Rule 424(b)(3)
Registration No. 333-2488
[logo] WAYNE BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR WAYNE SAVINGS BANK, F.S.B.)
2,875,000 SHARES OF COMMON STOCK
-----------------
Wayne Bancorp, Inc. (the "Company" or "Wayne Bancorp"), a Delaware
corporation, is offering up to 2,875,000 shares of its common stock, par value
$.01 per share (the "Common Stock"), in connection with the conversion of Wayne
Savings Bank, F.S.B. (the "Bank" or "Wayne") from a federally chartered mutual
savings bank to a federally chartered stock savings bank pursuant to the Bank's
plan of conversion (the "Plan" or "Plan of Conversion"). The simultaneous
conversion of the Bank to stock form, the issuance of the Bank's stock to the
Company and the offer and sale of the Common Stock by the Company are herein
referred to as the "Conversion." In certain circumstances, the Company may
increase the amount of Common Stock offered hereby to 3,306,250 shares. See
Footnote 4 to the table below.
(continued on following page)
-----------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" ON PAGES 15 TO 20.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT ACCOUNTS OR DEPOSITS AND
ARE NOT FEDERALLY INSURED OR GUARANTEED.
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.
<TABLE>
<CAPTION>
========================================================================================================
ESTIMATED UNDERWRITING
COMMISSIONS AND
PURCHASE OTHER FEES AND ESTIMATED
PRICE(1) EXPENSES(2) NET PROCEEDS(3)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Minimum Per Share...................... $10.00 $0.47 $9.53
Midpoint Per Share..................... $10.00 $0.42 $9.58
Maximum Per Share...................... $10.00 $0.39 $9.61
Total Minimum(1)....................... $21,250,000 $991,600 $20,258,400
Total Midpoint(1)...................... $25,000,000 $1,052,000 $23,948,000
Total Maximum(1)....................... $28,750,000 $1,112,400 $27,637,600
Total Maximum, as adjusted(4).......... $33,062,500 $1,181,800 $31,880,700
========================================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by FinPro,
Inc. ("FinPro") dated March 5, 1996, which states that the estimated
aggregate pro forma market value of the Common Stock ranged from $21.3
million to $28.8 million, with a midpoint of $25.0 million (the "Valuation
Range"). Based on the Valuation Range, the Boards of Directors of the
Company and the Bank established the estimated price range of $21.3 million
to $28.8 million (the "Estimated Price Range"), or between 2,125,000 and
2,875,000 shares of Common Stock at a price of $10.00 per share (the
"Purchase Price"). FinPro's appraisal is based upon estimates and
projections that are subject to change and the valuation must not be
construed as a recommendation as to the advisability of purchasing such
shares or that a purchaser will thereafter be able to sell such shares at
or above the Purchase Price. See "The Conversion--Stock Pricing" and
"--Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of $667,000 and
marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") in connection with the Subscription and Community Offerings (as
hereafter defined), which fees are estimated to be $324,600 and $445,400 at
the minimum and the maximum of the Estimated Price Range, respectively. See
"The Conversion--Marketing and Underwriting Arrangements." Such fees may be
deemed to be underwriting fees and Sandler O'Neill may be deemed to be an
underwriter. See "Pro Forma Data" for the assumptions used to arrive at
these estimates. The actual fees and expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in each of the offerings and other factors.
Includes the purchase of shares of Common Stock by the Wayne Savings Bank,
F.S.B. Employee Stock Ownership Plan and related trust (the "ESOP") funded
by a loan from the Company to the ESOP, which will initially be deducted
from the Company's stockholders' equity. See "Use of Proceeds," "Pro Forma
Data" and "The Conversion--Stock Pricing."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares offered at the Purchase Price, without resolicitation of subscribers
or any right of cancellation, due to regulatory considerations, changes in
market conditions or general financial and economic conditions. See "Pro
Forma Data" and "The Conversion--Stock Pricing." For a discussion of the
distribution and allocation of the additional shares, if any, see "The
Conversion--Subscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases."
-----------------
SANDLER O'NEILL & PARTNERS, L.P.
-----------------
THE DATE OF THIS PROSPECTUS IS MAY 13, 1996.
<PAGE>
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED, IN ORDER OF PRIORITY,
TO EACH OF THE BANK'S ELIGIBLE ACCOUNT HOLDERS, THE ESOP, THE BANK'S
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS AND CERTAIN OTHER MEMBERS (EACH AS DEFINED
IN THE PLAN OF CONVERSION). SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. 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
OFFICE OF THRIFT SUPERVISION ("OTS"). Concurrently, and 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
community offering (the "Community Offering") to certain members of the general
public, with preference given to natural persons residing in Passaic, Bergen,
Morris or Sussex counties in the State of New Jersey (the Subscription Offering
and Community Offering are referred to collectively as the "Subscription and
Community Offerings"). It is anticipated that shares not subscribed for in the
Subscription and Community Offerings will be offered to members of the general
public in a syndicated community offering (the "Syndicated Community Offering")
(the Subscription and Community Offerings and the Syndicated Community Offering
are referred to collectively as the "Offerings"). See "The
Conversion--Subscription Offering and Subscription Rights," "--Community
Offering," "--Restrictions on Transfer of Subscription Rights and Shares,"
"--Syndicated Community Offering," and "--Limitations on Common Stock
Purchases."
Except for the ESOP, which intends to subscribe for 8% of the total number
of shares of Common Stock issued in the Conversion, no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member (each as defined herein)
may, in their capacity as such, subscribe in the Subscription Offering for more
than $150,000 of the aggregate value of shares of Common Stock offered; no
person, together with associates of and persons acting in concert with such
person, may purchase in the Community Offering and the Syndicated Community
Offering in the aggregate more than $150,000 of the aggregate value of shares of
Common Stock offered; and no person, together with associates of and persons
acting in concert with such person, may purchase in the Offerings more than the
overall maximum purchase limitation of 1.0% of the total number of shares of
Common Stock to be issued in the Conversion, exclusive of any shares issued
pursuant to an increase in the Estimated Price Range of up to 15%; provided,
however, that the overall maximum purchase limitation may be increased and the
amount that may be subscribed for may be increased or decreased in the sole
discretion of the Bank and the Company without further approval of the Bank's
members. See "The Conversion--Subscription Offering and Subscription Rights,"
"--Community Offering" and "--Limitations on Common Stock Purchases." The
minimum purchase is 25 shares. The Company and the Bank reserve the right, in
their absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the Community Offering and the Syndicated Community Offering,
either at the time of receipt of an order or as soon as practicable following
the termination of the Offerings.
The Bank has engaged Sandler O'Neill to consult with and advise the Company
and the Bank in the Offerings and Sandler O'Neill has agreed to use its best
efforts to assist the Company with its solicitation of subscriptions and
purchase orders for shares of Common Stock in the Offerings. Sandler O'Neill is
not obligated to take or purchase any shares of Common Stock in the Offerings.
The Bank and the Company will pay a fee to Sandler O'Neill that will be based on
the aggregate Purchase Price of the Common Stock sold in the Offerings. The
Company and the Bank have agreed to indemnify Sandler O'Neill against certain
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). See "The Conversion--Marketing and Underwriting
Arrangements."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 12:00 NOON,
EASTERN TIME, ON JUNE 21, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE
BANK AND THE COMPANY, WITH APPROVAL OF THE OTS, IF NECESSARY. Subscriptions paid
by cash, check, bank draft or money order will be placed in a segregated account
at the Bank and will earn interest at the Bank's passbook rate of interest from
the date of receipt until completion or termination of the Conversion. Payments
authorized by withdrawal from deposit accounts at the Bank will continue to earn
interest at the contractual rate until the Conversion is completed or
terminated; these funds will be otherwise unavailable to the depositor until
such time. Orders submitted are irrevocable until the completion of the
Conversion; provided that, if the Conversion is not completed within 45 days
after the close of the Subscription and Community Offerings, unless such period
has been extended with the consent of the OTS, if necessary, all subscribers
will have their funds returned promptly with interest, and all withdrawal
authorizations will be cancelled. Extensions, if any, may not go beyond June 24,
1998. See "The Conversion--Subscription Offering and Subscription Rights,"
"--Community Offering" and "--Procedure for Purchasing Shares in Subscription
and Community Offerings."
