated
to each subscribing Supplemental Eligible Account Holder and whose subscription
remains unfilled in the proportion that the amount of his Qualifying Deposit
bears to the total amount of Qualifying Deposits of all subscribing Supplemental
Eligible Account Holders whose subscriptions remain unfilled.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his Order Form all deposit accounts in which he has
an ownership interest on the Supplemental Eligibility Record Date. Failure to
list an account could result in less shares being allocated than if all accounts
had been disclosed.
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Priority 4: Other Members. To the extent that there are shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
Employee Plans, and Supplemental Eligible Account Holders, each depositor with s
a Qualifying Deposit on the Voting Record Date ("Other Members") will receive,
without payment therefor, s nontransferable subscription rights to subscribe in
the Subscription Offering for a number of Subscription Shares equal to up to the
greater of 60,000 shares, or .10% of the total offering of shares, subject to
the overall purchase limitation. See "--Limitations on Stock Purchases." If
there are not sufficient shares available to satisfy all subscriptions,
available shares will be allocated in proportion to the amounts of the
subscriptions.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire on March __, 1998 (the "Expiration Date"), unless extended
for up to 45 days or such additional periods by the Bank with the approval of
the OTS, if necessary. The Bank and the Company may determine to extend the
Subscription Offering and/or the Community Offering for any reason, whether or
not subscriptions have been received for shares at the minimum, midpoint,or
maximum of the Offering Range, and are not required to give subscribers notice
of any such extension. Subscription rights which have not been exercised prior
to the Expiration Date will become void.
The Company will not execute orders until all shares of Common Stock
have been subscribed for or otherwise sold. If 14,961,058 shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the Bank
pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be canceled. If
an extension beyond the 45 day period following the Expiration Date is granted,
the Bank will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions. Such extensions may not go
beyond March __, 2000.
Persons in Nonqualified States or Foreign Countries. 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 stock pursuant to the
Plan of Conversion reside. However, the Company is not required to offer stock
in the Offering to any person who resides in a foreign country or resides in a
state of the United States with respect to which (i) a small number of persons
otherwise eligible to subscribe for shares of Common Stock reside in such state;
or (ii) the Company determines that compliance with the securities laws of such
state would be impracticable for reasons of cost or otherwise, including but not
limited to a request that the Company or its officers or directors, under the
securities laws of such state, register as a broker, dealer, salesman or selling
agent or to register or otherwise qualify the subscription rights or Common
Stock for sale or subject any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small,
the Company will base its decision as to whether or not to offer the Common
Stock in such state on a number of factors, including the size of accounts being
held by account holders in the state, the cost of registering or qualifying the
shares or the need to register the Company, its officers, directors or employees
as brokers, dealers or salesmen.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders and Other Members, the Company has
determined to offer shares pursuant to the Plan of Conversion to certain members
of the general public in a direct community offering (the "Community Offering")
with preference given first to Minority Stockholders and then to natural persons
residing in the Community (such natural persons referred to as "Preferred
Subscribers"). Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to 60,000 Subscription Shares,
subject to the overall purchase limitation. See "--Limitations on Common Stock
Purchases." The opportunity to subscribe for shares of Common Stock in the
Community Offering category is subject to the right of the Company, in its sole
discretion, to accept or reject any such orders in whole or in part either at
the time of receipt of an order or as soon as practicable following the
Expiration Date.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers, such stock will be
allocated among the Preferred Subscribers in the manner that first permits each
Minority Stockholder, to the extent possible, to purchase the number of shares
necessary to make his total allocation of Common Stock equal to the lesser of 2%
of the shares offered in the Offering or the number of shares subscribed
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for by each such Minority Stockholder; provided that if there are insufficient
shares available for such allocation, then shares will be allocated among
Minority Stockholders whose orders remain unsatisfied in the proportion that the
unfilled subscription of each bears to the total unfilled subscriptions of all
Minority Stockholders whose subscription remain unsatisfied. Remaining shares
will be allocated on an equal number of shares basis up to an aggregate of
60,000 shares, subject to the overall purchase limitation. If all orders of
Minority Stockholders are filled, any shares remaining will be allocated to
natural persons residing in the Community in the Community Offering applying the
same allocation described above for Minority Stockholders, and then to other
members of the general public.
The Community Offering will terminate no more than 45 days following
the Expiration Date, unless extended by the Bank and the Company with the
approval of the OTS if necessary. The Bank and the Company may determine to
extend the Community Offering for any reason, whether or not subscriptions have
been received for shares at the minimum, midpoint, or maximum of the Offering
Range, and are not required to give subscribers notice of any such extension.
The Company will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If 14,961,058 shares have not been subscribed
for or sold within 45 days after the Expiration Date, unless such period is
extended with the consent of the OTS, all funds delivered to the Bank pursuant
to the Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond the 45 day period following the Expiration Date is granted, the Bank will
notify subscribers of the extension of time and of any rights of subscribers to
modify or rescind their subscriptions. Such extensions may not go beyond March
__, 2000.
The term "resided" or "residing" as used herein shall mean any person
who occupies a dwelling within the Community, has a present intent to remain
within the Community for a period of time, and manifests the genuineness of that
intent by establishing an ongoing physical presence within the Community
together with an indication that such presence within the Community is something
other than merely transitory in nature. To the extent the person is a
corporation or other business entity, the principal place of business or
headquarters shall be in the Community. To the extent a person is a personal
benefit plan, the circumstances of the beneficiary shall apply with respect to
this definition. In the case of all other benefit plans, circumstances of the
trustee shall be examined for purposes of this definition. The Bank may utilize
deposit or loan records or such other evidence provided to it to make a
determination as to whether a person is a resident. In all cases, however, such
a determination shall be in the sole discretion of the Bank.
The Board of Directors has the right to reject any order submitted in
the Offering by a person whose representations the Board of Directors believes
to be false or who it otherwise believes, either alone or acting in concert with
others, is violating, evading, circumventing, or intends to violate, evade or
circumvent the terms and conditions of the Plan of Conversion.
Plan of Distribution and Selling Commissions
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
office and from FBR. All prospective purchasers are to send payment along with a
completed Order Form directly to the Bank, where such funds will be held in a
segregated special escrow account and not released until the Offering is
completed or terminated.
To assist in the marketing of the Common Stock, the Bank has retained
FBR, a broker-dealer registered with the National Association of Securities
Dealers, Inc. (the "NASD"). FBR will assist the Bank in the Offering as follows:
(i) in training and educating the Bank's employees regarding the mechanics and
regulatory requirements of the Conversion; (ii) in conducting any informational
meetings for employees, customers and the general public; (iii) in coordinating
the selling efforts in the Bank's local communities; and (iv) keeping records of
all orders for Common Stock. For these services, the Agent will receive (i) a
management fee of $50,000; and (ii) a marketing fee of .75% of the total dollar
amount of the Common Stock sold in the Subscription and Community Offerings,
reduced by the % management fee, not to exceed $1.0 million. No fee shall be
payable by the Bank in connection with the sale of Common Stock to the ESOP or
to the Bank's directors, officers, employees, and such persons' immediate family
members.
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The Bank also will reimburse the Agent for its reasonable out-of-pocket
expenses associated with its marketing effort, the estimated maximum of which
are $70,000. The Bank has made an advance payment to the Agent in the amount of
$50,000. The Bank will indemnify FBR against liabilities and expenses (including
legal fees) incurred in connection with certain claims or litigation arising out
of or based upon untrue statements or omissions contained in the offering
material for the Common Stock, including liabilities under the Securities Act of
1933.
Certain directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Such persons
will be reimbursed by the Mutual Holding Company and/or the Bank for their
reasonable out-of-pocket expenses, including, but not limited to, de minimis
telephone and postage expenses, incurred in connection with such solicitation.
Other regular, full-time employees of the Bank may participate in the Offering
but only in ministerial capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser provided that the
content of the employee's responses is limited to information contained in the
Prospectus or other offering documents, and no offers or sales may be made by
tellers or at the teller counter. All sales activity will be conducted in a
segregated or separately identifiable area of the Bank's offices apart from the
area accessible to the general public for the purpose of making deposits or
withdrawals. Other questions of prospective purchasers will be directed to
executive officers or registered representatives. Such other employees have been
instructed not to solicit offers to purchase Common Stock or provide advice
regarding the purchase of Common Stock. The Company will rely on Rule 3a4-1
under the Securities Exchange Act of 1934 (the "Exchange Act"), and sales of
Common Stock will be conducted within the requirements of 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 Bank will be
compensated in connection with his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.
Procedure for Purchasing Shares
Expiration Date. The Offering will terminate at _____ p.m., local time,
on March __, 1998, unless extended by the Company, with prior approval of the
OTS, if required, for up to an additional 45 days (as so extended, the
"Expiration Date). Such extension may be granted by the Company, in its sole
discretion, without further approval or additional notice to purchasers in the
Offering. Any extension of the Offering beyond the Expiration Date would be
subject to OTS approval and potential purchasers would be given the right to
increase, decrease, or rescind their orders for Common Stock. If the minimum
number of shares offered in the Offering is not sold by the Expiration Date the
Company may terminate the Offering and promptly refund all orders for Common
Stock. A reduction in the number of shares below the minimum of the Offering
Range will not require the approval of the Mutual Holding Company's members or
the Mid-Tier Holding Company's stockholders, or an amendment to the Independent
Valuation. If the number of shares is reduced below the minimum of the Offering
Range, purchasers will be given an opportunity to increase, decrease, or rescind
their orders.
To ensure that each purchaser receives a Prospectus at least 48 hours
before the 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 an Order Form
will confirm receipt or delivery in accordance with Rule 15c2-8. Order Forms
will be distributed only with a Prospectus.
The Company reserves the right in its sole discretion to terminate the
Offering at any time and for any reason, in which case the Company will return
all purchase orders, plus interest at its current passbook rate from the date of
receipt.
Use of Order Forms. In order to purchase the Common Stock, each
purchaser must complete an Order Form. Incomplete Order Forms will not be
accepted. Any person receiving an Order Form who desires to purchase Common
Stock must do so prior to ______ p.m., local time, on March __, 1998 by
delivering (by mail or in person) to the Company a properly executed and
completed Order Form, together with full payment for the shares purchased. Once
tendered, an Order Form cannot be modified or revoked without the consent of the
Company. The Company reserves the absolute right, in its sole discretion, to
reject orders received in the Community Offering, in whole or in part, at the
time of receipt or at any time prior to completion of the Offering. Each person
ordering shares is required to represent that he is purchasing such shares for
his own account and that he has no agreement or understanding with
92
any person for the sale or transfer of such shares. The interpretation by the
Company of the terms and conditions of the Plan of Conversion and of the
acceptability of the Order Forms will be final.
Payment for Shares. Payment for all shares will be required to
accompany all completed Order Forms for the purchase to be valid. Payment for
shares may be made by (i) cash, (ii) check or money order made payable to
Peoples Bancorp, Inc., or (iii) authorization of withdrawal from savings
accounts (including certificates of deposit) maintained with the Bank.
Appropriate means by which such withdrawals may be authorized are provided in
the Order Forms. Once such a withdrawal amount has been authorized, a hold will
be placed on such funds, making them unavailable to the depositor until the
Offering has been completed or terminated. In the case of payments authorized to
be made through withdrawal from deposit accounts, all funds authorized for
withdrawal will continue to earn interest at the contract rate until the
Offering is 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 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 rate subsequent to the
withdrawal. In the case of payments made by cash, check or money order, such
funds will be placed in a segregated savings account and interest will be paid
by the Bank at the current passbook rate per annum from the date payment is
received until the Offering is completed or terminated. An executed Order Form,
once received by the Bank, may not be modified, amended or rescinded without the
consent of the Bank, unless the Offering is not completed by the Expiration
Date, in which event purchasers may be given the opportunity to increase,
decrease, or rescind their orders for a specified period of time.
Tax-qualified employee stock benefit plans may order shares by
submitting an Order Form, along with evidence, if applicable, of a loan
commitment from a financial institution (or the Company) for the purchase of
shares of Common Stock during the Offering and by making payment for shares of
Common Stock on the date of the closing of the Offering.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self- directed IRA. Since the Bank does not offer
such accounts, it will allow a depositor to make a trustee-to-trustee transfer
of the IRA funds to a trustee offering a self-directed IRA program with the
agreement that such funds will be used to purchase the Common Stock in the
Offering. There will be no early withdrawal or IRS interest penalties for such
transfers. The new trustee would hold the Common Stock in a self-directed
account in the same manner as the Bank now holds the depositor's IRS funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in a Bank IRA to purchase Common Stock should contact
the Stock Center at the Bank as soon as possible so that the necessary forms may
be forwarded for execution and returned prior to the Expiration Date.
Individuals who are participants in self-directed tax qualified plans
maintained by self-employed individuals ("Keogh Plans") at the Bank may use the
assets in their self-directed Keogh Plan accounts to purchase shares of Common
Stock in the Offering, provided that such Keogh Plans maintained at the Bank
must have their accounts transferred to an unaffiliated institution or broker to
purchase shares of Common Stock in the Offering.
In addition, the provisions of ERISA and IRS regulations require that
executive officers, directors and 10% stockholders who use self-directed IRA
funds and/or Keogh Plan accounts to purchase shares of Common Stock in the
Offering, make such purchase for the exclusive benefit of the IRA and/or Keogh
Plan participant.
The ESOP will not be required to pay for shares purchased until
consummation of the Offering, provided that there is in force from the time the
order is received a loan commitment from an unrelated financial institution or
the Company to lend to the ESOP the necessary amount to fund the purchase.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering and Bank checks representing interest paid on
subscriptions made by cash, check, or money order will be mailed by the Bank to
the persons entitled thereto at the address noted on the Order Form, as soon as
practicable following consummation of the Offering and receipt of all necessary
regulatory approvals. Any certificates returned as undeliverable will be held by
the Bank until claimed by persons legally entitled thereto or otherwise disposed
of in accordance with
93
applicable law. Until certificates for the Common Stock are available and
delivered to purchasers, purchasers may not be able to sell the shares of stock
which they ordered. Regulations prohibit the Bank from lending funds or
extending credit to any persons to purchase Common Stock in the Offering.
Other Restrictions. Notwithstanding any other provision of the Plan of
Conversion, no person is entitled to purchase any Common Stock to the extent
such purchase would be illegal under any federal or state law or regulation
(including state "blue-sky" registrations), or would violate regulations or
policies of the NASD, particularly those regarding free riding and withholding.
The Bank and/or its agents may ask for an acceptable legal opinion from any
purchaser as to the legality of such purchase and may refuse to honor any such
purchase order if such opinion is not timely furnished.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan of Conversion 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 account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he 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 Bank 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.
Limitations on Common Stock Purchases
The Plan includes the following limitations, which are in addition to
other limitations described herein, on the number of shares of Common Stock
which may be purchased in the Offering:
(1) No person may purchase less than 25 shares of Common Stock;
(2) The ESOP may purchase in the aggregate up to 4% of the Subscription
Shares issued in the Offering and the 401(K) Plan may purchase up to
150,000 of the Subscription Shares issued in the Offering, including
shares issued in the event of an increase in the Offering Range of
15%;
(3) No person, together with associates of and groups of persons acting in
concert with such person, may purchase in the Offering a number of
Subscription Shares that when combined with Exchange Shares received
by any such person, together with associates of and persons acting in
concert with such person exceeds 5% of the Subscription Shares issued
in the Offering;
(4) Directors and officers of the Bank and their associates may not
purchase Subscription Shares in an amount that when combined with
Exchange Shares received by such directors and officers and their
associates exceeds 25% of the aggregate number of Subscription Shares
and Exchange Shares issued in the Conversion, excluding purchases by
the ESOP.
Depending upon market or financial conditions, the Board of Directors
of the Bank and Company, with the approval of the OTS and without further
approval of the Mid-Tier Holding Company's stockholders or the Mutual Holding
Company's members, may increase or decrease the purchase limitations. Subject to
any required regulatory approval and the requirements of applicable laws and
regulations, but without further approval of the members of the Company, both
the individual amount permitted to be subscribed for and the overall purchase
limitation in the Subscription Offering and the Community Offering may be
increased to up to a maximum of 5% of the shares issued in the Conversion at the
sole discretion of the Company and the Bank. If such amount is increased,
subscribers for
94
the maximum amount will be, and certain other large subscribers who through
their subscriptions evidence a desire to purchase the maximum allowable number
of shares in the sole discretion of the Bank may be, given the opportunity to
increase their subscriptions up to the then applicable limit. The effect of such
a resolicitation will be an increase in the number of shares owned by
subscribers who choose to increase their subscriptions. In addition, the Boards
of Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares issued in the Conversion shall not
exceed, in the aggregate, 10% of the total. Requests to purchase additional
shares under this provision will be determined by the respective Boards of
Directors in their sole discretion.
In the event of an increase in the total number of shares offered in
the Offering due to an increase in the Offering Range of up to 15%, the maximum
number of shares that may be purchased as restricted by the purchase limitations
shall not be increased proportionately (except for the ESOP), and the additional
shares sold will be allocated in the following order of priority in accordance
with the Plan: (i) to fill the ESOP's subscription for 4% of the total number of
shares sold; (ii) in the event that there is an oversubscription at the Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member, to fill
unfulfilled subscriptions of such subscribers according to such respective
priorities; and (iii) to fill unfulfilled subscriptions in the Community
Offering with preference given first to Minority Stockholders and then to
natural persons residing in the Community.
The term "associate" of a person is defined to mean: (i) any
corporation (other than the Bank or a majority-owned subsidiary of the Bank) of
which such person is an officer, partner or 10% stockholder; (ii) any trust or
other estate in which such person has a substantial beneficial interest or
serves as a director or in a similar fiduciary capacity; provided, however, such
term shall not include any employee stock benefit plan of the Bank in which such
person serves as director or in a similar fiduciary capacity; and (iii) any
relative or spouse of such persons, or any relative of such spouse, who either
has the same home as such person or who is a director or officer of the Bank.
Directors are not treated as associates solely because of their Board
membership. For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion, see
"Management of the Bank--Subscriptions by Management and Directors," and "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
Liquidation Rights
In the unlikely event of a complete liquidation of the Bank prior to
the Conversion, all claims of creditors of the Bank, including those of
depositors to the extent of their deposit balances, would be paid first.
Thereafter, if there were any assets of the Bank remaining, such assets would be
distributed to stockholders, including the Mutual Holding Company. Were the
Mutual Holding Company and the Bank to liquidate prior to the Conversion, all
claims of creditors would be paid first. Thereafter, if there were any assets of
the Mutual Holding Company remaining, members of the Mutual Holding Company
would receive such remaining assets, pro rata, based upon the deposit balances
in their deposit account in the Bank immediately prior to liquidation. In the
unlikely event that the Bank were to liquidate after Conversion, all claims of
creditors (including those of depositors, to the extent of their deposit
balances) would also be paid first, followed by distribution of the "liquidation
account" to certain depositors, with any assets remaining thereafter distributed
to the Company as the holder of the Bank's capital stock. Pursuant to the rules
and regulations of the OTS, a post-conversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the greater of: (a) the sum of: (i) the Mutual Holding Company's ownership
interest in the surplus and reserves of the Bank as of the date of its latest
balance sheet contained in the final Prospectus used in connection with
Conversion, and (ii) the restricted retained income account that reflects
certain dividends waived by the Mutual Holding Company; or (b) the retained
earnings of the Bank at the time that the Bank reorganized into the Mutual
Holding Company on August 3, 1995. The purpose of the liquidation account is to
provide Eligible Account Holders and Supplemental
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Eligible Account Holders who maintain their deposit accounts with the Bank after
the conversion with a distribution upon complete liquidation of the Bank after
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, on a complete liquidation of the Bank after Conversion to an
interest in the liquidation account prior to any payment to the stockholders of
the Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder
would have an initial interest in such liquidation account for each deposit
account, including regular accounts, transaction accounts such as NOW accounts,
money market deposit accounts, and certificates of deposit, with a balance of
$50 or more held in the Bank on the Eligibility Record Date, or Supplemental
Eligibility Record Date, respectively ("Deposit Accounts"). Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account for each of his Deposit Accounts based
on the proportion that the balance of each such Deposit Account on the
Eligibility Record Date, or Supplemental Eligibility Record Date, respectively,
bore to the balance of all Deposit Accounts in the Bank on such dates.
If, however, on any December 31, annual closing date of the Bank,
commencing after December 31, 1998, the amount in any Deposit Account is less
than the amount in such Deposit Account on the Eligibility Record Date, or
Supplemental Eligibility Record Date, respectively, or any other annual closing
date, then the interest in the liquidation account relating to such Deposit
Account would be reduced from time to time by the proportion of any such
reduction, and such interest will cease to exist if such Deposit Account is
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related Deposit Account.
Payment pursuant to liquidation rights of Eligible Account Holders and
Supplemental Eligible Account Holders would be separate and apart from any
insured deposit accounts to such depositor. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Supplemental Eligible Account
Holders are satisfied would be distributed to the Company as the sole
shareholder of the Bank.
Tax Aspects
The Conversion will be effected as: (i) a merger of the Mutual Holding
Company into the Mid-Tier Holding Company in a tax-free reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"); and (ii) an exchange of the Mid-Tier Holding Company's Charter for a
interim stock corporation charter and simultaneous merger of the Mid-Tier
Holding Company into the Bank in a tax-free reorganization under Section
368(a)(1)(A) of the Code; and (iii) a merger of the Interim Savings Bank into
the Bank with the Bank's shareholders exchanging their Bank common stock for
Common Stock of the Company in a tax-free reorganization under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(E). Consummation of the
Conversion is expressly conditioned upon the prior receipt of an opinion of
counsel with respect to federal income taxation, and an opinion of counsel or
tax advisor with respect to New Jersey income taxation, that indicates that the
Conversion will not be a taxable transaction to the Mutual Holding Company, the
Mid-Tier Holding Company, the Bank, the Company, Interim Savings Bank, Eligible
Account Holders, Supplemental Eligible Account Holders, or Members of the Mutual
Holding Company. Unlike private letter rulings, opinions of counsel or tax
advisors are not binding on the IRS or the New Jersey Department of Treasury,
and either agency could disagree with such opinions. In the event of such
disagreement, there can be no assurance that the Company or Bank would prevail
in a judicial proceeding.
Pursuant to Revenue Procedure 94-3, the IRS has stated that it will not
rule on whether a transaction qualifies as a tax-free reorganization under Code
Section 368(a)(1)(A), including a transaction that qualifies under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(E), or whether the taxpayer is
subject to the consequences of qualification under that section (such as
nonrecognition and basis issues) but that it would rule on significant
sub-issues that must be resolved to determine whether the transaction qualifies
under the above sections. In several instances over the last two years, the IRS
ruled favorably on certain significant sub-issues associated with downstream
mergers of mutual holding companies into their less than 80 percent owned
subsidiary savings associations. In such cases, the IRS has ruled that (i) the
exchange of the member's equity interests in the mutual holding company for
interests in a liquidation account established at the savings association will
satisfy the continuity of interest requirement with respect to the merger of
mutual holding company into the savings association; (ii) pursuant to the merger
of an interim savings association into the savings association, the stock
holding company will acquire control of the savings association (as defined in
Code Section 368(c)) as the interests in the liquidation account and the shares
of savings association stock previously held by the mutual holding company will
be disregarded; and (iii) the continuity of interest requirement will
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not be violated by the exchange of stock holding company stock for savings
association stock in the merger of an interim savings association into the
savings association.
In December 1996, the IRS issued Revenue Procedure 94-76 which states
that the IRS will not issue private letter rulings with respect to downstream
mergers of a corporation into a "less than 80 percent distributee", i.e., a
corporation, such as the Mid-Tier Holding Company, in which the merging
corporation (i.e., the Mutual Holding Company) possesses less than 80 percent of
the total voting power of the stock of such corporation and less than 80 percent
of the total value of the stock of such corporation. The IRS has assumed this
"no-rule" position to study whether such downstream mergers circumvent the
purpose behind the repeal of General Utilities & Operating Co. v. Helvering, 296
U.S. 200 (1935). Counsel to the Company is of a view that the downstream merger
to effect the Conversion of the Mutual Holding Company to stock form, where
after consummation of the Conversion, the Company holds 100% of the shares of
the Bank and the untaxed appreciation of the Bank remains in corporate solution,
is not the type of downstream merger which can be considered as circumventing
the repeal of General Utilities. If, however, the IRS were to conclude that such
mergers circumvent the repeal of General Utilities, the IRS could issue
correcting regulations which could have the effect of taxing to the merging
corporation, as of the effective time of the merger, the fair market value of
the assets of such corporation over its basis in such assets. If such
regulations are issued, it is expected that they would apply on a prospective
basis and would have no effect on transactions consummated before their
issuance. The Company will receive an opinion of counsel that, in the absence of
a change in the regulations, and based on current law and regulations, the
merger of the Mutual Holding Company into the Mid-Tier Holding Company will
qualify as a tax-free merger under Code Section 368(a)(1)(A), as more fully
discussed below.
On the Effective Date, the Mutual Holding Company, the Mid-Tier Holding
Company and the Bank will receive an opinion of counsel, Luse Lehman Gorman
Pomerenk & Schick, A Professional Corporation, which will indicate that the
federal income tax consequences of the Conversion will be as follows: (i) the
merger of the Mutual Holding Company with and into the Mid-Tier Holding Company
will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Code, (ii) the exchange of the members' equity interests in the Mutual
Holding Company for interests in a liquidation account established at the
Mid-Tier Holding Company will satisfy the continuity of interest requirement
with respect to the merger of the Mutual Holding Company into the Mid-Tier
Holding Company; (iii) the Mutual Holding Company will not recognize any gain or
loss on the transfer of its assets to the Mid-Tier Holding Company in exchange
for a liquidation account in the Mid-Tier Holding Company, and the Mid-Tier
Holding Company's assumption of the liabilities of Mutual Holding Company, if
any; (iv) no gain or loss will be recognized by the Mid-Tier Holding Company
upon the receipt of the assets of the Mutual Holding Company in exchange for a
liquidation account in the Mid-Tier Holding Company; (v) the basis of the assets
of Mutual Holding Company to be received by the Mid-Tier Holding Company will be
the same as the basis of such assets in the hands ofthe Mutual Holding Company
immediately prior to the transfer; (vi) the holding period of the assets of the
Mutual Holding Company to be received by the Mid-Tier Holding Company will
include the holding period of those assets in the hands of the Mutual Holding
Company immediately prior to the transfer; (vii) Mutual Holding Company members
will recognize no gain or loss upon the receipt of an interest in the
liquidation account in the Bank in exchange for their membership interest in the
Mutual Holding Company; (viii) the merger of the Mid-Tier Holding Company with
and into the Bank will qualify as a reorganization within the meaning of Section
368(a)(1)(A) of the Code, (ix) the exchange of the members' equity interests in
the Mid-Tier Holding Company for interests in a liquidation account established
at the Bank will satisfy the continuity of interest requirement with respect to
the merger of the Mid-Tier Holding Company into the Bank; (x) the Mid-Tier
Holding Company will not recognize any gain or loss on the transfer of its
assets to the Bank in exchange for a liquidation account in Bank, and the Bank's
assumption of the liabilities of Mid-Tier Holding Company, if any; (xi) no gain
or loss will be recognized by the Bank upon the receipt of the assets of the
Mid-Tier Holding Company in exchange for a liquidation account in Bank; (xii)
the basis of the assets of Mid-Tier Holding Company to be received by Bank will
be the same as the basis of such assets in the hands of the Mid-Tier Holding
Company immediately prior to the transfer; (xiii) the holding period of the
assets of the Mid-Tier Holding Company to be received by the Bank will include
the holding period of those assets in the hands of the Mid-Tier Holding Company
immediately prior to the transfer; (xiv) persons who have an interest in the
liquidation account established in the Mid-Tier Holding Company (i.e., former
members of the Mutual Holding Company) will recognize no gain or loss upon the
receipt of an interest in the liquidation account in the Bank in exchange for
their interest in the Mid-Tier Holding Company liquidation account; (xv) the
Mid-Tier Holding Company
97
shareholders will not recognize any gain or loss upon their constructive
exchange of Mid-Tier Holding Company Common Stock for Bank Common Stock; (xvi)
the merger of Interim Savings Bank into Bank with Bank as the surviving
institution qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code; (xvii)
interests in the liquidation account established at the Bank, and the shares of
Bank common stock held by the Mid-Tier Holding Company prior to consummation of
the merger of Mid-Tier Holding Company and Bank, will be disregarded for the
purposes of determining that an amount of stock in the Bank which constitutes
"control" was acquired by the Company pursuant to the merger of the Interim
Savings Bank into Bank; (xviii) the exchange of shares of Company Common Stock
for common stock of the Bank in the merger of Interim Savings Bank into the
Bank, following the merger of the Mid-Tier Holding Company into the Bank, will
not violate the continuity of interest requirement of the income tax
regulations; (xix) Interim Savings Bank will not recognize any gain or loss on
the transfer of its assets to Bank in exchange for Bank stock and the assumption
by the Bank of the liabilities, if any, of Interim Savings Bank; (xx) the Bank
will not recognize any gain or loss on the receipt of the assets of Interim
Savings Bank in exchange for Bank stock; (xxi) the Bank's basis in the assets
received from Interim Savings Bank in the proposed transaction will, in each
case, be the same as the basis of such assets in the hands of Interim Savings
Bank immediately prior to the transaction; (xxii) the Company will not recognize
any gain or loss upon its receipt of Bank stock solely in exchange for Company
Common Stock; (xxiii) the Bank's holding period for the assets received from
Interim Savings Bank in the proposed transaction will, in each instance, include
the period during which such assets were held by Interim Savings Bank; (xxiv)
Bank shareholders will not recognize any gain or loss upon their exchange of
Bank stock (which they constructively received) solely for shares of Company
Common Stock; (xxv) each Bank shareholder's aggregate basis in his or her
Company Common Stock received in the exchange will be the same as the aggregate
basis of the Bank stock surrendered in exchange therefor; (xxvi) each Bank
shareholder's holding period in his or her Company Common Stock received in the
exchange will include the period during which the Bank stock surrendered was
held, provided that the Bank stock surrendered is a capital asset in the hands
of the Bank shareholder on the date of the exchange; and (xxvii) the Eligible
Account Holders and Supplemental Eligible Account Holders will recognize gain,
if any, upon the issuance to them of withdrawable savings accounts, an interest
in the liquidation account and nontransferable subscription rights to purchase
Company stock, but only to the extent of the value, if any, of the subscription
rights. The form of such opinion has been filed with the SEC as an exhibit to
the Company's registration statement.