2
<PAGE>
The Company has received conditional approval from the National Association
of Securities Dealers, Inc. ("NASD") to have its Common Stock quoted on the
National Market System of the National Association of Securities Dealers
Automated Quotation ("Nasdaq") Stock Market under the symbol "WYNE" upon
completion of the Conversion. Prior to this Offering there has not been a public
market for the Common Stock, and there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that the Common Stock
will trade at or above the Purchase Price. The absence or discontinuance of a
market may have an adverse impact on both the price and liquidity of the Common
Stock. See "Risk Factors--Absence of Market for Common Stock" and "Market for
the Common Stock."
3
<PAGE>
MAP PRESENTING THE LOCATION IN PASSAIC COUNTY,
NEW JERSEY OF THE BRANCH OFFICES OF WAYNE SAVINGS BANK, F.S.B.
APPEARS ON THIS PAGE
4
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
and the Consolidated Financial Statements of the Bank and Notes thereto
appearing elsewhere in this Prospectus.
WAYNE BANCORP, INC.
The Company is a Delaware corporation that was organized at the direction
of the Bank to acquire all of the capital stock that the Bank will issue upon
the Conversion. In turn, the Company will be owned by purchasers of the Common
Stock in the Offerings. At present, the Company has not engaged in any business.
Upon Conversion, the Company will be a unitary savings and loan holding company.
See "Regulation." Immediately following the Conversion, the only significant
assets of the Company will be the capital stock of the Bank, the Company's loan
to the ESOP to enable the ESOP to purchase 8% of the Common Stock in the
Conversion, and the net proceeds from the Conversion remaining after purchase of
the Bank's common stock by the Company. The Company will use 50% of the net
proceeds to purchase the Bank's common stock. A portion of the remaining 50% of
the net proceeds will be used to fund the loan to the ESOP, with the remainder
to be used as general working capital. See "Use of Proceeds." The business of
the Company will consist initially of the business of the Bank. See "Wayne
Bancorp, Inc." and "Regulation--Holding Company Regulation."
WAYNE SAVINGS BANK, F.S.B.
The Bank was organized in 1921 as the Pequannock and Wayne Building and
Loan Association, a New Jersey mutual building and loan association, and was the
first financial institution located in the Township of Wayne, New Jersey. In
1946, the Bank changed its name to Wayne Savings and Loan Association, a New
Jersey mutual savings and loan association, and in 1994 converted to a federally
chartered mutual savings bank under its current name. At December 31, 1995, the
Bank had total assets of $208.0 million, deposits of $173.8 million and equity
of $17.3 million. The Bank's primary regulator is the OTS. The Bank's deposits
are insured up to the maximum allowable amount by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation (the
"FDIC").
The Bank has been and continues to be a community oriented financial
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank conducts its business through five offices
located in Passaic County, New Jersey. Three branch offices and the Bank's
administrative office are located in Wayne and one branch office is located in
North Haledon, New Jersey. The Bank's primary business has been and continues to
be attracting retail deposits from the general public and investing those funds
primarily in one- to four-family owner-occupied residential mortgage loans and
home equity loans in its primary market area. The Bank's deposit base is drawn
principally from Passaic County, primarily the Township of Wayne, a community of
approximately 50,000 persons located 20 miles west of New York City. The Bank's
primary market area includes portions of Passaic, Bergen and Morris counties,
New Jersey. Recently the Bank has originated a greater number of one- to
four-family, owner-occupied loans outside of its primary market area, but in the
State of New Jersey, as a result of its participation in a loan origination
program. Participation in the loan origination program has provided the Bank
with an additional source of loan originations when demand for the Bank's
lending products is low in its primary lending area. See "Business of the
Bank--Lending Activities--One- to Four-Family Lending."
Highlights of the Bank's operations include the following:
o Focus on Residential Lending. The Bank's primary lending emphasis
has long been, and will continue to be, one- to four-family, owner-occupied
residential lending. Management believes that, in comparison to many other
types of assets, one- to four-family residential loans carry acceptable
yields and credit risk. In addition, such loans create strong ties to the
Bank's customers, providing the Bank with an opportunity to market other
financial products to such customers. At December 31, 1995, $87.6 million,
or 77.1% of the Bank's total loan portfolio were one- to four-family
residential loans and $20.9 million, or 18.5% of total loans were home
equity loans. See "Business of the Bank--Lending Activities." While
continuing to be primarily a one- to four-family lender, the Bank intends
to modestly increase its originations of commercial real estate,
multi-family and construction loans as opportunities arise. The Bank also
intends to begin offering, on a limited basis, a greater variety of
consumer loans, including automobile loans and unsecured personal lines of
credit and
5
<PAGE>
overdraft protection, in its primary market area. The Bank also intends to
originate a moderate amount of commercial business loans in its primary
market area. Non-residential lending generally involves a greater degree of
credit risk than one- to four-family residential lending. See "Risk
Factors--Diversification of Lending Activities."
o Asset Quality. In 1987, the Board determined to enhance the quality
of senior management and hired a new President, Mr. William E. Vanderberg.
Subsequently, a new executive vice president, senior loan officer and chief
financial officer were added to the management team. This management team
has worked to improve underwriting standards, reduce loan delinquencies,
and reduce non-performing assets, substantially all of which were
originated by prior management. Non-performing assets as a percent of total
assets decreased from 4.04% at December 31, 1991 to 1.46% at December 31,
1995. The Bank's ratio of non-performing loans as a percent of gross loans
was 2.16% at December 31, 1995, down from 5.39% at December 31, 1991. At
December 31, 1995, none of the loans 90 days or more past due had been
originated by current management. The Bank's ratio of net charge-offs to
average gross loans was .09%, .01%, .02%, .54% and .04% for fiscal years
1995, 1994, 1993, 1992 and 1991, respectively. At December 31, 1995, the
Bank's allowance for loan losses as a percent of gross loans receivable was
1.40% and its allowance for loan losses as a percent of non-performing
loans was 64.9%. See "Business of the Bank--Lending Activities."
o Core Deposits. Management believes that the "core" portions of the
Bank's savings, transaction (which consist of checking and negotiable order
of withdrawal ("NOW") accounts) and money market accounts can have a lower
cost and be more resistant to interest rate changes than certificate
accounts. Accordingly, the Bank uses customer service and marketing
initiatives in an attempt to maintain and expand those accounts. At
December 31, 1995, $78.6 million, or 45.2% of the Bank's total deposits,
consisted of savings, transaction and money market accounts. See "Business
of the Bank--Sources of Funds."
o Capital Position. At December 31, 1995, the Bank exceeded all of its
regulatory capital requirements with tangible, core and risk-based capital
ratios of 8.34%, 8.34% and 23.39%, respectively. Assuming the Company
retains 50% of the net proceeds and utilizes the remaining net proceeds to
purchase the Bank's capital stock, the Bank would have pro forma tangible
capital of approximately $25.0 million and $27.8 million and a pro forma
tangible capital ratio of 11.56% and 12.68%, at the minimum and the maximum
of the Estimated Price Range, as of December 31, 1995, respectively. See
"Regulatory Capital Compliance."
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On December 4, 1995, the Board of Directors of the Bank adopted the Plan of
Conversion. Pursuant to the Plan, the Bank is converting from a federally
chartered mutual savings bank to a federally chartered stock savings bank. The
Common Stock of the Company will be offered and sold hereby and all of the
outstanding capital stock of the Bank will be acquired by the Company in
exchange for 50% of the net proceeds of the Offerings. The Conversion and the
Offerings are subject to OTS approval, which was received on May 13, 1996, and
approval of the Bank's members at a special meeting to be held on June 24, 1996
(the "Special Meeting"). See "The Conversion--General." The Bank is converting
to increase its capital and structure itself in a form used by many commercial
banks and other business entities and a growing number of savings institutions.