In the opinion of FinPro, which opinion is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common Stock
at a price equal to its estimated fair market value, which will be the same
price as the Purchase Price for the unsubscribed shares of Common Stock. If the
subscription rights granted to Eligible Account Holders and Supplemental
Eligible Account Holders are deemed to have an ascertainable value, receipt of
such rights could result in taxable gain to those Eligible Account Holders and
Supplemental Eligible Account Holders who exercise the subscription rights in an
amount equal to such value and the Bank could recognize gain on such
distribution. Eligible Account Holders and Supplemental Eligible Account Holders
are encouraged to consult with their own tax advisor as to the tax consequences
in the event that such subscription rights are deemed to have an ascertainable
value.
Unlike private rulings, an opinion of counsel is not binding on the IRS
and the IRS could disagree with the conclusions reached therein. Depending on
the conclusion or conclusions with which the IRS disagrees, the IRS may take the
position that the transaction is taxable to any one or more of the Mutual
Holding Company, the Mid-Tier Holding Company and/or the members of the Mutual
Holding Company, the Bank, the Minority Stockholders of the Bank and/or the
Eligible Account Holders and Supplemental Eligible Account Holders who exercise
their subscription rights. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding.
Certain Restrictions on Purchase or Transfer of Shares After Conversion
All Subscription Shares purchased in the Offering by a director or an
executive officer of the Bank will be subject to a restriction that the shares
not be sold for a period of one year following the Conversion, except in the
event of the death of such director or executive officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of
98
any certificate or record ownership of such shares other than as provided above
is a violation of the restriction. Any shares of Common Stock issued at a later
date as a stock dividend, stock split, or otherwise, with respect to such
restricted stock will be subject to the same restrictions. The directors and
executive officers of the Bank and certain other persons in receipt of material
non-public information will also be subject to the insider trading rules
promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to a stock option plan or any
tax qualified employee stock benefit plan of or non-tax qualified employee stock
benefit plan of the Bank or Company (including any employee plan, recognition
plan or restricted stock plan).
Unless approved by the OTS, the Company will not be permitted to
repurchase shares of its Common Stock for three years, except for: (i) an offer
to all stockholders on a pro rata basis; or (ii) for the repurchase of
qualifying shares of a director. Notwithstanding the foregoing, beginning one
year following completion of the Conversion the Company may repurchase its
Common Stock so long as (i) the repurchases within the following two years are
part of an open-market program not involving greater than 5% of its outstanding
capital stock during a twelve-month period; (ii) the repurchases do not cause
the Bank to become undercapitalized; and (iii) the Company provides to the
Regional Director of the OTS no later than ten days prior to the commencement of
a repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY AND THE BANK
General
The Plan of Conversion provides for the Conversion of the Mutual
Holding Company from the mutual to the stock form of organization and in
connection therewith, the Company, as a new Delaware stock corporation has been
organized which will become the sole stockholder of the Bank following the
Conversion. Provisions in the Company's Certificate of Incorporation and Bylaws
together with provisions of Delaware corporate law, may have anti-takeover
effects. In addition, certain provisions of the Company's and Bank's
compensation plans contain provisions which may discourage or make more
difficult for persons or companies to acquire control of either the Company or
the Bank. Also, the Bank's Stock Charter and Bylaws and compensation plans
entered into in connection with the Conversion may have anti-takeover effects as
described below. In addition, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
Restrictions in the Company's Certificate of Incorporation and Bylaws
A number of provisions of the Company's Certificate of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt or change of control which is not approved by the Board
of Directors but which a majority of individual Company stockholders may deem to
be in their best interests or in which stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who desire to participate in such a transaction may not have an
opportunity to do so. Such provisions will also render the removal of the
current Board of Directors or management of the Company more difficult. The
following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference.
99
Limitation 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. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Securities Exchange Act of 1934, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to which
such person and his affiliates have or share investment or voting power, but
shall not include shares beneficially owned by the ESOP or directors, officers
and employees of the Bank or Company or shares that are subject to a revocable
proxy and that are not otherwise beneficially owned, or deemed by the Company to
be beneficially owned, by such person and his affiliates. The Certificate of
Incorporation of the Company further provides that the provision limiting voting
rights may only be amended upon the vote of 80% of the outstanding shares of
voting stock.
Board of Directors. The Board of Directors of the Company is divided
into three classes. Each class shall serve a staggered term. The Company's
Certificate of Incorporation and Bylaws provide that the size of the Board l
shall be determined by a majority of the directors. The Certificate of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a shareholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Company. The Certificate of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon the
vote of 80% of the outstanding shares of voting stock.
The Company will have a Nominating Committee which will be responsible
for nominations of directors. Stockholders who wish to nominate persons for
election to the Board of Directors may do so if the stockholder makes timely
written notice to the Company's Secretary. Generally, to be timely, such notice,
which must include all information required to be disclosed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, must be received at
the Company's principal executive offices no later than ninety (90) days prior
to the date of the meeting.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of shareholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
shareholders of the Company may be taken only at an annual or special meeting
and prohibits shareholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 70.0 million shares of Common Stock and 1.0 million shares of
Preferred Stock. The shares of Common Stock and Preferred Stock were authorized
in an amount greater than that to be issued in the Conversion to provide 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 rating 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
100
of stock options and to permit the 1998 Retention Plan to obtain the equivalent
of 4% of the shares sold in the Offering.
Shareholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Company's outstanding shares of voting
stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to exceptions, be
approved by the vote of the holders of only a majority of the outstanding shares
of Common Stock of the Company and any other affected class of stock. Under the
Certificate of Incorporation, at least 80% approval of stockholders is required
in connection with any Business Combination involving an Interested Stockholder
(as defined below) except (i) in cases where the proposed transaction has been
approved in advance by a majority of those members of the Company's Board of
Directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the shareholder became an Interested
Stockholder or (ii) if the proposed transaction met certain conditions set forth
therein which are designed to afford the shareholders a fair price in
consideration for their shares, in which cases approval of only a majority of
the outstanding shares of voting stock is required. The term "Interested
Stockholder" is defined to include any individual, corporation, partnership or
other entity (other than the Company or its subsidiary) which owns beneficially
or controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of the Company. This provision of the Certificate of Incorporation
applies to any "Business Combination," which is defined to include (i) any
merger or consolidation of the Company or any of its subsidiaries with or into
any Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, transfer, pledge or other disposition to or with any Interested
Stockholder or Affiliate of an Interested Stockholder of 25% or more of the
assets of the Company or combined assets of the Company and its subsidiary;
(iii) the issuance or transfer to any Interested Stockholder or its Affiliate by
the Company (or any subsidiary) of any securities of the Company in exchange for
any assets, cash or securities the value of which equals or exceeds 25% of the
fair market value of the Common Stock of the Company; (iv) the adoption of any
plan for the liquidation or dissolution of the Company proposed by or on behalf
of any Interested Stockholder or Affiliate thereof; and (v) any reclassification
of securities, recapitalization, merger or consolidation of the Company which
has the effect of increasing the proportionate share of Common Stock or any
class of equity or convertible securities of the Company owned directly or
indirectly, by an Interested shareholder or Affiliate thereof.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein), to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Bank and the stockholders of the Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Company's
customers and the Bank's present and future account holders, borrowers and
employees; on the communities in which the Company and the Bank operate or are
located; and on the ability of the Company to fulfill its corporate objectives
as a savings and loan holding company and on the ability of the Bank to fulfill
the objectives of a federally chartered stock savings association under
applicable statutes and regulations. By having these standards in the
Certificate of Incorporation of the Company, the Board of Directors may be in a
stronger position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Certificate of Incorporation, including the provision limiting voting rights,
the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Certificate of
101
Incorporation. The Company's Bylaws may be amended by its Board of Directors, or
by a vote of 80% of the total votes eligible to be voted at a duly constituted
meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
shareholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a shareholder meeting to have at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a shareholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
shareholder and the stockholder's interest in the business matter. Similarly, a
shareholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
Anti-Takeover Effects of the Company's Certificate of Incorporation, Bylaws and
Compensation Plans Adopted in the Conversion
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Bank's current and proposed employment agreements and stock
benefit plans may also discourage takeover attempts by increasing the costs to
be incurred by the Bank and Company in the event of a takeover. See "Management
of the Bank."
The foregoing provisions and limitations may make it more difficult for
companies or persons to acquire control of the Bank. Additionally, the
provisions could deter offers to the shareholders which might be viewed by such
shareholders to be in their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and compensation plans are in the best
interests of the Company and its stockholders. An unsolicited non-negotiated
proposal can seriously disrupt the business and management of a corporation and
cause it great expense. Accordingly, the Board of Directors believes it is in
the best interests of the Company and its stockholders to encourage potential
acquirors to negotiate directly with management and that these provisions will
encourage such negotiations and discourage non-negotiated takeover attempts. It
is also the Board of Directors' view that these provisions should not discourage
persons from proposing a merger or other transaction at a price that reflects
the true value of the Company and that otherwise is in the best interest of all
stockholders.
Delaware Corporate Law
In 1988, Delaware enacted a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in transactions with the
target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the shareholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, calculated without regard to those
shares owned by the corporation's directors who are also officers or certain
employee stock plans; (iii) any business combination with an Interested
Stockholder that is approved by the Board of Directors and by a two-thirds vote
of the outstanding voting
102
stock not owned by the Interested Stockholder; and (iv) certain business
combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the Board of Directors. A corporation may exempt
itself from the requirements of the statute by adopting an amendment to its
Certificate of Incorporation or Bylaws electing not to be governed by Section
203. At the present time, the Board of Directors of the Company does not intend
to propose any such amendment.
Restrictions in the Bank's Federal Stock Charter and Bylaws
The Bank's Charter contains a provision whereby the acquisition of or
offer to acquire beneficial ownership of more than 10% of the issued and
outstanding shares of any class of equity securities of the Bank by any person
(i.e., any individual, corporation, group acting in concert, trust, partnership,
joint stock company or similar organization), either directly or through an
affiliate thereof, will be prohibited until August 3, 2000 (five years from the
date of consummation of the Reorganization). Any stock beneficially owned in
excess of 10% of the stock outstanding will be deemed to be acquired in
violation of the Charter provision and will not be counted as outstanding for
voting purposes. This limitation shall not apply to any transaction in which the
Bank forms a stock holding company without a change in the respective beneficial
ownership interests of its stockholders, other than pursuant to the exercise of
any dissenter or appraisal rights, the purchase of shares by underwriters in
connection with a public offering, or the purchase of shares by a tax qualified
employee stock benefit plan. In the event that holders of revocable proxies for
more than 10% of the shares of the Common Stock of the Company seek, among other
things, to elect one-third or more of the Company's Board of Directors, to cause
the Company's stockholders to approve the acquisition or corporate
reorganization of the Company, or to exert a continuing influence on a material
aspect of the business operations of the Company, which actions could indirectly
result in a change in control of the Bank, the Board of Directors of the Bank
will be able to assert this provision of the Bank's Charter against such
holders. Although the Board of Directors of the Bank is not currently able to
determine when and if it would assert this provision of the Bank's Charter, the
Board of Directors, in exercising its fiduciary duty, may assert this provision
if it were deemed to be in the best interests of the Bank, the Company and its
stockholders. It is unclear, however whether this provision, if asserted, would
be successful against such persons in a proxy contest which could result in a
change in control of the Bank indirectly through a change in control of the
Company. For a period of five years from the effective date of the
Reorganization, shareholders will not be permitted to call a special meeting of
shareholders relating to a change of control of the Bank or a Charter amendment
or to cumulate their votes in the election of directors. The staggered terms of
the Board of Directors could have an anti-takeover effect by making it more
difficult for a majority of shares to force an immediate change in the Board of
Directors since only one-third of the Board is elected each year. The purpose of
the provisions is to assure stability and continuity of management of the Bank
in the years immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time for the issuance or use of the shares of undesignated preferred
stock proposed to be authorized, the Board of Directors believes that the
availability of such shares will provide the Bank with increased flexibility in
structuring possible future financing and acquisitions and in meeting other
corporate needs which may arise. In the event of a proposed merger, tender offer
or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of preferred stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such preferred stock, therefore, may be to deter or render
more difficult a future takeover attempt. The Board of Directors of the Bank
does not intend to issue any preferred stock except on terms which the Board
deems to be in the best interests of the Bank and its then existing
stockholders.
Regulatory Restrictions
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
103
For three years following the Conversion, OTS regulations prohibit any
person from acquiring, either directly or indirectly, or making an offer to
acquire more than 10% of the stock of any converted savings institution, without
the prior written approval of the OTS, except for (i) offers that if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock, (ii) offers in the
aggregate for up to 24.99% by the ESOP or other tax-qualified plans of the
Company or the Bank, and (iii) offers which are not offered by recently
converted savings associations and which receive prior OTS approval. Such
prohibition is also applicable to the acquisition of the Common Stock of the
Company. 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 matters submitted to a
vote of shareholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity
security of the Company generally would be subject to approval by the OTS under
the Savings and Loan Holding Company Act (the "SLHCA"). The OTS requires all
persons seeking control of a savings institution, and, therefore, indirectly its
holding company, to obtain regulatory approval prior to offering to obtain
control. Such change in control restrictions on the acquisition of holding
company stock are not limited to three years after conversion but will apply for
as long as the regulations are in effect. Persons holding revocable or
irrevocable proxies may be deemed to be beneficial owners of such securities
under OTS regulations and therefore prohibited from voting all or the portion of
such proxies in excess of the 10% aggregate beneficial ownership limit. Such
regulatory restrictions may prevent or inhibit proxy contests for control of the
Company or the Bank which have not received prior regulatory approval.
Additional Antitakeover Effects
Assuming executive officers and directors (i) purchase 76,000
Subscription Shares in the Offering, (ii) receive Exchange Shares in the Share
Exchange as described above, (iii) receive a number of shares of Common Stock
equal to 4% and 10% of the number of Subscription Shares sold in the Offering
pursuant to the 1998 Recognition Plan and 1998 Stock Option Plan, respectively
(assuming such plans are approved by stockholders, that all awards are vested
and all options exercised, and the 1998 Recognition Plan shares are purchased in
the open market); and (iv) receive all stock benefits that were not vested as of
December 1, 1997, and exercised all such stock options; then executive officers
and directors will own between _____% and _____% of the Common Stock at the
minimum and adjusted maximum of the Offering Range, respectively. Such amount
does not include the 2.6% of the Company's Common Stock that will be owned by
the ESOP at the conclusion of the Conversion, assuming it purchases 8.0% of the
Subscription Shares sold in the Offering, and assuming that all participants
vote the shares allocated to their ESOP account in accordance with management's
recommendations. Under the terms of the ESOP, the unallocated shares will be
voted by the independent ESOP trustee in the same proportion as the allocated
shares. Accordingly, directors and officers will have effective voting control
over a substantial amount of Common Stock issued and outstanding at the
completion of the Conversion. The potential voting control by directors and
officers could, together with additional stockholder support or upon exercise of
their options, defeat stockholder proposals requiring an 80% supermajority vote.
As a result, these provisions may preclude takeover attempts that certain
stockholders deem to be in their best interest and may tend to perpetuate
existing management.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
At the Effective Date, the Company will be authorized to issue 75.0
million shares of Common Stock having a par value of $.01 per share and 5.0
million shares of preferred stock having a par value of $.01 per share (the
"Preferred Stock"). The Company currently expects to issue up to 20,241,623
(subject to adjustment) shares of Common Stock in the Offering, and up to
10,808,377 shares (subject to adjustment) in exchange for Minority Shares in the
Conversion. The Company does not intend to issue shares of Preferred Stock in
the Conversion. Each share of the Company's Common Stock will have the same
relative rights as, and will be identical in all respects with, each
104
other share of Common Stock. Upon payment of the Purchase Price for the Common
Stock, in accordance with the Plan of Conversion, all such stock will be duly
authorized, fully paid and nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the FDIC
or any other government agency.
Common Stock
Dividends. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy." The holders of Common
Stock of the Company will be entitled to receive and share equally in such
dividends as may be declared by the Board of Directors of the Company out of
funds legally available therefor. If the Company issues Preferred Stock, the
holders thereof may have a priority over the holders of the Common Stock with
respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or as are otherwise presented to them by
the Board of Directors. Except as discussed in "Restrictions on Acquisition of
the Company and the Bank," each holder of Common Stock will be entitled to one
vote per share and (for a period of five years from the consummation of the
Conversion) will not have any right to cumulate votes in the election of
directors. If the Company issues Preferred Stock, holders of the Preferred Stock
may also possess voting rights. Certain matters require an 80% shareholder vote.
See "Restrictions on Acquisition of the Company and the Bank."
As a federal stock savings association, corporate powers and control of
the Bank are vested in its Board of Directors, who elect the officers of the
Bank and who fill any vacancies on the Board of Directors as it exists upon
Conversion. Voting rights of the Bank are vested exclusively in the owners of
the shares of capital stock of the Bank, which will be the Company, and voted at
the direction of the Company's Board of Directors. Consequently, the holders of
the Common Stock will not have direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion--Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue Preferred Stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
105
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General. The Charter of the Bank authorizes the issuance of capital
stock consisting of 20,000,000 shares of common stock, par value $10.00 per
share, and 10,000,000 shares of preferred stock, which preferred stock may be
issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common stock
of the Bank has the same relative rights as, and is identical in all respects
with, each other share of common stock. The Board of Directors of the Bank is
authorized to approve the issuance of common stock up to the amount authorized
by the Charter without the approval of the Bank's stockholders. All of the
issued and outstanding Common Stock of the Bank will be held by the Company as
the Bank's sole stockholder.
Dividends. The holders of the Bank's common stock are entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefore. See "Dividend
Policy" for certain restrictions on the payment of dividends.
Voting Rights. The holders of the Bank's common stock possess exclusive
voting rights in the Bank. Each holder of shares of common stock is entitled to
one vote for each share held, subject to any right of shareholders to cumulate
their votes for the election of directors. The holders of the Bank's common
stock are not be permitted to cumulate their votes for the election of
directors. See "Restrictions on Acquisition of the Company and the
Bank--Antitakeover Effects of the Company's Certificate of Incorporation, Bylaws
and Compensation Plans Adopted in the Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of the Bank's common stock will be entitled to
receive, after payment of all debts and liabilities of the Bank (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to Eligible Account Holders, all assets of
the Bank available for distribution in cash or in kind. If additional preferred
stock is issued subsequent to the Conversion, the holders thereof may also have
priority over the holders of common stock in the event of liquidation or
dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price thereon, the common
stock will be fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services.
EXPERTS
The consolidated financial statements of Peoples Bancorp, Inc. as of
December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996, have been included herein in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
FinPro has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its opinion with
respect to subscription rights.
106
LEGAL OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Bank and Company by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., special counsel to the Bank and Company. Certain legal matters will be
passed upon for FBR by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act 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, including
the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
The SEC maintains a web site (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants,
including the Company, that file electronically. The statements contained in
this Prospectus 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.
The Bank 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 Office of the District Director of the
OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan of Conversion, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion.
A copy of the Certificate of Incorporation and the Bylaws of the
Company and the Federal Stock Charter and Bylaws of the Bank are available
without charge from the Bank.
107
PEOPLES BANCORP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT.............................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION
(As of September 30, 1997 (unaudited) and December 31, 1996 and 1995)... F-3
CONSOLIDATED STATEMENTS OF INCOME
(For the nine months ended September 30, 1997 and 1996 (unaudited) and
the years ended December 31, 1996, 1995 and 1994)....................... 29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(For the nine months ended September 30, 1997 (unaudited) and the years
ended December 31, 1996, 1995 and 1994)................................. F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the nine months ended September 30, 1997 and 1996 (unaudited) and
the years ended December 31, 1996, 1995 and 1994)....................... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(For the nine months ended September 30, 1997 and 1996 (unaudited) and
the years ended December 31, 1996, 1995 and 1994)....................... F-10
All schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements.
Financial statements of Peoples Bancorp, Inc. (the "Company") are not presented
herein because the Company has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an organizational
nature.
Financial statements of Peoples Bancorp, M.H.C. (the "Mutual Holding Company")
are not presented herein because the Mutual Holding Company's assets other than
Mid-Tier Common Stock are insignificant and it has no liabilities and does not
conduct any business.
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Peoples Bancorp, Inc.:
We have audited the accompanying consolidated financial statements of Peoples
Bancorp, Inc. (holding company for Trenton Savings Bank FSB) as listed on the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Peoples
Bancorp, Inc. as of December 31, 1996 and 1995, and the results of its
operations and cash flows for each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted accounting principles.
January 21, 1997
PEOPLES BANCORP, INC.
Consolidated Statements of Condition
September 30, 1997 (unaudited) and
December 31, 1996 and 1995
(in thousands)
September 30, December 31,
Assets 1997 1996 1995
--------- --------- ----------
(unaudited)
Cash and due from banks (note 14) $ 10,909 12,938 6,253
Federal funds sold 2,300 8,000 10,000
--------- --------- ---------
Total cash and cash equivalents 13,209 20,938 16,253
Securities available for sale (note 5) 127,651 87,648 83,776
Securities and mortgage-backed securities held to
maturity (market value of $70,922 in 1997, $86,512
in 1996 and $92,158 in 1995) (notes 6 and 7) 70,761 86,553 91,261
Federal Home Loan Bank stock, at cost 3,386 3,089 2,864
Loans, net (note 8) 397,866 380,288 306,093
Bank premises and equipment, net (note 9) 6,800 6,982 5,867
Accrued interest receivable (note 10) 4,823 3,602 3,765
Prepaid expenses 1,822 1,471 767
Intangible assets (note 2) 10,834 9,164 2,325
Other assets 1,790 1,281 1,247
--------- --------- ---------
Total assets $ 638,942 601,016 514,218
========= ========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 11) 493,334 491,246 410,770
Borrowing (note 12) 30,000 -- --
Accrued expenses and other liabilities 7,369 6,418 5,906
--------- --------- ---------
Total liabilities 530,703 497,664 416,676
--------- --------- ---------
Stockholders' equity:
Common stock. $.10 par value. Authorized
20,000,000 shares; issued and outstanding
9,045,795 shares at September 30, 1997,
9,037,160 shares at December 31, 1996 and
8,912,500 shares at December 31, 1995 904 904 891
Additional paid-in capital 30,495 30,357 28,687
Retained earnings - substantially restricted 77,592 72,545 65,267
Unearned Management Recognition Plan shares (954) (1,543) --
Net unrealized gain on securities available for sale,
net of taxes 202 1,089 2,697
--------- --------- ---------
Total stockholders' equity (notes 13 and 14) 108,239 103,352 97,542
Commitments and contingencies (notes 9 and 16)
--------- ------- -------
Total liabilities and stockholders' equity $ 638,942 601,016 514,218
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
PEOPLES BANCORP, INC.
Consolidated Statements of Income
Nine months ended September 30, 1997 and 1996 (unaudited)
and the years ended December 31, 1996, 1995 and 1994
(in thousands)
September 30, December 31,
----------------- ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
Interest and dividend income:
Interest and fees on loans $22,393 18,085 25,503 22,347 20,569
Interest on securities available for sale 5,825 3,594 4,762 4,484 5,058
Interest and dividends on investment
securities held to maturity 3,992 4,464 5,861 5,183 3,485
Interest on Federal funds sold 406 519 777 1,504 355
------- ------- ------- ------- -------
Total interest income 32,616 26,662 36,903 33,518 29,467
Interest expense on deposits (note 11) 14,734 12,865 17,941 17,010 12,851
Interest expense on borrowings (note 12) 1,489 -- -- -- --
------- ------- ------- ------- -------
Total interest expense 16,223 12,865 17,941 17,010 12,851
------- ------- ------- ------- -------
Net interest income 16,393 13,797 18,962 16,508 16,616
Provision for loan losses (note 8) 1,488 -- -- 150 180
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 14,905 13,797 18,962 16,358 16,436
------- ------- ------- ------- -------
Other income:
Service fees on deposit accounts 651 259 485 361 346
Fees and other income 595 240 471 390 394
Net gain on sale of other real estate -- 23 23 2 3
Net gain on sale of securities (note 5) 2,923 2,189 2,839 4,193 2,408
------- ------- ------- ------- -------
Total other income 4,169 2,711 3,818 4,946 3,151
------- ------- ------- ------- -------
Operating expense:
Salaries and employee benefits (note 15) 5,357 3,361 5,104 3,959 3,626
Net occupancy expense (note 9) 1,171 903 1,306 1,131 1,033
Equipment expense 84 53 88 58 71
Data processing fees 392 302 416 346 334
Amortization of intangible assets 577 204 389 226 21
FDIC insurance premium (note 18) 39 232 233 492 873
FDIC Special Assessment -- 177 177 -- --
Other operating expense 2,224 1,202 1,956 1,580 1,517
------- ------- ------- ------- -------
Total operating expense 9,844 6,434 9,669 7,792 7,475
------- ------- ------- ------- -------
Income before income taxes 9,230 10,074 13,111 13,512 12,112
Income taxes (note 13) 3,332 3,626 4,720 4,864 4,437
------- ------- ------- ------- -------
Net income $ 5,898 6,448 8,391 8,648 7,675
======= ======= ======= ======= =======
Earnings per common share $ .65 .72 0.94 -- --
======= ======= ======= ======= =======
Weighted average common shares outstanding 9,129 8,966 8,966 -- --
See accompanying Notes to Consolidated Financial Statements.
PEOPLES BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the nine months ended September 30, 1997 (unaudited)
and the years ended December 31, 1996, 1995 and 1994
(in thousands)
Net
unrealized
gain on
Retained Unearned securities
Additional earnings Management available Total
Number Common paid-in (substantially Recognition for sale, stockholders'
of shares stock capital restricted) Plan shares net of taxes equity
--------- ----- ------- ---------- ----------- ------------ ----------
Balance at December 31, 1993 -- $ -- -- 49,123 -- -- 49,123
Net income for the year -- -- -- 7,675 -- -- 7,675
Cumulative effect of accounting
change - net unrealized gain in
securities designated as available
for sale, net of income tax
expense of $3,019 -- -- -- -- -- 5,371 5,371
Net change in net unrealized gain
on securities available for sale,
net of income tax benefit of $1,861 -- -- -- -- -- (3,401) (3,401)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 -- -- -- 56,798 -- 1,970 58,768
Proceeds of the stock offering,
net of issuance expenses of $1,387,
and mutual holding company
capitalization, $200 8,912,500 891 28,687 -- -- -- 29,578
Net income for the year -- -- -- 8,648 -- -- 8,648
Dividends declared -- -- -- (179) -- -- (179)
Net change in net unrealized
gain on securities
available for sale,
net of tax expense of $360 -- -- -- -- -- 727 727
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 8,912,500 891 28,687 65,267 -- 2,697 97,542
Net income for the year -- -- -- 8,391 -- -- 8,391
Dividends declared -- -- -- (1,113) -- -- (1,113)
Establishment of Management
Recognition Plan 124,660 13 1,670 -- (1,683) -- --
Amortization on unearned
Management Recognition
Plan shares -- -- -- -- 140 -- 140
Net change in net unrealized
gain on securities
available for sale, net
of tax expense of $905 -- -- -- -- -- (1,608) (1,608)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 9,037,160 904 30,357 72,545 (1,543) 1,089 103,352
Net income for the nine
month period (unaudited) -- -- -- 5,898 -- -- 5,898
Dividends declared -- -- -- (851) -- -- (851)
Proceeds from exercise of
stock options 8,635 -- 13 -- -- -- 13
Amortization on unearned
Management Recognition
Plan shares -- -- 125 -- 589 -- 714
Net change in net unrealized
gain on securities
available for sale, net
of tax expense of $499 -- -- -- -- -- (887) (887)
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30,
1997 (unaudited) 9,045,795 $ 904 30,495 77,592 (954) 202 108,239
See accompanying Notes to Consolidated Financial Statements.
PEOPLES BANCORP, INC.
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 (unaudited)
and the years ended December 31, 1996, 1995 and 1994
(in thousands)
September 30, December 31,
----------------- -----------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
Net income $ 5,898 6,448 8,391 8,648 7,675
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,488 -- -- 150 181
Depreciation and amortization expense 579 147 507 433 389
Amortization of Management Recognition Plan shares 714 56 140 -- --
Amortization of intangible assets 577 204 389 226 21
Net accretion of premiums and discounts on securities (64) (126) (586) (204) (81)
(Increase) decrease in accrued interest receivable
and other assets (4,340) 361 602 (4,997) 124
Increase (decrease) in accrued interest payable and other
liabilities 826 (565) 863 855 750
Net gain on sale of securities (2,923) (2,189) (2,839) (4,193) (2,408)
Net gain on sale of other real estate -- (23) (23) (2) (3)
-------- -------- -------- -------- --------
Net cash provided by operating activities 2,755 4,313 7,444 916 6,648
-------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale
and held to maturity 39,940 44,055 51,756 44,850 56,960
Purchase of securities held to maturity -- (11,522) (11,759) (34,016) (6,491)
Purchase of securities available for sale (73,046) (16,997) (40,281) (44,949) (29,127)
Proceeds from sales of securities available for sale 3,816 3,583 9,368 10,054 12,661
Purchase of Federal Home Loan Bank Stock (297) (225) -- -- --
Maturities and repayments of mortgage-backed securities 9,337 11,042 12,176 6,699 6,576
Purchase of mortgage-backed securities held to maturity -- -- (6,065) (25,495) (9,540)
Net increase in loans (17,578) (29,715) (26,266) (16,773) (34,106)
Net additions to bank premises, furniture and equipment (398) (478) (742) (387) (402)
Proceeds from sale of bank premises, furniture and equipment 312 -- -- -- --
Proceeds from sales of other real estate owned -- 105 105 79 3
Payment for purchase of Burlington County Bank, net
of cash acquired -- -- 3,363 -- --
Payment for purchase of Manchester Trust Bank, net
of cash acquired (3,807) -- -- -- --
-------- -------- -------- -------- --------
Net cash used in investing activities (41,721) (152) (8,345) (59,938) (3,466)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds received from stock offering -- -- -- 29,778 --
Dividends paid (851) (828) (1,113) (179) --
Capitalization of mutual holding company -- -- -- (200) --
Net cash received from assumption of deposit liabilities -- -- -- 31,468 --
Net increase in demand deposits 16,475 3,688 4,856 1,405 929
Net (decrease) increase in savings and time deposits (14,387) 2,671 2,443 338 (7,209)
Repayment of subordinated note -- -- (600) -- --
Net increase in borrowings 30,000 -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 31,237 5,531 5,586 62,610 (6,280)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents (7,729) 9,692 4,685 3,588 (3,098)
Cash and cash equivalents as of beginning of period 20,938 16,253 16,253 12,665 15,763
-------- -------- -------- -------- --------
Cash and cash equivalents as of end of period $ 13,209 25,945 20,938 16,253 12,665
======== ====== ====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid:
Interest $ 16,112 10,829 15,577 16,394 12,673
Income taxes $ 3,351 3,975 4,875 5,805 4,320
Noncash investing activities:
Transfer of securities to securities available for sale $ -- -- -- -- 93,872
Transfer of securities available for sale to securities
held to maturity $ -- -- -- -- 37,112
Assets acquired in settlement of loans $ 374 110 723 34 77
See accompanying Notes to Consolidated Financial Statements
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996 (unaudited) and
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Peoples Bancorp, Inc. (the Bancorp) is the holding company for its
wholly-owned subsidiary , Trenton Savings Bank FSB (the Bank). The Bank
provides banking services to individual and corporate customers
primarily in Mercer and Burlington counties in New Jersey and Bucks
county in Pennsylvania. The Bank is subject to competition from other
financial institutions and the regulations of certain Federal and state
agencies and undergoes periodic examinations by those regulatory
authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts
of the Bancorp, the Bank, Manchester Trust Bank, and TSBusiness Finance
Corporation. Significant intercompany accounts and transactions have
been eliminated in consolidation.