The Conversion will enhance the Bank's ability to access capital markets, expand
its current operations, acquire other financial institutions or branch offices
or diversify into other financial services, to the extent allowable by
applicable law and regulation. See "The Conversion--Purposes of Conversion." The
holding company form of organization will provide additional flexibility to
diversify the Bank's business activities through existing or newly formed
subsidiaries, or through acquisitions of or mergers with other financial
institutions, as well as other companies. Although there are no current
arrangements, understandings or agreements regarding any such opportunities, the
Company will be better positioned after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
opportunities that may arise. The holding company form of organization also
provides certain anti-takeover protections. See "Risk Factors--Certain
Anti-Takeover Provisions."
Common Stock offered in the Subscription Offering will be offered in
the following order of priority:(1) depositors whose accounts with the Bank
totalled $50 or more ("Qualifying Deposit") on September 30, 1994 ("Eligible
Account Holders"); (2) the ESOP; (3) depositors with a Qualifying Deposit on
March 31, 1996
6
<PAGE>
("Supplemental Eligible Account Holders"); and (4) other members of the Bank,
consisting of depositors of the Bank as of April 30, 1996, the voting record
date ("Voting Record Date") for the Special Meeting, and borrowers with loans
outstanding as of November 7, 1994, which continue to be outstanding as of the
Voting Record Date, other than those members who otherwise qualify as Eligible
Account Holders or Supplemental Eligible Account Holders ("Other Members").
Subject to the prior rights of holders of subscription rights, Common Stock not
subscribed for in the Subscription Offering is being offered concurrently in the
Community Offering to certain members of the general public, with preference
given to natural persons residing in Passaic, Bergen, Morris or Sussex counties
in the State of New Jersey. It is anticipated that any shares not subscribed for
in the Subscription and Community Offering will be offered to members of the
general public in a Syndicated Community Offering. The Company and the Bank
reserve the right, in their absolute discretion, to reject or accept, in whole
or in part, any orders in the Community Offering and the Syndicated Community
Offering, either at the time of receipt of an order or as soon as practicable
following the Expiration Date. If an order is rejected, the funds submitted with
such order will be returned promptly. Subscription rights will expire if not
exercised by 12:00 noon, Eastern Time, on June 21, 1996, unless extended by the
Bank and the Company. See "The Conversion--Subscription Offering and
Subscription Rights" and "--Community Offering."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), no order form will be mailed any
later than five days prior to the Expiration Date or hand delivered any later
than two days prior to such date. Order forms will only be distributed with a
Prospectus. Execution of the order form will confirm receipt of the Prospectus
in accordance with Rule 15c2-8. The Bank and the Company are not obligated to
accept orders not submitted on original order forms. Order forms unaccompanied
by an executed certification form will not be accepted. Payment by check, money
order, bank draft, cash or debit authorization to an existing account at the
Bank must accompany the order and certification forms. No wire transfers will be
accepted. The Bank is prohibited from lending funds to any person or entity for
the purpose of purchasing shares of Common Stock in the Conversion.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, such depositors and borrowers must list all deposit and/or
loan accounts on the stock order form, giving all names on each account and the
account numbers. Failure to properly list all account numbers may result in the
inability of the Company or the Bank to fill all or part of a subscription
order. In addition, registration of shares in a name or title different from the
names or titles listed on the account may adversely affect such subscriber's
purchase priority. See "The Conversion--Procedure for Purchasing Shares in
Subscription and Community Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, 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 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. The 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. See "The
Conversion--Restrictions on Transfer of Subscription Rights and Shares."
Following the Conversion there generally will be no restrictions on the
transfer or sale of shares by purchasers other than affiliates of the Company
and the Bank. See "Regulation--Federal Securities Laws" and "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion."
PURCHASE LIMITATIONS
The minimum purchase in the Subscription and Community Offerings is 25
shares. The ESOP intends to subscribe for 8% of the shares of Common Stock
issued in the Conversion pursuant to the subscription rights granted under the
Plan. No Eligible Account Holder, Supplemental Eligible Account Holder or Other
Member, in their
7
<PAGE>
capacity as such, may subscribe in the Subscription Offering for more than
$150,000 of the aggregate value of shares of Common Stock offered; no person,
together with associates of or persons acting in concert with such person, may
purchase in the Community Offering and the Syndicated Community Offering in the
aggregate more than $150,000 of the aggregate value of shares of Common Stock
offered; and no person, together with associates of or persons acting in concert
with such person, may purchase in the Offerings more than the overall maximum
purchase limitation of 1% of the total number of shares of Common Stock to be
issued in the Conversion, exclusive of any shares issued pursuant to an increase
in the Estimated Price Range of up to 15%. At any time during the Conversion and
without further approval by the Bank's members, the Company and the Bank may in
their sole discretion decrease the maximum purchase limitation below $150,000 of
the aggregate value of shares offered in the Subscription and Community
Offerings. Additionally, at any time during the Conversion and without further
approval by the Bank's members or the resolicitation of subscribers, the Company
and the Bank may in their sole discretion increase the overall maximum purchase
limitation and/or increase the amount that may be subscribed for in the
Subscription and Community Offerings to up to 5% of the shares to be issued in
the Conversion, or if orders for Common Stock exceeding 5% of the total offering
of shares do not exceed in the aggregate 10% of the total shares offered, up to
9.99%. Prior to consummation of the Conversion, if the maximum purchase
limitation is increased, subscribers for the maximum amount will be, and certain
other large subscribers in the sole discretion of the Bank may be, given the
opportunity to increase their subscriptions up to the then applicable limit. See
"The Conversion--Limitations on Common Stock Purchases." In the Community
Offering a preference will be given to natural persons residing in Passaic,
Bergen, Morris or Sussex counties in the State of New Jersey. See "The
Conversion--Community Offering." In the event of an increase in the Estimated
Price Range, the additional shares will be distributed and allocated to fill
unfilled orders in the Subscription and Community Offerings, with priority given
to the ESOP, without any resolicitation of subscribers, as described in "The
Conversion--Subscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require that the aggregate purchase price of the Common
Stock to be issued in the Conversion be consistent with an independent appraisal
of the estimated pro forma market value of the Common Stock giving effect to the
Conversion. FinPro, an independent appraiser, has advised the Bank that in its
opinion, dated March 5, 1996 the estimated aggregate pro forma market value of
the Common Stock ranged from $21.3 million to $28.8 million, with a midpoint of
$25.0 million. THE APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT
BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE
COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES AT OR ABOVE THE
PURCHASE PRICE AFTER THE COMPLETION OF THE CONVERSION.