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
dates of the financial statements and the reported amounts of revenues
and expenses during the periods presented. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses. In connection with the determination of the allowance
for loan losses, management obtains independent appraisals for
significant properties.
The unaudited consolidated financial statements as of September 30,
1997 and the nine month periods ended September 30, 1997 and 1996 have
been prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation of
such interim periods have been made. The results of operations for the
nine months ended September 30, 1997 are not necessarily indicative of
results that may be expected for the year ending December 31, 1997.
Loans
Loans are stated at the principal amount outstanding, net of deferred
loan origination fees, costs and unearned discounts, and the allowance
for loan losses.
Interest income on commercial, real estate mortgage and installment
loans is credited to operations based upon the principal amount
outstanding. Loans are placed on a nonaccrual status when a default of
principal or interest has existed for a period of 90 days, except when,
in the opinion of management, the collection of the principal and
interest is reasonably anticipated or adequate collateral exists.
Previously accrued and uncollected interest is reversed when a loan is
placed on nonaccrual status. Interest income is recognized subsequently
only in the period collected. Loans are returned to an accrual status
when factors indicating doubtful collectibility on a timely basis no
longer exist.
2
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Management, considering current information and events regarding the
borrowers ability to repay their obligations, considers a loan to be
impaired when it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of
impairment is measured based on the fair value of the collateral.
Impairment losses are included in the allowance for loan losses through
provisions charged to operations.
The Bank has defined the population of impaired loans to be all
nonaccrual commercial loans. Impaired loans are individually assessed
to determine that the loan's carrying value is not in excess of the
fair value of the collateral or the present value of the loan's
expected cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, including mortgage and consumer
loans, are specifically excluded from the impaired loan portfolio.
Loan origination and commitment fees less certain costs have been
deferred, and the net amount amortized as an adjustment to the related
loan's yield over the contractual life of the related loan.
Allowance for Loan Losses
An allowance for loan losses is charged to operations based on
management's evaluation of the credit risk in its portfolio. Such
evaluation includes a review of all loans for which full collectibility
may not be reasonably assured and considers, among other matters, the
estimated net realizable value of the underlying collateral, economic
conditions and other matters which warrant consideration. All losses
are charged to the allowance when the loss actually occurs or when a
determination is made that a loss is probable. Subsequent recoveries,
if any, are added back to the allowance.
A substantial portion of the Bank's loans are secured by real estate in
the New Jersey market. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio is susceptible to
changes in market conditions in New Jersey and the Bank's market area.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions, particularly in New Jersey. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to
the allowance based on their judgments about information available to
them at the time of their examination.
Debt, Equity and Mortgage-Backed Securities
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS 115, the Bank is
required to report debt, readily-marketable equity and
3
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
mortgage-backed securities in one of the following categories (i)
"held-to-maturity" (management has a positive intent and ability to
hold to maturity) which are to be reported at amortized cost; (ii)
"trading" (held for current resale) which are to be reported at fair
value, with unrealized gains and losses included in earnings and (iii)
"available-for-sale" (all other debt, readily marketable equity and
mortgage-backed securities) which are to be reported at fair value,
with unrealized gains and losses excluded from earnings and reported,
net of tax, as a separate component of stockholders' equity.
Accordingly, in adopting SFAS 115, the Bank classified all of its
holdings of debt, readily-marketable equity and mortgage-backed
securities at January 1, 1994 as either "held-to-maturity" or
"available-for-sale." The adoption of SFAS 115 had no impact on 1994
net income but resulted in a net credit of $5,371,298 in stockholders'
equity due to unrealized gains at January 1, 1994, on securities
classified as "available-for-sale."
Premiums and discounts on debt and mortgage-backed securities are
amortized to expense and accreted to income over the estimated life of
the respective security using the level-yield method.
Gains and losses on the sale of securities are based upon the amortized
cost of the security using the specific identification method.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is provided for on a
straight-line basis over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided for on a
straight-line basis over the shorter of the useful life or the lease
term plus one renewal period.
Intangible Assets
Intangible assets consist primarily of premiums paid upon the 1995
assumption of deposits and goodwill arising from the 1996 acquisition
of the net assets of Burlington County Bank and the 1997 acquisition of
the net assets of Manchester Trust Bank. Premiums on deposits are
amortized on a straight-line basis over a period of ten years. Goodwill
is being amortized on a straight-line basis over 15 years. On a
periodic basis, the Bank reviews its intangible assets for the events
or changes in circumstances that may indicate that the carrying amount
of the assets may not be recoverable.
Income Taxes
The Bank records income taxes utilizing the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
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 in effect for the year in which those
temporary differences are expected to be recovered or settled.
4
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Pension Plan
The Bank has a pension plan covering employees and officers meeting
service and age requirements. The Bank's policy is to fund pension
costs accrued.
Other Postretirement Benefit Plans
In addition to the Bank's defined benefit plan, the Bank provides a
postretirement medical and life insurance plan to its retirees. The
benefits available under the plan depend on the years of service to the
Bank and the age of the retiree. The Bank's policy is to accrue for
such cost in the period which the benefit is earned.
Stock Option Plan
The Bank applies the "intrinsic value based method" as described in APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation.
Accordingly, no compensation cost has been recognized for the stock
option plan.
Management Recognition Plan
Compensation cost is incurred by the Bank over the vesting period based
upon the fair value of the shares at the date of allocation.
Statements of Cash Flows
The Bank considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Earnings Per Share
Earnings per share data is presented for the periods ended September
30, 1997 and 1996 and for the year ended December 31, 1996. Prior years
earnings per share data is not presented as the Bank completed its
initial public offering on August 3, 1995 and such data is not deemed
meaningful by management.
Reclassifications
Certain reclassifications have been made to prior years amounts to
conform to the September 1997 presentation.
5
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions
Intangible assets consist primarily of premium paid upon the assumption
of deposits and goodwill arising from the acquisitions of Burlington
County Bank and Manchester Trust Bank.
On September 8, 1997, the Bancorp completed the acquisition of
Manchester Trust Bank, a trust services company with $140.1 million of
assets under management. Under terms of the agreement, Manchester will
be operated as a wholly-owned subsidiary of the Bank.
The following summarizes completed acquisitions of Peoples Bancorp,
Inc. as of September 30, 1997 (in thousands):
Total as of the date acquired
------------------------------------------------ Method
Year Net Cash of
acquired Assets Loans Deposits assets paid accounting
-------- ------ ----- -------- ------ ---- ----------
Assumption of deposits
from the RTC 1995 $ - - 33,974 - 2,506 Purchase
Burlington County Bank 1996 80,249 48,200 73,200 5,245 12,473 Purchase
Manchester Trust Bank 1997 2,013 - - 1,894 4,134 Purchase
====== ====== ====== ===== ======
The above transactions resulted in the following goodwill (in
thousands):
Goodwill balance as of:
-------------------------------------------
Sept. 30, December 31, Original Amortization
1997 1996 1995 amount period
---- ---- ---- ------ ------
Assumption of deposits
from the RTC $ 1,850 2,054 2,325 2,506 10 years
Burlington County Bank 6,750 7,110 - 7,228 15 years
Manchester Trust Bank 2,234 - - 2,240 15 years
--------- ----- ------ ------
$ 10,834 9,164 2,325 11,974
========= ===== ===== ======
The following supplemental schedule presents the pro forma results of
operations for the periods ended September 30, 1997 and 1996 and for
the years ended December 31, 1996 and 1995 as though the companies had
combined on January 1, 1995. The pro forma results of operations do not
necessarily reflect the results of operations that would have occurred
had the Bank, Manchester and Burlington been combined during such
periods.
September 30,+++ December 31,
---------------------- ------------------
1997 1996 1996 1995
---- ---- ---- ----
(in thousands)
Net interest income $ 16,458 16,410 21,599 20,126
Net income 5,991 6,665 8,633 9,219
Earnings per common share .66 .74 .96 -
Pro forma earnings per common share as of December 31, 1995 is not
presented as its presentation would not be meaningful due to the Bank's
initial stock offering as of August 3, 1995.
6
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(3) Charter Conversion, Reorganization to a Mutual Holding Company and
Conversion to Stock Form of Ownership
On January 1, 1995 the Bank converted from a state chartered mutual
savings bank to a federally chartered mutual savings bank called
Trenton Savings Bank FSB.
On February 8, 1995, the Board of Directors of the Bank unanimously
adopted the Plan of Reorganization from a Federal Mutual Savings Bank
to a Federal Mutual Holding Company and Stock Issuance Plan, which plan
was subsequently amended (as amended, the Plan). Pursuant to the Plan,
the Bank reorganized from a Federally-chartered mutual savings bank
into a Federal mutual holding company, Peoples Bancorp, MHC and
concurrently formed a Federally-chartered capital stock savings
subsidiary, which took the name Trenton Savings Bank FSB. Each deposit
account of the Bank at the time of the reorganization became a deposit
account in the newly-formed bank in the same amount and upon the same
terms and conditions, except that the holder of each such deposit
account has voting and liquidation rights with respect to the holding
company rather than the Bank.
As part of the reorganization, the Bank was authorized to offer stock
in one or more offerings, up to a maximum of 49.9% of the issued and
outstanding shares of its common stock. On May 15, 1995, the Bank
received initial approval from the Office of Thrift Supervision (OTS)
to solicit subscribers for stock.
On August 3, 1995, the Bank completed its minority stock offering
whereby the Bank issued 3,116,500 shares at $10 per share for a total
of $31,165,000, which represents a minority ownership of 35.0% of the
Bank based upon its valuation by an independent appraiser. The net
proceeds of the stock offering, after reflecting offering expenses of
$1.387 million and costs to capitalize the mutual holding of $200,000,
were $29.578 million. The net proceeds were added to the Bank's general
funds to be used for general corporate purposes.
In 1996 and 1995, the Bank declared cash dividends of $0.35 and
$0.0575, respectively, per common share to holders of common stock of
the Bank. The Bank's Federal mutual holding company, Peoples Bancorp,
MHC, waived the receipt of the cash dividends paid by the Bank, and it
currently intends to continue this policy. There can be no assurance
that the Bank's regulators will permit future dividend waivers, or the
terms of such waivers.
(4) Reorganization to a Two-Tiered Mutual Holding Company and Subsequent
Plan of Conversion to Full Stock Ownership Structure
On November 26, 1996 the Bank and Peoples Bancorp, Mutual Holding
Company (MHC) filed an application with the Office of Thrift
Supervision (OTS), their primary regulator, to reorganize into a
two-tiered holding company. Pursuant to the reorganization, which was
approved by the OTS and stockholders, the Bancorp was formed and became
the majority-owned subsidiary of Peoples Bancorp, MHC, and the Bank
became the wholly-owned subsidiary of the Bancorp. The relative
ownership interests of all stockholders of the Bank remained unchanged
as a result of the reorganization. After the reorganization, the Bank
continued its current business and operations as a Federally-chartered
savings bank under its existing name.
7
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(4) Reorganization to a Two-Tiered Mutual Holding Company and Subsequent
Plan of Conversion to Full Stock Ownership Structure, cont.
On September 24, 1997, the Board of Directors of the MHC unanimously
adopted the Plan of Conversion and Reorganization, pursuant to which
the MHC is converting from a federally charted mutual holding company
to a Delaware chartered stock corporation. As part of the Conversion
each of the issued and outstanding Minority Shares shall automatically,
without further action by the holder thereof, be converted into and
become a right to receive a number of shares of Common Stock determined
pursuant to the Exchange Ratio.
Pursuant to the Plan, the MHC's majority interests in the Mid-Tier
Holding Company will be converted into shares at the Exchange Ratio,
and sold in a subscription offering.
The affirmative vote of a majority of the total eligible votes of the
members of the MHC at the Special Meeting of Members is required to
approve the Plan of Conversion and the transactions incident to the
Conversion. The affirmative vote of the holders of at least (i)
two-thirds of the outstanding common stock of the Mid-Tier Holding
Company, and (ii) a majority of the Minority Shares at a special
meeting of stockholders of the Mid-Tier Holding Company is required to
approve the Plan of Conversion. Consummation of the Conversion is also
subject to the approval of the OTS.
(5) Securities Available for Sale
As discussed in note 1, the Bank adopted SFAS 115 as of January 1,
1994. The cumulative effect of this change in accounting for the net
unrealized appreciation in securities designated as available for sale
was an increase to securities of $8,390,032 and to stockholders' equity
of $5,371,298, net of income tax expense of $3,018,734.
The amortized cost and estimated market value of securities available
for sale as of September 30, 1997 and December 31, 1996 and 1995 are as
follows:
September 30, 1997
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ----------
(in thousands)
Debt securities:
United States
Treasury securities $ 51,320 124 -- 51,444
United States Agencies
securities 46,067 322 3 46,386
Other bonds 14,547 43 -- 14,590
Mortgage-backed securities 15,072 149 -- 15,221
-------- -------- -------- --------
127,006 638 3 127,641
Equity securities 10 -- -- 10
-------- -------- -------- --------
$127,016 638 3 127,651
======== ======== ======== ========
8
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(5) Securities Available for Sale, cont.
1996
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
Debt securities:
United States
Treasury securities $65,336 204 33 65,507
United States Agencies
securities 9,924 10 167 9,767
Other bonds 9,151 21 -- 9,172
------- ------- ------- -------
84,411 235 200 84,446
Equity securities 894 2,308 -- 3,202
------- ------- ------- -------
$85,305 2,543 200 87,648
======= ======= ======= =======
1995
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
Debt securities:
United States
Treasury securities $70,944 728 30 71,642
United States Agencies
securities 5,011 -- -- 5,011
------- ------- ------- -------
75,955 728 30 76,653
Equity securities 2,536 4,587 -- 7,123
------- ------- ------- -------
$78,491 5,315 30 83,776
======= ======= ======= =======
On October 1, 1994, the Bank transferred $29,704,943 and $5,799,679 of
mortgage-backed securities and United States Agencies securities from
available for sale to held to maturity at fair value. The unrealized
loss at the date of the transfer was $1,607,055 ($641,346 and
$1,070,550 at December 31, 1996 and 1995, respectively) and is being
amortized over the estimated remaining life of the related securities.
The amortized cost and estimated market value of securities available
for sale at September 30, 1997 and December 31, 1996 by contractual
maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalties.
9
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(5) Securities Available for Sale, cont.