Based upon the above Valuation Range, the Boards of Directors of the
Company and the Bank have established the Estimated Price Range of $21.3 million
to $28.8 million, or between 2,125,000 and 2,875,000 shares of Common Stock at
the Purchase Price of $10.00 per share. All shares of Common Stock issued in the
Conversion will be sold at the Purchase Price of $10.00 per share, as determined
by the Bank and approved by the Company. The actual number of shares to be
issued in the Conversion will be determined by the Company and the Bank based
upon the final updated estimate at the completion of the Offerings of the
aggregate pro forma market value of the Common Stock, giving effect to the
Conversion. The maximum of the Estimated Price Range may be increased by up to
15% and the number of shares of Common Stock to be issued in the Conversion may
be increased up to 3,306,250 shares due to regulatory considerations or changes
in market or general financial and economic conditions. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel their subscriptions unless the gross proceeds from the sale of the Common
Stock are less than the minimum or more than 15% above the maximum of the
current Estimated Price Range. See "Risk Factors--Possible Increase in Estimated
Price Range and Number of Shares Issued," "Pro Forma Data," and "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
$20.3 million and $27.6 million (or $31.9 million if the Estimated Price Range
is increased by 15%) depending on the number of shares sold and the expenses of
the Conversion. See "Pro Forma Data." The Company will purchase all of the
capital stock of the Bank to
8
<PAGE>
be issued and outstanding upon Conversion in exchange for 50% of the net
proceeds, with the remaining net proceeds to be retained by the Company. In
determining the amount of net proceeds to be used for the purchase of the
capital stock of the Bank, consideration was given to such factors as the
regulatory capital position of the Bank (both before and after giving effect to
the Conversion) and the rules and regulations of the OTS governing the amount of
proceeds which may be retained by the Company. Net proceeds to be retained by
the Company after the purchase of the capital stock of the Bank are estimated to
be between $10.1 million and $13.8 million (or $15.9 million if the Estimated
Price Range is increased by 15%). The Company will be unable to use any of the
net proceeds until the close of the Offerings.
Net proceeds retained by the Company will be used for general business
purposes, including a loan by the Company directly to the ESOP and, subject to
applicable limitations, may be used for the possible payment of dividends and
repurchases of Common Stock. See "Use of Proceeds" and "Dividend Policy."
Assuming the acquisition by the ESOP of 8% of the shares to be issued in the
Conversion, the amount of the loan to the ESOP is estimated to be between $1.7
million and $2.3 million (or $2.6 million, if the Estimated Price Range is
increased by 15%) to be repaid over a 10 year period at an interest rate of
8.25%. See "Management of the Bank--Benefits--Employee Stock Ownership Plan and
Trust." Funds received by the Bank from the Company's purchase of its capital
stock will be used for general business purposes. See "Business of the Bank."
The Company and the Bank may consider exploring opportunities to use such funds
to expand operations through the acquisition or establishment of branch offices
and the acquisition of other financial institutions. Neither the Bank nor the
Company has any pending agreements or understandings regarding acquisitions of
any specific branch offices or financial institutions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Operating Strategy." On an interim basis, the Company and the Bank
intend to invest the net proceeds in interest-bearing deposits and short to
intermediate term securities, including mortgage-backed securities. See "Use of
Proceeds." Investments in mortgage-backed securities involve certain additional
risks. See "Business of the Bank--Securities Portfolio."
DIVIDEND POLICY
The Board of Directors of the Company intends to consider a policy of
paying cash dividends on the Common Stock in the future. However, no decision
has been made as to the amount or timing of such dividends, if any. Declarations
of dividends by the Board of Directors will depend upon a number of factors,
including the amount of the net proceeds retained by the Company in the
Conversion, 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 operations, tax considerations and general
economic conditions. No assurances can be given that any dividends will be paid
or, if commenced, will continue to be paid. See "Dividend Policy."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Prospectus. The Bank changed its fiscal year end from June 30
to December 31, effective as of December 31, 1995. Accordingly, the consolidated
financial and operating data at December 31, 1993, 1992 and 1991 and for the
years ended December 31, 1992 and 1991 were derived from unaudited financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of results of the
unaudited periods have been included.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets......................... $207,997 $176,664 $183,228 $179,214 $162,719
Securities available-for-sale(1)..... 58,155 3,360 11,715 -- --
Securities held-to-maturity(1)....... 3,841 50,304 33,774 46,276 30,270
Loans receivable, net(2)............. 111,988 113,091 106,333 114,858 110,696
Deposits............................. 173,822 159,013 166,821 164,321 150,279
Total equity......................... 17,299 16,259 15,005 12,644 11,221
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income...................... $13,136 $11,833 $12,633 $13,870 $13,789
Interest expense..................... 6,950 5,172 5,753 7,921 9,716
------- ------- ------- ------- -------
Net interest income before
provision for loan losses. 6,186 6,661 6,880 5,949 4,073
Provision for loan losses............ 152 316 286 619 289
------- ------- ------- ------- -------
Net interest income after provision
for loan losses.................... 6,034 6,345 6,594 5,330 3,784
Other income:
Net gain (loss) from sale of
securities available-for-sale...... (363) 270 (3) -- 44
Other............................... 520 450 499 917 373
------- ------- ------- ------- -------
Total other income................. 157 720 496 917 417
Other expenses....................... 4,833 4,432 4,155 3,922 3,275
------- ------- ------- ------- -------
Income before income taxes........... 1,358 2,633 2,935 2,325 926
Income tax expense(3)................ 487 944 745 902 382
------- ------- ------- ------- -------
Net income........................... $ 871 $ 1,689 $ 2,190 $ 1,423 $ 544
======= ======= ======= ======= =======
(continued on next page)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER DATA (4):
PERFORMANCE RATIOS:
Return on average assets......... 0.46% 0.93% 1.21% 0.81% 0.35%
Return on average equity......... 5.12 10.79 15.76 12.07 4.95
Average equity to average assets. 9.03 8.63 7.68 6.72 7.10
Equity to total assets at end of
period.......................... 8.32 9.20 8.10 7.06 6.90
Interest rate spread(5).......... 3.13 3.63 3.83 3.35 2.45
Net interest margin(6)........... 3.42 3.82 3.99 3.54 2.75
Average interest-earning assets
to average interest-bearing
liabilities..................... 107.63 106.36 104.59 104.00 104.60
Efficiency ratio(7).............. 72.07 62.33 56.31 57.12 73.66
Other expenses to average assets. 2.57 2.44 2.30 2.23 2.11
REGULATORY CAPITAL RATIOS(8):
Tangible capital................. 8.34 9.31 8.08 7.05 6.85
Core capital..................... 8.34 9.31 8.08 7.05 6.85
Risk-based capital............... 23.39 21.85 20.22 16.14 15.35
ASSET QUALITY RATIOS(9):
Non-performing loans as a
percent of gross loans.......... 2.16 3.17 3.26 3.60 5.39
Non-performing assets as a
percent of total assets......... 1.46 2.61 2.65 3.35 4.04
Allowance for loan losses as a
percent of gross loans
receivable...................... 1.40 1.34 1.15 0.84 0.88
Allowance for loan losses as a
percent of non-performing
loans........................... 64.86 42.33 35.24 23.33 16.38
NUMBER OF FULL-SERVICE CUSTOMER
FACILITIES....................... 4 4 4 4 3
- ------------
<FN>
(1) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective as of December 31, 1993. Prior to the adoption of SFAS No. 115,
investment securities and mortgage-backed securities were carried at
amortized cost.
(2) The allowance for loan losses at December 31, 1995, 1994, 1993, 1992 and
1991 was $1.6 million, $1.5 million, $1.2 million, $974,000 and $986,000,
respectively.
(3) Income tax expense for the year ended December 31, 1993 includes a $297,000
benefit due to the cumulative effect of a change in accounting principle.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods.
(5) The interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents total other expense as a percent of net
interest income before provision for loan losses plus total other income,
excluding gains and losses on the sale of securities.
(8) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(9) Non-performing assets consist of non-performing loans and real estate
owned ("REO"). Non-performing loans consist of all loans 90 days or more
past due and all other non-accrual loans. It is the Bank's policy to cease
accruing interest on loans 90 days or more past due. See "Business of the
Bank--Lending Activities--Non-Accrual Loans."