September 30, 1997 December 31, 1996
-------------------- ------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
-------- --------- --------- ----------
(in thousands)
Due within one year $ 32,497 32,538 39,530 39,649
Due after one year through five years 33,093 33,218 34,633 34,706
Due after five years through ten years 46,344 46,664 10,248 10,091
Due after ten years 15,072 15,221 -- --
-------- -------- -------- --------
127,006 127,641 84,411 84,446
Equity securities 10 10 894 3,202
-------- -------- -------- --------
$127,016 127,651 85,305 87,648
======== ======== ======== ========
During the nine month period ended September 30, 1997, and years ended
December 31, 1996, 1995 and 1994, proceeds from sales of securities
available for sale resulted in gross gains and gross losses as follows:
December 31, 1997
Sept. 30, ------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(in thousands)
Proceeds from sales of
securities available for sale $3,816 9,368 10,054 12,661
Gross realized gains 2,923 2,839 4,264 2,559
Gross realized losses -- -- 71 151
====== ====== ====== ======
As of September 30, 1997 United States Agency and Treasury securities with a
fair value of $32,270,000 were pledged to secure a borrowing agreement entered
into during 1997.
10
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(6) Securities Held to Maturity
The amortized cost and estimated market value of securities held to
maturity as of September 30, 1997 and December 31, 1996 and 1995 are as
follows:
September 30, 1997
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ------
(in thousands)
Debt securities:
United States Agencies $14,350 -- 29 14,321
Obligations of state and
political subdivisions 2,293 119 -- 2,412
Corporate bonds 14,515 36 12 14,539
------- ------- ------- -------
$31,158 155 41 31,272
======= ======= ======= =======
1996
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ------
(in thousands)
Debt securities:
United States Agencies $17,042 -- 135 16,907
Obligations of state and
political subdivisions 3,400 98 -- 3,498
Corporate bonds 17,493 55 28 17,520
------- ------- ------- -------
$37,935 153 163 37,925
======= ======= ======= =======
1995
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ------
(in thousands)
Debt securities:
United States Agencies $24,934 71 77 24,928
Obligations of state and
political subdivisions 1,056 100 -- 1,156
Corporate bonds 10,955 100 13 11,042
------- ------- ------- -------
$36,945 271 90 37,126
======= ======= ======= =======
11
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(6) Securities Held to Maturity, cont.
The amortized cost and estimated market value of securities held to
maturity as of September 30, 1997 and December 31, 1996 by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
September 30, 1997 December 31, 1996
-------------------- ------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
--------- ------ --------- ------
(in thousands)
Due in one year or less $11,268 11,261 6,202 6,229
Due after one year through five years 17,576 17,558 29,354 29,196
Due five years through ten years 1,548 1,578 1,578 1,604
Due after ten years 766 875 801 896
------- ------- ------- -------
$31,158 31,272 37,935 37,925
======= ======= ======= =======
As of September 30, 1997 and December 31, 1996 and 1995, United States
Treasury securities with a face value of $900,000, $3,900,000 and
$100,000, respectively were held in trust to secure deposits of public
funds.
(7) Mortgage-Backed Securities Held to Maturity
The amortized cost and estimated market value of mortgage-backed
securities held to maturity as of September 30, 1997, December 31, 1996
and 1995 are as follows:
September 30, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ------
(in thousands)
Government National
Mortgage Association $ 1,459 -- -- 1,459
Federal Home Loan
Mortgage Corporation 38,144 208 161 38,191
------- ------- ------- -------
$39,603 208 161 39,650
======= ======= ======= =======
12
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(7) Mortgage-Backed Securities Held to Maturity, cont.
1996
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ------
(in thousands)
Government National
Mortgage Association $ 1,614 38 8 1,644
Federal Home Loan
Mortgage Corporation 47,004 431 492 46,943
------- --- ------ ------
$48,618 469 500 48,587
======= === ====== ======
1995
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ------
(in thousands)
Government National
Mortgage Association $ 2,056 112 5 2,163
Federal Home Loan
Mortgage Corporation 52,260 748 139 52,869
------- --- ------ ------
$54,316 860 144 55,032
======= === ====== ======
The amortized cost and market value of mortgage-backed securities held
to maturity as of September 30, 1997 and December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
September 30, 1997 December 31, 1996
-------------------- ------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
--------- ------ --------- ------
(in thousands)
Due in one year or less $ 5,540 5,521 3,014 2,990
Due after one year through five years 21,885 22,304 28,776 28,401
Due five years through ten years -- -- 1,405 1,434
Due after ten years 12,178 11,825 15,423 15,762
------- ------- ------- -------
$39,603 39,650 48,618 48,587
======= ======= ======= =======
13
PEOPLES BANCORP, INC.
Notes to Statements of Condition, Continued
(8) Loans
A summary of loans as of September 30, 1997, December 31, 1996 and 1995
follows:
Sept. 30,
1997 1996 1995
--------- -------- --------
(in thousands)
Mortgage loans:
One to four family $ 242,374 239,470 227,717
Commercial real estate and
multi-family 40,305 53,415 27,827
--------- -------- --------
Total mortgage loans 282,679 292,885 255,544
--------- -------- --------
Commercial 62,245 34,486 11,573
Home equity 33,914 28,138 21,833
Other consumer loans 22,195 27,478 18,783
--------- -------- --------
Total other loans 118,354 90,102 52,189
--------- -------- --------
Total loans 401,033 382,987 307,733
Allowance for loan loss (3,202) (2,901) (1,767)
Premiums (discounts) 17 (24) 23
Net deferred costs 18 226 104
--------- -------- --------
Total loans, net $ 397,866 380,288 306,093
========= ======== ========
A summary of the activity in the allowance for loan losses for the nine
month periods ended September 30, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994 is as follows:
September 30, December 31,
------------------------- -------------------------------
1997 1996 1996 1995 1994
------- ------ ------ ------ ------
(in thousands)
Allowance for loan losses
at beginning of period $ 2,901 1,767 1,767 1,642 1,471
Acquired allowance -- -- 1,186 -- --
Provision for loan losses 1,488 -- -- 150 180
Chargeoffs (1,313) (26) (110) (32) (23)
Recoveries 126 -- 58 7 14
------- ------ ------ ------ ------
Allowance for loan losses
at end of period $ 3,202 1,741 2,901 1,767 1,642
======= ====== ====== ====== ======
14
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) Loans, cont.
Loans contractually in arrears by three months or more at September 30,
1997, December 31, 1996 and 1995 were as follows:
1997
---------------------------------------
Carrying Number % of
value of loans category
------------ ----------- ---------
(in thousands)
Mortgage $2,788 48 0.99%
Commercial 1,166 38 1.87
Consumer 109 7 0.19
====== == ====
1996
---------------------------------------
Carrying Number % of
value of loans category
------------ ----------- ---------
(in thousands)
Mortgage $2,277 37 0.78%
Commercial 1,183 19 2.01
Consumer 244 20 0.44
====== == ====
1995
---------------------------------------
Carrying Number % of
value of loans category
------------ ----------- ---------
(in thousands)
Mortgage $1,017 18 0.40%
Commercial 75 1 0.65
Consumer 40 3 0.10
====== == ====
Nonaccrual loans totalled $4,477,000, $1,109,000, $2,951,000,
$1,122,000 and $1,025,000 at September 30, 1997 and 1996, and December
31, 1996, 1995 and 1994, respectively. Nonaccrual loans as of September
30, 1997 include $1,437,000 of loans that are current but are
classified as doubtful as management believes the ultimate collection
of principal and interest is uncertain. Nonaccrual loans do not include
certain loans contractually in arrears by three months or more for
which adequate collateral exists or the collection of principal and
interest is reasonably anticipated. These loans totalled $1,023,000,
$753,000, $10,000 and $448,000 as of September 30, 1997, December 31,
1996, 1995 and 1994, respectively. The amount of interest income on
nonaccrual loans, which would have been recorded had these loans
continued to pay interest at the original contract rate, was
approximately $381,000, $95,000, $249,000, $87,000 and $98,000 for the
nine months ended September 30, 1997 and 1996 and the years ended
December 31, 1996, 1995 and
15
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) Loans, cont.
1994, respectively. Interest income on nonaccrual loans included in net
income amounted to $116,000, $30,000, $76,000, $14,000 and $55,000 for
the nine months ended September 30, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994, respectively. There is no commitment
to lend additional funds to borrowers whose loans have been placed on
nonaccrual.
Restructured loans totalled $192,000, $206,000, $206,000, $1,052,000
and $1,044,000 at September 30, 1997 and 1996, December 31, 1996, 1995
and 1994. The amount of interest income on restructured loans, which
would have been recorded had these loans continued to pay interest at
the original contract rate, was approximately $16,000, $16,000,
$21,000, $87,000 and $90,000 for the nine months ended September 30,
1997 and 1996 and the years ended December 31, 1996, 1995 and 1994,
respectively. Interest income on restructured loans included in net
income was approximately $15,000, $15,000, $20,000, $80,000 and $80,000
for the nine months ended September 30, 1997 and 1996 and the years
ended December 31, 1996, 1995 and 1994, respectively. There is no
commitment to lend additional funds to borrowers whose loans have been
restructured.
The recorded investment in loans receivable considered impaired and the
related allowance for loan losses at September 30, 1997 was $1,166,000
and $292,000, respectively. The balances at December 31, 1996 were
$1,183,000 and $448,000, respectively and $75,000 and $4,000,
respectively, at December 31, 1995.
At September 30, 1997 and December 31, 1996 and 1995, loans to officers
and directors amounted to $772,000, $784,000 and $515,000,
respectively. All such loans were performing according to their
original terms.
(9) Bank Premises and Equipment
Bank premises and equipment consists of the following as of September
30, 1997, December 31, 1996 and 1995:
Sept. 30,
1997 1996 1995
------ ------ ------
(in thousands)
Land $1,008 867 667
Buildings and improvements 4,848 5,166 4,661
Furniture and equipment 2,441 2,521 1,917
Leasehold improvements 1,318 1,214 901
------ ----- -----
9,615 9,768 8,146
Less accumulated depreciation
and amortization 2,815 2,786 2,279
------ ----- -----
$6,800 6,982 5,867
====== ===== =====
16
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(9) Bank Premises and Equipment, cont.
In the normal course of business, the Bank has entered into leases for
its branch locations. The lease terms range from five to twenty years
and expire at various times through the year 2007. The agreements
provide for renewal options and all but one require the Bank to pay
common area costs.
The following is a schedule of future minimum lease payments for
operating leases (with initial or remaining terms in excess of one
year) as of September 30, 1997 and December 31, 1996:
September 30, December 31,
- ------------- ------------
1998 $ 396 1997 $ 404
1999 359 1998 424
2000 261 1999 395
2001 229 2000 281
2002 196 2001 252
2003 181 2002 250
Thereafter 436 Thereafter 1,038
------ -----
Total minimum lease Total minimum lease
payments $ 2,058 payments $3,044
======= ======
The annual rental expense amounted to $303,000 and $183,000 for the
nine month periods ended September 30, 1997 and 1996, respectively, and
$304,000, $226,000 and $164,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
(10) Accrued Interest Receivable
A summary of accrued interest receivable at September 30, 1997,
December 31, 1996 and 1995 is as follows:
Sept. 30,
1997 1996 1995
---- ---- ----
(in thousands)
Loans $2,091 1,654 1,427
Securities available for sale 1,916 1,114 1,334
Mortgage-backed securities held
to maturity 274 350 387
Securities held to maturity 542 484 538
Federal funds sold -- -- 79
------ ----- -----
$4,823 3,602 3,765
====== ===== =====
17
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Deposits
Deposit balances as of September 30, 1997, December 31, 1996 and 1995
are summarized as follows:
Weighted
average
rate at 1997 1996 1995
Sept.30, -------------------- ---------------------- --------------------
1997 Amount % Amount % Amount %
---- ------ ----- ------ ---- ---------- ----
(in thousands)
Types of deposit:
Noninterest
bearing demand
deposit accounts -- $ 27,982 5.7 $ 25,366 5.2 $ 10,800 2.6
N.O.W 1.24 14,955 3.1 16,431 3.3 9,555 2.3
Money market
demand accounts 3.39 58,394 11.8 44,794 9.1 32,894 8.0
Passbook 2.26 95,132 19.3 104,210 21.2 92,747 22.6
Club accounts -- 1,069 0.2 269 .1 219 0.1
Other -- 5,573 1.1 3,630 .7 2,758 0.7
-------- ----- -------- ----- -------- -----
203,105 41.2 194,700 39.6 148,973 36.3
-------- ----- -------- ----- -------- -----
Certificates of
deposit 5.25 247,158 50.1 248,396 50.6 209,488 51.0
Retirement
accounts 5.50 43,071 8.7 48,150 9.8 52,309 12.7
-------- ----- -------- ----- -------- -----
290,229 58.8 296,546 60.4 261,797 63.7
-------- ----- -------- ----- -------- -----
$493,334 100.0 $491,246 100.0 $410,770 100.0
======== ===== ======== ===== ======== =====
As of September 30, 1997, December 31, 1996 and 1995, certificates of
deposit, regular and retirement accounts have scheduled maturities as
follows:
1997 1996 1995
-------- -------- -------
(in thousands)
Within one year $218,046 188,744 183,658
One to two years 47,621 39,803 27,920
Two to three years 20,474 20,298 27,753
Thereafter 4,088 47,701 22,466
-------- ------- -------
$290,229 296,546 261,797
======== ======= =======
18
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Deposits, cont.
An analysis of the interest expense for the nine month periods ended
September 30, 1997 and 1996 and for the years ended December 31, 1996,
1995 and 1994 by deposit category is as follows:
September 30, December 31,
---------------- ------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
NOW, passbook and other
accounts $ 1,756 1,722 2,402 2,671 2,821
Money market demand accounts 1,366 837 1,233 1,066 1,099
Club accounts 1 -- 15 13 13
Regular certificates of deposit 9,626 8,532 11,836 11,125 7,490
Retirement accounts 1,985 1,774 2,456 2,134 1,428
------- ------ ------ ------ ------
Total interest $14,734 12,865 17,942 17,009 12,851
======= ====== ====== ====== ======
Certificates of deposit greater than $100,000 amounted to $26,698,000,
$26,093,000 and $14,837,000 at September 30, 1997, December 31, 1996
and 1995, respectively. The deposits of the Bank are insured up to
$100,000 by the BIF and SAIF, which is administered by the FDIC and is
backed by the full faith and credit of the U.S. Government.
(12) Borrowed Funds
On January 3, 1997, the Bank entered into an agreement to borrow $30
million at a fixed interest rate of 6.02%. The debt matures on January
3, 2000. The funds provided were used to fund a leveraging program
whereby proceeds from the borrowing were used to fund the purchase of
Federal agency securities designated as available for sale. The note is
secured by United States Agency and Treasury securities designated as
available for sale and having a fair value of $32,270,000 as of
September 30, 1997. The collateral fulfills the security agreement
requirement that collateral with a market value of 107% secure the
note.
(13) Income Taxes
The Federal tax bad debt reserve method available to thrift
institutions was repealed in 1996 for tax years beginning after 1995.
As a result, the Bank must change from the reserve method to the
specific charge-off method to compute its bad debt deduction. In
addition, the Bank is required generally to recapture into income the
portion of its bad debt reserves (other than the supplemental reserve)
that exceeds its base year reserves, approximately $2,500,000.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into
taxable income ratably (on a straight-line basis) over a six-year
period. If the Bank meets a "residential loan requirement" for a tax
year beginning in 1996 or 1997, the recapture of the reserves will be
suspended for such tax year. Thus, recapture can potentially be
deferred for up to two years. The residential loan requirement is met
if the principal amount of housing loans made by the Bank during the
year at issue (1996 and 1997) is at least as much as the average of the
principal amount of loans made during the six most recent tax years
prior to 1996. Refinancings and home equity loans are excluded.
For 1996 the Bank has met the residential loan requirement and expects
to meet it for 1997.
19
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
Retained earnings as of December 31, 1996 includes approximately
$3,500,000 for which no provision for Federal income tax has been made.
This reserve (base year and supplemental) is frozen not forgiven as
certain events could trigger a recapture.
Income tax expense for the nine month periods ended September 30, 1997
and 1996 and for the years ended December 31, 1996, 1995 and 1994 is
comprised of the following components:
September 30, December 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
------- ------ ------ ------ -----
(in thousands)
Current income tax expense:
Federal $ 3,624 3,590 4,728 4,796 3,929
State 311 317 415 382 338
------- ------ ------ ------ -----
3,935 3,907 5,143 5,178 4,267
Deferred income tax (benefit) expense:
Federal (571) (266) (401) (297) 161
State (32) (15) (22) (17) 9
------- ------ ------ ------ -----
(603) (281) (423) (314) 170
------- ------ ------ ------ -----
Total income tax expense $ 3,332 3,626 4,720 4,864 4,437
======= ===== ===== ===== =====
A reconciliation between the effective income tax expense and the
expected amount computed using the applicable statutory Federal income
tax rate for the nine month periods ended September 30, 1997 and 1996
and for the years ended December 31, 1996, 1995 and 1994 is as follows:
September 30, December 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
------- ------ ------ ------ -----
(in thousands)
Income before income taxes $ 9,230 10,074 13,111 13,512 12,112
Applicable statutory Federal tax rate 35% 35% 35% 35% 35%
Expected Federal income tax expense 3,230 3,526 4,589 4,729 4,239
State tax net of Federal benefit 181 196 256 249 226
Increase (Decrease) in Federal income tax resulting from:
Tax-exempt income (32) (18) (24) (25) (25)
Other (178) (78) (101) (89) (3)
Goodwill 131 -- -- -- --
------- ------- ------- ------- -------
$ 3,332 3,626 4,720 4,864 4,437
------- ------- ------- ------- -------
Effective tax rate 36.1% 36.0% 36.0% 36.0% 36.6%
20
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset (liability) at September 30,
1997, December 31, 1996 and 1995 are as follows:
Sept. 30,
1997 1996 1995
---- ---- ----
(in thousands)
Deferred tax assets:
Loan fees $ 26 49 48
Other 352 256 91
Postretirement benefits 507 506 411
Pension 191 117 67
Supplemental Employee Retire-
ment Plan 305 211 -
Allowance for loan loss - book 1,405 980 653
----- ------ ------
2,786 2,119 1,270
----- ----- -----
Deferred tax liabilities:
Shareholders' equity - unrealized
gain on securities available
for sale 114 613 1,517
Allowance for loan losses - tax 1,031 930 928
Other 28 65 33
------ ------- -------
1,173 1,608 2,478
----- ----- -----
Net deferred tax asset
(liability) $ 1,613 511 (1,208)
======= === ======
Management believes that it is more likely than not that the deferred
tax asset will be realized based upon taxable income in the carryback
period and the probability of future operations to generate sufficient
taxable income.
21
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
Total deferred tax benefits for the nine month periods ended September
30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994
were allocated as follows:
September 30, December 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
------- ------ ------ ------ -----
(in thousands)
Income from operations $ (603) (281) (423) (314) 170
Shareholders' equity - unrealized
gains on securities available
for sale (499) -- (905) 360 1,861
Business combination -- -- (391) -- --
------- ------ ------ ----- -----
$(1,102) (281) (1,719) 46 2,031
======= ====== ====== ===== =====
(14) Regulatory Matters
Office of Thrift Supervision (OTS) regulations require banks to
maintain minimum levels of regulatory capital. Under the regulations in
effect at December 31, 1996, the Bank was required to maintain (i) a
minimum tangible capital ratio of 1.50%, (ii) a minimum leverage ratio
of Tier I capital to total adjusted assets of 3.0%, and (iii) a minimum
ratio of total capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the
classification of savings institutions into five categories: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier
I) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio of
at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors.
Management believes that, as of September 30, 1997 and December 31,
1996 and 1995, the Bank meets all capital adequacy requirements to
which it is subject. Further, the most recent OTS notification
categorized the Bank as a well-capitalized institution under the prompt
corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the
Bank's capital classification.
22
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(14) Regulatory Matters, cont.
The following is a summary of the Bank's actual capital amounts and
ratios as of September 30, 1997 and December 31, 1996 and 1995,
compared to the OTS minimum capital adequacy requirements and
classification as a well-capitalized institution:
OTS Requirements
----------------------------------------------
For Classification
Minimum as Well
Actual Capital Adequacy Capitalized
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
September 30, 1997:
Tangible capital $ 97,200 15.48% $ 9,418 1.50% $ - - %
Tier I (core) capital 97,200 15.48 18,835 3.00 31,392 5.00
Risk-based capital:
Tier I 97,200 25.64 - - 22,743 6.00
Total 100,401 26.48 30,324 8.00 37,906 10.00
December 31, 1996:
Tangible capital 92,302 15.6 8,860 1.50 - -
Tier I (core) capital 92,302 15.6 17,721 3.00 29,534 5.00
Risk-based capital:
Tier I 92,302 27.5 - - 20,119 6.00
Total 95,200 28.4 26,825 8.00 33,531 10.00
December 31, 1995:
Tangible capital 91,838 18.1 7,627 1.50 - -
Tier I (core) capital 91,838 18.1 15,253 3.00 25,422 5.00
Risk-based capital:
Tier I 91,838 35.5 - - 15,528 6.00
Total 93,605 36.2 20,704 8.00 25,880 10.00
As of September 30, 1997, December 31, 1996 and 1995, the Federal
Reserve Bank required the Bank to maintain an average reserve balance
of $0, $0 and approximately $564,000, respectively, to meet regulatory
requirements.
23
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans
Pension Plan
The Bank has a pension plan covering officers and employees meeting
certain eligibility requirements. Prior service costs are amortized
over a forty-year period, changes in the unfunded liability due to a
prior year change in actuarial assumptions are amortized over thirty
years and pension costs are funded as accrued.
A comparison of the most recent available accumulated plan benefits and
plan net assets for the pension plan, as determined by the plan
actuaries as of January 1, 1997, 1996 (as amended October 1, 1996 for
the acquisition of Burlington County Bank) and 1995, follows:
1997 1996 1995
------- ------ ------
(in thousands)
Actuarial present value of accumulated
plan benefits:
Vested participants $ 2,584 2,082 2,030
Non-vested participants 123 87 82
------- ------ ------
$ 2,707 2,169 2,112
======= ====== ======
Projected benefit obligation for
services rendered 3,306 3,081 2,653
Plan assets at fair value 2,987 2,807 2,387
------- ------ ------
Projected benefit obligation
in excess of plan assets 319 274 266
Unrecognized gain 225 322 149
Unrecognized prior service cost (178) (182) (215)
------- ------ ------
Accrued pension expense $ 366 414 200
======= ====== ======
The components of net pension expense for the periods ended September
30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994
are as follows:
Sept. 30, December 31,
------------------- ---------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Service cost-benefits earned during the year $ 174 116 155 117 130
Interest cost on projected benefit obligation 194 149 199 214 188
Actual return on plan assets (175) (137) (183) (182) (189)
Net amortization and deferral 14 13 17 19 (14)
---- ---- ---- ---- ----
Net pension expense $ 207 141 188 168 115
===== === === === ===
24
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
Assumptions used to develop the net periodic pension cost for the
periods ended September 30, 1997 and 1996 and for the years ended
December 31, 1996, 1995 and 1994 are as follows:
September 30, December 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
Discount rate 7.5% 7.75% 7.75% 8.25% 7.0%
Expected long-term rate of return 7.5 7.5 7.5 7.5 7.5
Rate of increase in compensation
levels 5.5 5.5 5.5 6.0 5.5
=== ==== ==== ==== ===
Postretirement Benefits
The Bank has established a postretirement medical and life insurance
plan for the benefit of substantially all employees. The Bank utilizes
the accrual method of accounting for postretirement benefits.
The following table sets forth the net periodic postretirement benefit
cost and accumulated postretirement benefit obligation (APBO) as
determined by the plan actuaries as of January 1, 1997, 1996 (as
amended October 1, 1996 for the acquisition of Burlington County Bank)
and 1995, follows:
1997 1996 1995
-------- -------- -------
(in thousands)
Accumulated postretirement benefit
obligation (APBO) $(1,195) (1,177) (980)
Fair value of assets - - -
------- ------ ------
Projected benefit obligation funded status (1,195) (1,177) (980)
Accumulated net unrecognized gain (107) (109) (98)
------- ------ ------
Net postretirement accrued benefit cost $(1,302) (1,286) (1,078)
======= ====== ======
Net postretirement benefit costs for the periods ended September 30,
1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 are
as follows:
Sept. 30, December 31,
------------------- ---------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
Service cost $ 35 23 30 26 23
Interest cost on accumulated post-
retirement benefit obligation 65 59 79 80 64
---- --- --- --- --
$100 82 109 106 87
==== === === === ==
25
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
For measurement purposes, the cost of medical benefits was projected to
increase at a rate of 9.50% and 10.00% in 1997 and 1996, respectively,
thereafter grading to a stable 5.5% medical inflation rate in 2005. The
present value of the accumulated benefit obligation assumed a 7.50% and
7.75% discount rate compounded annually for 1997 and 1996,
respectively. The plan is unfunded as of September 30, 1997, as the
Bank funds the plan on a cash basis.
Stock Option Plan
During 1996, the Bank's stockholders approved a stock option plan
authorizing 311,650 shares available to be granted to certain
directors, officers and employees of the Bank. Options granted under
the plan amounted to 77,500 during 1997 and 234,000 at during 1996 and
are exercisable at the fair value of the stock as of the grant date.
The options vest over a five-year term, and expire after 10 years from
the date of the grant. For the nine month period ended September 30,
1997, 8,635 options were exercised and no options were forfeited or had
expired. No options were exercised, forfeited or had expired during
1996.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS 123 encourages all entities to adopt the "fair
value based method" of accounting for employee stock compensation
plans. However, SFAS 123 also allows an entity to continue to measure
compensation cost under such plans using the "intrinsic value based
method" as described in APB No. 25. Under the fair value based method,
compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, usually the
vesting period. Fair value is determined using an option pricing model
that takes into account the stock price at the grant date, the exercise
price, the expected life of the option, the volatility of the
underlying stock and the expected dividends on it, and the risk-free
interest rate over the expected life of the option.
The Bank continues to recognize compensation expense using the method
prescribed in APB No. 25. Had compensation cost been determined
consistent with SFAS 123 for options granted during 1997 and 1996,
additional compensation cost for the nine month periods ended September
30, 1997 and 1996 and the year ended December 31, 1996 would have been
$134,000, $20,000 and $61,000, respectively. As a result, net income
and net income per share for the nine month periods ended September 30,
1997 and 1996 and for the year ended December 31, 1996 would have been
reduced to $5,812,000 and $0.64, $6,435,000 and $0.72, and $8,352,000
and $0.93, respectively. The stock option plan's fair value of options
granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for the grants
issued during 1997 and 1996: dividend yield of 1.67% and 2.59%,
respectively, expected volatility of 23.79%; risk-free interest rate of
6.1% and 6.7%, respectively, and expected lives of 5 years.
The weighted average exercise price of options granted in 1997 was
$21.00. The weighted average grant date fair value for the stock option
plan's options granted during 1997 was $5.84.
26
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
The weighted average exercise price of options granted in 1996 and
outstanding as of December 31, 1996 was $13.50. The weighted average
grant date fair value for the stock option plan's options granted
during 1996 was $3.49.
Management Recognition Plan
During 1996, the Bank's stockholders approved the Trenton Savings Bank
Management Recognition Plan and authorized the issuance of 124,660
shares from unissued common stock to the Management Recognition Plan.
As of September 30, 1997 and December 31, 1996, 124,660 shares have
been allocated to employees and directors of the Bank with a weighted
average grant date fair value of $13.50 per share. The shares vest over
a five-year period.
(16) Commitments and Contingencies
The Bank is party to commitments to extend credit in the normal course
of business to meet the financial needs of its customers. Commitments
to extend credit are agreements to lend money to a customer as long as
there is no violation of any condition established in the contract.
Commitments to fund mortgage loans generally have fixed expiration
dates or other termination clauses, whereas home equity lines of credit
have no expiration date. Since some commitments are expected to expire
without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. Collateral is not
required by the Bank for loan commitments. The Bank's loans are located
primarily in the State of New Jersey and Bucks county in Pennsylvania.
At September 30, 1997 and December 31, 1996 and 1995, the Bank had loan
commitments (including unused lines of credit) of $47,712,000,
$27,697,000 and $18,843,000, respectively, consisting primarily of
fixed rate loans which are not included in the accompanying financial
statements. The commitments at December 31, 1996 have commitment
periods that range from 30 to 90 days and interest rates ranging from
5.5% to 12.0%. There is no exposure to credit loss in the event the
other party to commitments to extend credit does not exercise its right
to borrow under the commitment.
In the normal course of business, the Bank may be a party to various
outstanding legal proceedings and claims. In the opinion of management,
the financial position of the Bank will not be materially affected by
the outcome of such legal proceedings and claims.
(17) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value.
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of the fair value of these
instruments.
27
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
Debt, Equity and Mortgage-Backed Securities
Fair values are based on quoted market prices or dealer quotes.
Loan Receivables
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, residential mortgage and other consumer. Each loan category
is further segmented into fixed and adjustable rate interest terms.
The fair value is estimated using an estimate of 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 demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand as of September 30,
1997 and December 31, 1996 and 1995. The fair value of certificates of
deposit was estimated using the rates currently offered for deposits of
similar remaining maturities.
Commitments to Extend Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. The outstanding commitment balance is a reasonable
estimate of fair value.
Limitations: The following fair value estimates were made as of
September 30, 1997 and December 31, 1996 and 1995, based on pertinent
market data and relevant information on the financial instrument. These
estimates do not include any premium or discount that could result from
an offer to sell at one time the Bank's entire holdings of a particular
financial instrument or category thereof. Since no market exists for a
substantial portion of the Bank's financial instruments, fair value
estimates were necessarily based on judgments with respect to future
expected loss experience, current economic conditions, risk assessments
of various financial instruments involving a myriad of individual
borrowers, and other factors. Given the inherently subjective nature of
these estimates, the uncertainties surrounding them and the matters of
significant judgement that must be applied, these fair value
estimations cannot be calculated with precision. Modifications in such
assumptions could meaningfully alter these estimates.
Since these fair value approximations were made solely for on and off
balance sheet financial instruments as of September 30, 1997 and
December 31, 1996 and 1995, no attempt was made to estimate the value
of anticipated future business or the value of
28
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
nonfinancial statement assets and liabilities. Furthermore, certain tax
implications related to the realization of the unrealized gains and
losses could have a substantial impact on these fair value estimates
and have not been incorporated into many of the estimates.