</FN>
</TABLE>
11
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain condensed consolidated financial and
other data of the Bank at the dates and for the periods indicated. Consolidated
financial and operating data and financial ratios and other data and regulatory
capital ratios at March 31, 1996 and for the three months ended March 31, 1996
and 1995, were derived from unaudited financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of results of the unaudited periods presented
have been included. The results of operations and other data presented for the
three months ended March 31, 1996 are not necessarily indicative of the results
of operations that may be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
1996 1995
------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets.................................................... $195,720 $207,997
Securities available-for-sale................................... 58,597 58,155
Securities held-to-maturity..................................... 3,705 3,841
Loans receivable, net(1)........................................ 112,537 111,988
Deposits........................................................ 174,701 173,822
Total equity.................................................... 17,438 17,299
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
1996 1995
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income................................................. $3,410 $3,187
Interest expense................................................ 1,832 1,446
------ ------
Net interest income before provision for loan losses............ 1,578 1,741
Provision for loan losses....................................... 35 75
------ ------
Net interest income after provision for loan losses............. 1,543 1,666
Other income.................................................... 131 96
Other expenses.................................................. 1,163 1,226
------ ------
Income before income taxes...................................... 511 536
Income tax expense.............................................. 187 190
------ ------
Net income...................................................... $ 324 $ 346
====== ======
</TABLE>
(continued on next page)
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1996 1995
------ ------
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(2):
PERFORMANCE RATIOS:
Return on average assets................................................. 0.67% 0.77%
Return on average equity................................................. 7.36 8.26
Average equity to average assets......................................... 9.06 9.34
Equity to total assets at end of period.................................. 8.91 9.18
Interest rate spread(3).................................................. 3.10 3.74
Net interest margin(4)................................................... 3.25 3.82
Average interest-earning assets to average interest-bearing liabilities.. 106.91 106.87
Efficiency ratio(5)...................................................... 68.05 66.74
Other expenses to average assets......................................... 2.40 2.73
REGULATORY CAPITAL RATIOS(6):
Tangible capital......................................................... 9.02 9.22
Core capital............................................................. 9.02 9.22
Risk-based capital....................................................... 24.16 22.17
ASSET QUALITY RATIOS(7):
Non-performing loans as a percent of gross loans......................... 2.42 2.83
Non-performing assets as a percent of total assets....................... 1.79 2.53
Allowance for loan losses as a percent of gross loans receivable......... 1.36 1.22
Allowance for loan losses as a percent of non-performing loans........... 56.50 42.95
<FN>
- -------------
(1) The allowance for loan losses at March 31, 1996 was $1.6 million.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(3) The interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) The efficiency ratio represents total other expense as a percent of net
interest income before provision for loan losses and total other income,
excluding gains and losses on the sale of securities.
(6) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(7) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of all loans 90 days or more past due and all
other non-accrual loans. It is the Bank's policy to cease accruing interest
on loans 90 days or more past due. See "Business of the Bank--Lending
Activities--Non-Accrual Loans."
</FN>
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Total assets at March 31, 1996 were $195.7 million compared with $208.0
million at December 31, 1995. This is a decrease of $12.3 million or 5.9%, which
was due primarily to the following: at December 31, 1995, the Bank's total
assets included $13.4 million of mortgage-backed securities recently purchased,
but not yet delivered, and $13.4 million in cash, which was the amount owed on
those mortgage-backed securities. In January 1996, the mortgage-backed
securities, which in accordance with generally accepted accounting principles
("GAAP") had already been included in the Bank's total assets upon confirmation
of the purchase, were delivered and the purchase price was paid. This resulted
in total assets being decreased by the amount of the purchase price, or $13.4
million.
Total deposits increased by $900,000 to $174.7 million at March 31, 1996
compared to $173.8 million at December 31, 1995. Total equity at March 31, 1996
was $17.4 million compared with $17.3 million at December 31, 1995. The increase
in total equity was due to net income of $324,000 for the three months ended
March 31, 1996, which was partially offset by an increase of $185,000 in the
unrealized loss on securities available for sale, net of income tax, pursuant to
SFAS No. 115.
Interest income was $3.4 million for the three months ended March 31, 1996
compared to $3.2 million for the three months ended March 31, 1995. Interest
expense increased by $386,000 to $1.8 million for the three months ended March
31, 1996 from $1.4 million for the three months ended March 31, 1995. The
increase in interest expense was due to higher market rates of interest, which
have also resulted in the Bank's net interest margin and interest rate spread
narrowing to 3.25% and 3.10% for the three months ended March 31, 1996,
respectively, compared to 3.82% and 3.74% for the three months ended March 31,
1995, respectively. Further increases in the general market rates are likely to
continue to adversely impact the Bank's net interest margin and interest rate
spread, which will have a negative effect on net interest income.
14
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and securities, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. When interest rates rise, the Bank's net interest
income tends to be adversely impacted since its liabilities tend to reprice more
quickly than its assets. Conversely, in a declining rate environment the Bank's
net interest income is generally positively impacted since its assets tend to
reprice more slowly than its liabilities. Changes in the level of interest rates
also affect the amount of loans originated by the Bank and, thus, the amount of
loan and commitment fees, as well as the market value of the Bank's
interest-earning assets. Moreover, changes in interest rates also can result in
disintermediation, which is the flow of funds away from savings institutions
into direct investments, such as corporate securities and other investment
vehicles, which generally pay higher rates of return than savings institutions.
Although one of the goals of the Bank's asset/liability management strategy
is to more effectively manage the Bank's exposure to changes in interest rates,
the Board of Directors continues to believe that the increased net interest
income resulting from a mismatch in the maturity of its asset and liability
portfolios can, during periods of declining or stable interest rates and periods
in which there is a substantial positive difference between long- and
short-term interest rates (i.e., a "positively sloped yield curve"), provide
high enough returns to justify the increased exposure to sudden and unexpected
increases in interest rates. As a result of the above, the Bank will continue to
be vulnerable to changes in interest rates and to decreases in the difference
between long- and short-term interest rates, which has resulted in the Bank's
interest rate spread and net interest margin decreasing in 1994 and 1995 and the
first quarter of 1996.
Specifically, the increase in general interest rates and a decline in the
difference between long- and short-term interest rates during 1995, which
resulted in the Bank's deposit liabilities repricing from an average yield of
3.16% for the year ended December 31, 1994 to 4.09% for the year ended December
31, 1995, contributed to the Bank experiencing compression in its interest rate
spread, which was reduced to 3.13% for the year ended December 31, 1995, from
3.63% for the year ended December 31, 1994, and in its net interest margin,
which was reduced to 3.42% from 3.82% for the year ended December 31, 1994. This
trend continued into the first quarter of 1996. See "Recent Developments." The
Bank's interest rate spread and net interest margin was 3.83% and 3.99%,
respectively, for the year ended December 31, 1993. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Operating
Strategy."
DIVERSIFICATION OF LENDING ACTIVITIES
While continuing to focus primarily on one- to four-family lending, the
Bank intends to focus on increasing its originations of commercial real estate
and multi-family loans, which generally have adjustable rates and/or shorter
terms to maturity than one- to four-family residential real estate loans.
Multi-family and commercial real estate loans typically involve higher loan
principal amounts and are generally considered to involve a higher degree of
credit risk and be more vulnerable to deteriorating economic conditions than
one- to four-family residential mortgage loans. Income producing property
values are also generally subject to greater volatility than owner-occupied
residential property values. Repayment of multi-family and commercial real
estate loans generally is dependent, in large part, on sufficient income from
the property to cover operating expenses and debt service. The Bank currently
originates loans secured by multi-family and commercial real estate properties
on a limited basis. The Bank attempts to offset the risks associated with
multi-family and commercial real estate lending primarily by lending to
individuals who will be actively involved in the management of the property and
who have proven management experience, and by making such loans with lower
loan-to-value ratios than one- to four-family loans. Economic events and
government regulations, which are outside the control of the borrower or lender,
could impact the value of the security for such loans or the future cash flow of
the affected properties.
At December 31, 1995, the Bank had no construction loans in its total gross
loan portfolio. The Bank does, on a case by case basis, originate construction
loans, primarily to accommodate existing customers. As part of its business
15
<PAGE>
plan, the Bank intends to place a greater emphasis on the origination of
construction loans. Construction loans involve many of the same risks as
multi-family and commercial real estate loans, as well as certain additional
risks. Changes in circumstances could adversely affect income from the property
as well as its market value. There are uncertainties inherent in estimating
construction development costs as well as the market value of the completed
project and the effects of government regulation of real property.
Subject to market conditions in the future, the Bank intends to expand its
consumer lending on a limited basis in the Bank's primary market area and
intends to begin offering commercial business loans to businesses located within
the Bank's primary market area. See "Business of the Bank--Lending Activities."
COMPETITION
The Bank faces intense competition both in making mortgage loans and in
attracting deposits. Many of the Bank's competitors in its market area, whether
traditional financial institutions or otherwise, have much greater financial and
marketing resources than those of the Bank. The Bank faces intense competition
for loans principally from savings and loan associations and savings banks,
mortgage banking companies, insurance companies, commercial banks and other
institutional lenders. In addition, the Bank faces direct competition for
deposits from, among other sources, savings and loan associations, savings
banks, commercial banks, credit unions, other financial institutions, short-term
money market funds and other corporate and government securities funds.
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the Bank Insurance Fund ("BIF"), the deposit insurance fund that covers most
commercial bank deposits, are statutorily required to be recapitalized to a
1.25% of insured reserve deposits ratio. A portion of the insurance assessment
paid by SAIF members is required by statute to be used to make payments on by
the Financing Corporation ("FICO") bonds which were issued in the late 1980s to
recapitalize the predecessor to the SAIF.
Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 23 and 26 basis points. The FDIC recently adopted
a new assessment rate schedule of 0 to 27 basis points for BIF members. Under
the new schedule, approximately 92% of BIF members would be required to pay only
$2,000 per year, the legal minimum, in insurance premiums. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. Consequently, there is a significant differential in the insurance
premiums paid by BIF and SAIF members. As long as the premium differential
continues, it may place SAIF members, such as the Bank, at a substantial
competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
Several bills have been introduced in Congress to mitigate the effect of
the BIF/SAIF premium disparity. As of the date hereof, provisions included in
certain pending legislation passed by Congress would impose a one-time special
assessment on SAIF-member institutions, including the Bank, to recapitalize the
SAIF and would spread the FICO payments across all BIF and SAIF members. It is
presently estimated that the amount of the one-time fee would range from 79 to
85 basis points on the amount of deposits held by SAIF-member institutions as of
March 31, 1995. The legislation would also require the BIF and SAIF to be merged
by January 1, 1998 provided that subsequent legislation is adopted to eliminate
the federal thrift charter. The payment of the one-time fee would have the
effect of immediately reducing the capital of the SAIF-member institutions by
the amount of the fee, net of any tax effect. See "Regulatory Capital
Compliance" and "Regulation--Insurance of Deposit Accounts." Management cannot
predict whether legislation imposing such a fee will be enacted, or, if enacted,
the amount of any one-time fee, whether such fee will be calculated based on the
amount of deposits held by the institution on March 31, 1995 or whether ongoing
SAIF premiums will be reduced to a level equal to that of BIF premiums.
The Bank's assessment rate for 1995 and 1994 was 23 basis points for each
period and the premiums paid for these periods were $368,000 and $378,000,
respectively. A significant increase in SAIF insurance premiums or a significant
one-time fee to recapitalize the SAIF would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Based on the Bank's
deposit insurance assessment base as of March 31, 1995, a 79 to 85 basis point
fee to recapitalize the SAIF would result in a $793,000 to $854,000 payment on
an after-tax basis. If the Bank had been required to pay a special assessment of
85 basis points on December 31, 1995, the Bank would have reported net income of
$17,000 for the year ended December 31, 1995.
16
<PAGE>
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings bank. In addition, the Company, as a savings and loan holding company,
is subject to extensive regulation and supervision. Such regulations, which
affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant laws and regulations is also subject to change by
the authorities who examine the Bank and interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, its operations or the Conversion. See
"Regulation."
Congress currently has under consideration various proposals to eliminate
the federal thrift charter and abolish the OTS. Several of the bills presently
pending in Congress would require that all federal savings associations convert
to national banks or state banks by no later than January 1, 1998 and would
treat all state savings associations as state banks as of that date. All savings
and loan holding companies would become bank holding companies under the pending
legislative proposals and would be subject to the activities restrictions
applicable to bank holding companies. Under the pending bills, any lawful
activity in which a savings association was engaged on September 13, 1995 would
be grandfathered for up to five years following the effective date of its
conversion to a bank charter and existing thrift intrastate and interstate
branches which were operated as branches on September 13, 1995 would also be
grandfathered. The legislative proposals would also abolish the OTS and transfer
its functions to the existing bank regulatory agencies and to the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") with respect
to the regulation of savings and loan holding companies. An institution's
regulator would depend upon the bank charter chosen. Pending legislation would
eliminate the bad debt reserve deduction for financial institutions, and would
require savings associations to recapture any post-1987 deductions for bad debt
reserves. See "Federal and State Taxation--Federal Taxation--Bad Debt Reserve."
The outcome of any pending legislation and the effect of such legislation on the
bad debt reserve deduction of thrift institutions such as the Bank is uncertain.
Therefore, the Bank is unable to determine the extent to which such legislation,
if enacted, would affect its business or require the recapture of the bad debt
reserve.
BENEFITS TO MANAGEMENT AND DIRECTORS
Stock Programs. The Company intends to seek stockholder approval of a
performance-based stock program or programs (the "Stock Programs"), for the
benefit of non-employee directors, officers and employees of the Company and the
Bank, at a meeting of stockholders following the Conversion, which, under
current OTS regulations, may be held no earlier than six months after completion
of the Conversion. Assuming the receipt of stockholder approval, a trustee
selected by the Company is expected to acquire Common Stock on behalf of the
Stock Programs in an amount equal to 4.0% of the Common Stock issued in the
Conversion, or 85,000 shares and 115,000 shares at the minimum and maximum of
the Estimated Price Range, respectively. These shares will be acquired either
through open market purchases, if permissible, or from authorized but unissued
Common Stock. See "--Possible Dilutive Effect of Stock Programs and Stock
Options." Although no specific award determinations have been made, the Company
anticipates that, if stockholder approval is obtained, it will provide awards to
its directors, officers and employees to the extent permitted by applicable
regulations. Current OTS regulations provide that no individual may receive more
than 25% of the shares of any plan and non-employee directors may not receive
more than 5% individually, or 30% in the aggregate, of the shares awarded under
any plan. These shares will be awarded at no cost to the recipients. Under the
terms of the Stock Programs, the trustee will vote unallocated shares in the
same proportion as it receives instructions from recipients with respect to
allocated shares which have not been earned and distributed. The trustee will
not vote allocated shares which have not been distributed if it does not receive
instructions from the recipient. See "Management of the Bank--Benefits--Stock
Programs."
Stock Options. The Company also intends to seek stockholder approval of a
benefit plan or plans which would provide options to purchase Common Stock to
officers, employees and non-employee directors (the "Option Plans") at a meeting
of stockholders following the Conversion, which under current OTS regulations
may be held no earlier than six months after completion of the Conversion.
Although no specific determinations have been made, assuming the receipt of
stockholder approval, the Company expects that officers, employees and directors
will be granted options to purchase an amount of authorized but unissued Common
Stock or treasury stock, if any, equal to 10% of the Common Stock issued in the
Conversion, or 212,500 shares and 287,500 shares at the minimum and maximum of
the Estimated Price Range. Under the Option Plans, the exercise price will be
equal to the fair market value of the
17
<PAGE>
underlying Common Stock on the date of grant. Such options will permit such
officers and directors to benefit from any increase in the market value of the
shares in excess of the exercise price at the time of exercise. Officers and
directors receiving such options will not be required to pay for the shares
until the date of exercise. See "Management of the Bank--Benefits--Stock Option
Plans."