The estimated fair values of the Bank's financial instruments as of
September 30, 1997, December 31, 1996 and 1995 are as follows:
September 30,
1997
--------------------
Carrying Fair
amount value
------ -----
(in thousands)
Financial assets:
Cash and cash equivalents $ 13,209 13,209
Securities available for sale 127,651 127,651
Securities and mortgage-backed securities
held to maturity 70,761 70,922
Loans, net 397,866 395,786
======= =======
Financial liabilities:
Deposits $ 493,334 493,327
Borrowed funds 30,000 30,096
====== ======
Off balance sheet financial instruments:
Commitments to extend credit $ 47,712 47,712
====== ======
1996
--------------------
Carrying Fair
amount value
------ -----
(in thousands)
Financial assets:
Cash and cash equivalents $ 20,938 20,938
Securities and mortgage-backed securities
held to maturity 87,648 87,648
Securities held to maturity 86,553 86,512
Loans, net 380,288 377,976
======= =======
Financial liabilities:
Deposits $ 491,246 493,654
========= =======
Off balance sheet financial instruments:
Commitments to extend credit $ 27,697 27,697
========= ======
29
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
1995
--------------------
Carrying Fair
amount value
------ -----
(in thousands)
Financial assets:
Cash and cash equivalents $ 16,253 16,253
Securities available for sale 83,776 83,776
Securities and mortgage-backed securities
held to maturity 91,261 92,158
Loans, net 306,093 307,927
======== =======
Financial liabilities:
Deposits $410,770 416,705
======== =======
Off balance sheet financial instruments:
Commitments to extend credit $ 18,843 18,843
======== =======
(18) Insurance Funds Legislation
On September 30, 1996, legislation was enacted which, among other
things, imposed a special one-time assessment on SAIF-insured deposits
to recapitalize Savings Associations Insurance Fund (SAIF) and spread
the obligations for payment of Financing Corporation (FICO) bonds
across all SAIF and Bank Insurance Fund (BIF) members. The Federal
Deposit Insurance Corporation (FDIC) special assessment being levied
amounts to 65.7 basis points on SAIF assessable deposits held as of
March 31, 1995. The Bank recorded a $177,000 charge (before tax-effect)
as a result of the FDIC special assessment. This legislation will
eliminate the substantial disparity between the amount that BIF and
SAIF member institutions had been paying for deposit insurance
premiums. As of December 31, 1996, the Bank's deposits are primarily
BIF-insured except for $34 million of deposits which were acquired from
a SAIF-insured institution.
Beginning on January 1, 1997, BIF members will pay a portion of the
FICO payment equal to 1.29 basis points per $100 in BIF-insured
deposits compared to 6.44 basis points per $100 in SAIF-insured
deposits, and will pay a pro rata share (approximately 2.4 basis points
per $100 in deposits) of the FICO payment on the earlier of January 1,
2000, or the date upon which the last savings association ceases to
exist. The legislation also requires BIF and SAIF to be merged by
January 1, 1999, provided that subsequent legislation is adopted to
eliminate the savings association charter and no savings associations
remain as of that time.
The FDIC has recently lowered SAIF assessments to a range comparable to
that of BIF members, although SAIF members must also make the FICO
payments described above. Management cannot predict the level of FDIC
insurance assessments on an on-going basis or whether the BIF and SAIF
will eventually be merged.
30
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(19) Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (SFAS No. 125),
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. These standards are based on consistent
application of a financial-component approach and focuses on control.
Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
SFAS No. 125 provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers occurring after
December 31, 1996 and has been applied prospectively.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 (SFAS No. 127), "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125", an amendment of SFAS No.
125. SFAS No. 127 defers for one year the effective date of portions of
SFAS No. 125 that address secured borrowings and collateral for all
transactions. Additionally, SFAS No. 127 defers for one year the
effective date of transfers of financial assets that are part of
repurchase agreements, securities lending and similar transactions. The
adoption of SFAS No. 125 and SFAS No. 127 is not expected to have a
material effect on the Bank's consolidated financial statements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), "Earnings per share" establishes
standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common
stock. SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures. SFAS No. 128 requires a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. SFAS No. 128
is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, earlier application is
not permitted. SFAS No. 128 also requires restatement of all prior
period EPS data presented. SFAS No. 128 is not expected to have a
material effect on the Bank's reported earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income".
This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Bank has not
determined the impact that this Statement will have on its reporting of
operations.
31
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(19) Recent Accounting Pronouncements, cont.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an
Enterprise and Related Information". This Statement establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This Statement is
effective for financial statements for periods beginning after December
15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied
to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim
periods in the second year of application. The adoption of this
Statement is not expected to change the Bank's reporting requirements.
(20) Quarterly Financial Data
The following tables summarizes certain 1997, 1996 and 1995 quarterly
financial data.
Quarter Ended
----------------------------------
Sept. 30 June 30, Mar. 31
1997 1997 1997
-------- -------- -------
(in thousands)
Interest income $ 11,009 10,827 10,646
Interest expense 5,571 5,324 5,328
Net interest income 5,438 5,503 5,318
Provision for loan losses 1,274 204 10
Gain (loss) on security transaction 1,676 913 334
Operating expenses 3,751 3,073 3,019
Income before tax expense 2,619 3,558 3,052
Net income for the quarter 1,668 2,276 1,953
Earnings per share 0.18 0.25 0.22
Quarter Ended
------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
1996 1996 1996 1996
-------- --------- -------- --------
(in thousands)
Interest income $10,241 8,970 8,850 8,842
Interest expense 5,076 4,356 4,217 4,292
Net interest income 5,165 4,614 4,633 4,550
Provision for loan losses - - - -
Gain (loss) on security transaction 650 - 617 1,572
Operating expenses 3,235 2,369 2,002 2,063
Income before tax expense 3,037 2,430 3,410 4,234
Net income for the quarter 1,943 1,556 2,183 2,709
Earnings per share 0.22 0.17 0.25 0.30
32
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(20) Quarterly Financial Data, cont.
Quarter Ended
------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
1995 1995 1995 1995
-------- --------- -------- --------
(in thousands)
Interest income $8,852 8,898 8,185 7,583
Interest expense 4,420 4,593 4,301 3,696
Net interest income 4,432 4,305 3,884 3,887
Provision for loan losses 15 45 45 45
Gain (loss) on security transaction 884 937 1,525 847
Operating expenses 2,085 1,843 2,017 1,847
Income before tax expense 3,402 3,546 3,505 3,059
Net income for the quarter 2,178 2,269 2,244 1,957
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by the Company, the Bank or the Agent. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus nor any sale hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company or the
Bank since any of the dates as of which information is furnished herein or since
the date hereof.
-------------
SUMMARY.................................................................... 4
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF THE BANK AND SUBSIDIARIES................................ 12
RISK FACTORS............................................................... 14
THE COMPANY................................................................ 18
THE BANK................................................................... 18
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE................................ 20
USE OF PROCEEDS............................................................ 20
DIVIDEND POLICY............................................................ 21
MARKET FOR THE COMMON STOCK................................................ 22
CAPITALIZATION............................................................. 24
PRO FORMA DATA............................................................. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 30
BUSINESS OF THE BANK....................................................... 44
REGULATION................................................................. 62
TAXATION................................................................... 68
MANAGEMENT OF THE COMPANY.................................................. 70
MANAGEMENT OF THE BANK..................................................... 70
THE CONVERSION............................................................. 80
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY AND THE BANK................ 99
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY................................ 104
DESCRIPTION OF CAPITAL STOCK OF THE BANK................................... 106
TRANSFER AGENT AND REGISTRAR............................................... 106
EXPERTS.................................................................... 106
LEGAL OPINIONS............................................................. 107
ADDITIONAL INFORMATION..................................................... 107
-------------
Until March __, 1998 or 25 days after commencement of the Syndicated
Community Offering, if any, whichever is later, all dealers effecting
transactions inthe registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments of subscriptions.
- --------------------------------------------------------------------------------
35,707,500 Shares
Peoples
Bancorp, Inc.
(Proposed Holding Company for
Trenton Savings Bank FSB)
COMMON STOCK
Par Value $.01 per share
----------
PROSPECTUS
----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
February __, 1998
- --------------------------------------------------------------------------------
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Amount
------
* Legal Fees and Expenses............................... $ 160,000
* Printing, Postage and Mailing......................... 220,000
* Appraisal and Business Plan Fees and Expenses......... 25,000
* Accounting Fees and Expenses.......................... 140,000
* Conversion Data Processing............................ 47,000
** Marketing Fees and Expenses........................... 1,045,000
* Filing Fees (NASD, OTS and SEC)....................... 170,000
* Other Expenses........................................ 128,000
----------
* Total ................................................ $1,935,000
==========
- ---------------
* Estimated
** The Bank and the Company have retained Friedman, Billings, Ramsey & Co,
Inc. ("FBR") to assist in the sale of common stock on a best efforts basis
in the Subscription and Community Offerings. For purposes of computing
estimated expenses, it has been assumed that FBR will receive fees of
approximately $1,000,000, exclusive of attorneys' fees of $45,000.
Item 14. Indemnification of Directors and Officers
Indemnification of Directors and Officers of Peoples Bancorp, Inc.
Article TENTH of the Certificate of Incorporation of Peoples Bancorp,
Inc. (the "Corporation") sets forth circumstances under which directors,
officers, employees and agents of the Corporation may be insured or indemnified
against liability which they incur in their capacities as such:
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation
Law requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a Director or Officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Section or otherwise. The rights
to indemnification and to the advancement of expenses conferred in Sections A
and B of this Article TENTH shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a Director, Officer, employee
or agent and shall inure to the benefit of the indemnitee's heirs, executors and
administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable.
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows: (a) List of Exhibits
1.1 Engagement Letter between Peoples Bancorp, Inc. and Friedman, Billings,
Ramsey & Co., Inc.
1.2 Form of Agency Agreement among Peoples Bancorp, Inc., Trenton Savings Bank,
FSB, and Friedman, Billings, Ramsey & Co., Inc.*
2 Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of Peoples Bancorp, Inc. (Included as Exhibit
D of the Plan of Conversion and Reorganization)
3.2 Bylaws of Peoples Bancorp, Inc. (Included as Exhibit E of the Plan of
Conversion and Reorganization)
4 Form of Common Stock Certificate of Peoples Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 State Tax Opinion*
8.3 Letter from FinPro, Inc. with respect to Subscription Rights
10.1 Amended Employment Agreement between Trenton Savings Bank FSB and Wendell
T. Breithaupt**
10.2 Supplemental Executive Retirement Plan**
10.3 Trenton Savings Bank FSB and Peoples Bancorp, MHC 1996 Stock Option Plan**
10.4 Trenton Savings Bank FSB and Peoples Bancorp, M.H.C. 1996 Recognition and
Retention Plan**
10.5 Form of Employment Agreement
10.6 Form of Severance Agreement
10.7 Employee Stock Ownership Plan
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in opinion
filed as Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of FinPro, Inc.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Peoples Bancorp, Inc. and FinPro, Inc.*
99.2 Appraisal Report of FinPro, Inc.*
99.3 Proxy Statement to be furnished to Members of Peoples Bancorp, M.H.C.
99.4 Proxy Statement to be furnished to Stockholders of Peoples Bancorp, Inc.
99.5 Marketing Materials*
99.6 Order and Acknowledgment Form*
- -----------
* To be filed supplementally or by amendment.
** Filed as exhibits to the Registration Statement on Form S-4 under the
Securities Act of 1933 of Peoples Bancorp, Inc., filed with the Securities
and Exchange Commission on March 10, 1997 and amended April 17, 1997
(Registration No. 333-23029). All of such previously filed documents are
hereby incorporated by reference in accordance with Item 601 of Regulation
S-K.
(b) Financial Statement Schedules
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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 Lawrenceville, New
Jersey on December 19, 1997.
Peoples Bancorp, Inc.
By: /s/ Wendell T. Breithaupt
--------------------------------------
Wendell T. Breithaupt
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Peoples Bancorp, Inc.
(the "Company") hereby severally constitute and appoint Wendell T. Breithaupt as
our true and lawful attorney and agent, to do any and all things in our names in
the capacities indicated below which said Wendell T. Breithaupt may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, 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 the Company's Common Stock, including specifically,
but not limited to, power and authority to sign for 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 approve, ratify and
confirm all that said Wendell T. Breithaupt shall do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Wendell T. Breithaupt President, Chief Executive December 19, 1997
- ------------------------- Officer and Director (Principal
Wendell T. Breithaupt Executive Officer
/s/ Robert Russo Vice President and Treasurer December 19, 1977
- ------------------------- (Principal Financial and
Robert Russo Accounting Officer
/s/ John B. Sill, Jr. Chairman December 19, 1997
- -------------------------
John B. Sill, Jr.
/s/ Miles W. Truesdell, Jr. Director December 19, 1997
- --------------------------
Miles W. Truesdell, Jr.
/s/ Peter S. Longstreth Director December 19, 1997
- --------------------------
Peter S. Longstreth
/s/ George A. Pruitt
- -------------------------- Director December 19, 1997
George A. Pruitt
/s/ George W. Reinhard
- -------------------------- Director December 19, 1997
George W. Reinhard
/s/ Charles E. Stokes
- -------------------------- Director December 19, 1997
Charles E. Stokes
/s/ Raymond E. Trainer
- -------------------------- Director December 19, 1997
Raymond E. Trainer
As filed with the Securities and Exchange Commission on December 22, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
------------------------------------
PEOPLES BANCORP, INC.
================================================================================
EXHIBIT INDEX
1.1 Engagement Letter between Peoples Bancorp, Inc. and Friedman, Billings,
Ramsey & Co., Inc.
1.2 Form of Agency Agreement among Peoples Bancorp, Inc., Trenton Savings Bank,
FSB, and Friedman, Billings, Ramsey & Co., Inc.*
2 Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of Peoples Bancorp, Inc. (Included as Exhibit
D of the Plan of Conversion and Reorganization)
3.2 Bylaws of Peoples Bancorp, Inc. (Included as Exhibit E of the Plan of
Conversion and Reorganization)
4 Form of Common Stock Certificate of Peoples Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 State Tax Opinion*
8.3 Letter from FinPro, Inc. with respect to Subscription Rights
10.1 Amended Employment Agreement between Trenton Savings Bank FSB and Wendell
T. Breithaupt**
10.2 Supplemental Executive Retirement Plan**
10.3 Trenton Savings Bank FSB and Peoples Bancorp, MHC 1996 Stock Option Plan**
10.4 Trenton Savings Bank FSB and Peoples Bancorp, M.H.C. 1996 Recognition and
Retention Plan**
10.5 Form of Employment Agreement
10.6 Form of Severance Agreement
10.7 Employee Stock Ownership Plan
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in opinion
filed as Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of FinPro, Inc.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Peoples Bancorp, Inc. and FinPro, Inc.*
99.2 Appraisal Report of FinPro, Inc.*
99.3 Proxy Statement to be furnished to Members of Peoples Bancorp, M.H.C.
99.4 Proxy Statement to be furnished to Stockholders of Peoples Bancorp, Inc.
99.5 Marketing Materials*
99.6 Order and Acknowledgment Form*
- ------------
* To be filed supplementally or by amendment.
** Filed as exhibits to the Registration Statement on Form S-4 under the
Securities Act of 1933 of Peoples Bancorp, Inc., filed with the Securities
and Exchange Commission on March 10, 1997 and amended April 17, 1997
(Registration No. 333-23029). All of such previously filed documents are
hereby incorporated by reference in accordance with Item 601 of Regulation
S-K.