Change In Control Provisions. Upon completion of the Conversion, and
subject to the approval of the OTS, the Bank and the Company intend to enter
into employment and severance agreements with certain members of management and
to implement a severance plan for the employees of the Bank. See "Management of
the Bank--Employment Agreements," "--Change in Control Agreements" and
"--Employee Severance Compensation Plan." Such employment or severance
agreements provide for benefits and cash payments in the event of a change in
control of the Company or the Bank. These provisions may have the effect of
increasing the cost of acquiring the Company, thereby discouraging future
attempts to take over the Company or the Bank. However, the actual amount to be
paid in the event of a change in control of the Bank or the Company cannot be
estimated at this time because the actual amount is based on the average salary
of the employee and other factors existing at the time of the change in control
which cannot be determined at this time. See "Restrictions on Acquisition of the
Company and the Bank--Restrictions in the Company's Certificate of Incorporation
and Bylaws," "Management of the Bank--Employment Agreements," "--Change in
Control Agreements," "--Employee Severance Compensation Plan,"
"--Benefits--Stock Option Plans" and "--Benefits--Stock Programs."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion, the Stock Programs, if approved by the
stockholders of the Company, will acquire an amount of shares equal to 4% of the
shares of Common Stock issued in the Conversion, either through open market
purchases or the issuance of authorized but unissued shares of Common Stock from
the Company. If the Stock Programs are funded by the issuance of authorized but
unissued shares, the voting interests of existing shareholders will be diluted
by approximately 3.9%. Also following the Conversion, directors, officers and
employees will be granted options, if the Stock Option Plans are approved by the
stockholders of the Company. Although no specific determinations have been made,
the Company expects that executive officers and directors will be granted
options to purchase authorized but unissued shares in an amount equal to 10% of
the Common Stock issued in the Conversion. Under certain circumstances, such
options may be exercised and sold on the same day, thereby eliminating any risk
to officers and directors in exercising options in the event that the market
price exceeds the exercise price. If all of the options were to be exercised
using authorized but unissued Common Stock, the voting interests of existing
stockholders would be diluted by approximately 9.1%.
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions in the Company's and the Bank's Governing Instruments. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's 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 provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of the outstanding shares, and certain uniform price provisions for certain
business combinations. The Bank's Federal Stock Charter also prohibits, for five
years, the acquisition of or offer to acquire, directly or indirectly, the
beneficial ownership of more than 10% of the Bank's equity securities. Any
person violating this restriction may not vote the Bank's securities in excess
of 10%. These provisions in the Bank's and the Company's governing instruments
may discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate current management. For a more
detailed discussion of these provisions, see "Restrictions on Acquisition of the
Company and the Bank."
Voting Control of Officers and Directors. Directors and executive officers
of the Bank and the Company expect to purchase approximately 4.61% or 3.41% of
the shares of Common Stock to be issued in the Conversion, based upon the
minimum and the maximum of the Estimated Price Range, respectively, exclusive of
shares that may be attributable to directors and officers through the Stock
Programs, the Stock Options Plans and the ESOP. Management's potential voting
control could, together with additional stockholder support, defeat stockholder
proposals requiring 80% approval of stockholders. As a result, this potential
voting control may preclude takeover
18
<PAGE>
attempts that certain stockholders deem to be in their best interest and may
tend to perpetuate existing management. See "Restrictions on Acquisition of the
Company and the Bank--Restrictions in the Company's Certificate of Incorporation
and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company has
received conditional approval from the NASD to have its Common Stock quoted on
the Nasdaq Stock Market under the symbol "WYNE" upon completion of the
Conversion. However, there can be no assurance that an active and liquid trading
market for the Common Stock will develop, or, once developed, will continue, nor
can there be any assurances that purchasers of the Common Stock will be able to
sell their shares at or above the Purchase Price. The absence or discontinuance
of a market for the Common Stock may have an adverse impact on both the price
and liquidity of the Common Stock. See "Market for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% due to
regulatory considerations, changes in market conditions or general financial and
economic conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 3,306,250 shares of Common Stock at
the Purchase Price for an aggregate price of up to $33,062,500. An increase in
the number of shares issued will decrease a subscriber's pro forma net earnings
per share and stockholders' equity per share and will increase the Company's pro
forma consolidated stockholders' equity and net earnings. Such an increase will
also increase the Purchase Price as a percentage of pro forma stockholders'
equity per share and as a multiple of pro forma net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF
SUBSCRIPTION RIGHTS
The Bank has received a letter from FinPro which states that, pursuant to
FinPro's valuation, subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members have no value. However,
such valuation is not binding on the Internal Revenue Service ("IRS"). If the
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are deemed to have an ascertainable value,
receipt of such rights could result in taxable gain to those Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members who receive
and/or exercise the subscription rights in an amount equal to such value.
Additionally, the Bank could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion--Effects of
Conversion" and "--Tax Aspects."
RISK OF DELAYED OFFERING
The Company and the Bank expect to complete the Conversion within the time
periods indicated in this Prospectus. Nevertheless, it is possible, although not
anticipated, that adverse market, economic or regulatory conditions, or other
factors could significantly delay the completion of the Conversion and result in
increased Conversion costs or in changes in the Conversion valuation. The
Subscription and Community Offerings could be extended to August 4, 1996 before
subscribers would have the right to confirm, modify or rescind their
subscriptions. If the Subscription and Community Offerings are extended beyond
August 4, 1996, all subscribers will have the right to confirm, modify or
rescind their subscriptions and to have their subscription funds returned
promptly, with interest at a rate equal to the Bank's interest rate paid on
passbook accounts, or to have their withdrawal authorization terminated. See
"The Conversion."
RETURN ON EQUITY AFTER CONVERSION
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. The Company's
post-Conversion pro forma return on equity will be less than the Bank's
pre-Conversion return on equity because of the increase in consolidated equity
of the Company that will result from the net proceeds of the Offerings. See
"Selected Consolidated Financial and Other Data of the Bank" for information
regarding the Bank's historical return
19
<PAGE>
on equity and "Capitalization" for a discussion of the Company's estimated pro
forma consolidated capitalization as a result of the Conversion.
In order for the Company to achieve a return on equity comparable to the
historical levels achieved by the Bank prior to the Conversion, the Company
would have to either increase net income or reduce stockholders' equity, or
both, commensurate with the increase in equity as a result of the Conversion.
Reductions in equity could be achieved by, among other things, the payment of
regular cash dividends or periodic special dividends (although no assurances can
be given as to whether any dividends will be paid or, if paid, their amount and
frequency), the repurchase of shares of Common Stock subject to regulatory
restrictions, or the acquisition of branch offices or other financial
institutions (neither the Company nor the Bank has any present plans,
arrangements, or understandings, written or oral, regarding any repurchase or
acquisitions). See "Dividend Policy" and "Use of Proceeds." Achievement of
increased net income levels will depend on several important factors outside the
control of management, such as general economic conditions, including the level
of market interest rates, competition and related factors, among others. In
addition to the contraction in net interest rate spread that the Bank has
experienced in recent periods, and which can be expected to continue if interest
rates increase, the expenses associated with the ESOP and the Stock Programs
(see "Pro Forma Data"), along with other post-Conversion expenses, is expected
to contribute initially to reduced earnings levels. The Bank intends to deploy
the net proceeds of the Offerings to increase earnings per share and book value
per share without assuming undue risk, with the goal of achieving a return on
equity comparable to the average for publicly traded thrift institutions and
their holding companies. This goal will likely take a number of years to achieve
and no assurances can be given that this goal can be attained.
WAYNE BANCORP, INC.
The Company was organized at the direction of the Board of Directors of the
Bank for the purpose of acquiring all of the capital stock to be issued by the
Bank. The Company has received conditional OTS approval to become a savings and
loan holding company, and, as such, will be subject to regulation by the OTS.
See "The Conversion--General." 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 consist of all of the outstanding shares
of the Bank's capital stock issued to the Company in the Conversion and that
portion of the net proceeds of the Offerings retained by the Company. The
Company intends to use part of the net proceeds it retains to make a loan
directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock in
the Conversion. See "Use of Proceeds." The Company will have no significant
liabilities upon Conversion. The management of the Company is set forth under
"Management of the Company." Initially, the Company will neither own nor lease
any property, but will instead 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 in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. 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 net proceeds retained by the
Company and earnings thereon or, alternatively, through dividends from the Bank.
The Company's executive offices are located at the Bank's administrative
office at 1195 Hamburg Turnpike, Wayne, New Jersey 07474. The Company's
telephone number is (201) 305-5500.
WAYNE SAVINGS BANK, F.S.B.
The Bank has operated as a community oriented financial institution since
it was organized in 1921. The Bank conducts its business through five offices
located in Passaic County, New Jersey. Three branch offices and the Bank's
administrative office are located in Wayne, and one branch office is located in
North Haledon, New Jersey. The Bank's primary market area includes portions of
Passaic, Bergen and Morris Counties, New Jersey.
20
<PAGE>
The Bank's primary business has been and continues to be attracting
deposits from the general public in its primary market area and investing such
deposits and other funds, generated from operations and borrowings, primarily in
mortgage loans secured by one- to four-family residences and home
equity loans. At December 31, 1995, $87.6 million and $20.9 million, or 77.1%
and 18.5%, respectively, of the Bank's gross loans consisted of one- to
four-family mortgage loans and home equity loans, respectively. To a
significantly lesser extent, the Bank invests in commercial real estate,
multi-family, construction (primarily residential construction), and
consumer loans and intends to begin investing in commercial business loans on a
moderate basis in the Bank's primary market area. See "Business of the
Bank--Lending Activities." In addition to its lending activities, the Bank also
invests in mortgage-backed securities, primarily those guaranteed by
governmental agencies such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") and investment securities.
Additionally, the Bank offers certain financial planning services, including the
sale of insurance annuity products, government securities, mutual funds, stocks
and other equity investment products through Wayne Savings Financial Services
Group, Inc. ("Financial Services"), a subsidiary of the Bank. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business of the Bank."
The Bank is subject to extensive regulation, supervision and examination by
the OTS, its primary regulator, and the FDIC, which insures its deposits. As of
December 31, 1995, the Bank exceeded all regulatory capital requirements with
tangible, core and risk-based capital of $17.4 million, $17.4 million and $18.4
million, respectively. Additionally, the Bank's regulatory capital was in excess
of the amount necessary to be "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). See "Regulatory
Capital Compliance" and "Regulation." The Bank is a member of the Federal Home
Loan Bank of New York ("FHLB") which is one of the 12 regional banks which
comprise the FHLB system.
The Bank's executive offices are located at its administrative office
at 1195 Hamburg Turnpike, Wayne, New Jersey 07474. The Bank's telephone number
is (201) 305-5500.
21
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At December 31, 1995, the Bank exceeded all regulatory capital
requirements. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements." Set forth below is a summary of the Bank's compliance with
regulatory capital standards as of December 31, 1995, on a historical and pro
forma basis assuming that the indicated number of shares were sold as of such
date and receipt by the Bank of 50% of the net proceeds and that such net
proceeds are invested in assets that carry a 20% risk-weighting. 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 Stock Programs are deducted from pro
forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1995 BASED UPON SALE AT $10.00 PER SHARE
---------------------------------------------------------------------------
2,125,000 SHARES 2,500,000 SHARES 2,875,000 SHARES
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED
DECEMBER 31, 1995 PRICE RANGE) PRICE RANGE) PRICE RANGE)
----------------------- ---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- ---------- -------- ---------- -------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............... $17,299 8.32% $24,878 11.54% $26,273 12.11% $27,668 12.67%
======= ==== ======= ===== ======= ===== ======= =====
Tangible Capital:
Capital Level(3).......... $17,394 8.34% $24,973 11.56% $26,368 12.12% $27,763 12.68%
Requirement............... 3,128 1.50 3,243 1.50 3,265 1.50 3,286 1.50
------- ---- ------- ----- ------- ----- ------- -----
Excess.................... $14,266 6.84% $21,730 10.06% $23,103 10.62% $24,477 11.18%
======= ==== ======= ===== ======= ===== ======= =====
Core Capital:
Capital Level(3).......... $17,394 8.34% $24,973 11.56% $26,368 12.12% $27,763 12.68%
Requirement(4)............ 6,256 3.00 6,486 3.00 6,530 3.00 6,572 3.00
------- ---- ------- ----- ------- ----- ------- -----
Excess.................... $11,138 5.34% $18,487 8.56% $19,838 9.12% $21,191 9.68%
======= ==== ======= ===== ======= ===== ======= =====
Total Risk-Based Capital:
Capital Level(3).......... $18,383 23.39% $25,962 32.20% $27,357 33.77% $28,752 35.33%
Requirement............... 6,287 8.00 6,451 8.00 6,481 8.00 6,511 8.00
------- ---- ------- ----- ------- ----- ------- -----
Excess.................... $12,096 15.39% $19,511 24.20% $20,876 25.77% $22,241 27.33%
======= ==== ======= ===== ======= ===== ======= =====
</TABLE>
PRO FORMA AT DECEMBER 31, 1995
BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------
3,306,250 SHARES
(15% ABOVE MAXIMUM
OF ESTIMATED
PRICE RANGE)(1)
----------------------
PERCENT
OF
AMOUNT ASSETS(2)
------- ---------
(DOLLARS IN THOUSANDS)
GAAP Capital............... $29,272 13.31%
======= =====
Tangible Capital:
Capital Level(3).......... $29,366 13.32%
Requirement............... 3,310 1.50
------- -----
Excess.................... $26,056 11.82%
======= =====
Core Capital:
Capital Level(3).......... $29,366 13.32%
Requirement(4)............ 6,620 3.00
------- -----
Excess.................... $22,746 10.32%
======= =====
Total Risk-Based Capital:
Capital Level(3).......... $30,355 37.10%
Requirement............... 6,545 8.00
------- -----
Excess.................... $23,810 29.10%
======= =====
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets. 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.
(3) The difference between equity under GAAP and regulatory tangible and core
capital is attributable to the addition of the net unrealized loss on debt
securities available for sale at December 31, 1995. The difference between
equity under GAAP and regulatory risk-based capital is attributable to
additions for the general valuation allowance and the net unrealized loss
on debt securities available for sale at December 31, 1995.
(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 thrifts
that receive the highest supervisory rating for safety and soundness and a
4% to 5% core capital ratio requirement for all other thrifts. See
"Regulation--Federal Savings Institution Regulation--Capital Requirements."
22
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently anticipated
that the net proceeds will be between $20.3 million and $27.6 million (or $31.9
million if the Estimated Price Range is increased by 15%). See "Pro Forma Data"
and "The Conversion--Stock Pricing" as to the assumptions used to arrive at such
amounts. The Company will be unable to utilize any of the net proceeds of the
Offerings until the consummation of the Conversion.
The Company will purchase all of the capital stock of the Bank to be issued
and outstanding upon Conversion in exchange for 50% of the net proceeds. Such
proceeds will be added to the Bank's general funds to be used for general
corporate purposes, including investment in one- to four-family residential
mortgage loans and other loans, investment in interest-bearing deposits, short
to intermediate term securities, including mortgage-backed securities, and to
fund the Stock Programs. The Bank may consider exploring opportunities to use
such funds to expand operations through the acquisition or establishment of
branch offices and the acquisition of other financial institutions. The Bank has
not yet determined the approximate amount of net proceeds to be used for each of
the purposes mentioned above and neither the Bank nor the Company has any
pending agreements or understandings regarding acquisitions of any specific
branch offices or financial institutions.
The net proceeds retained by the Company will initially be invested
primarily in interest-bearing deposits and short to intermediate term
securities. The Company intends to use a portion of the net proceeds to make a
loan directly to the ESOP to enable the ESOP to purchase up to 8% of the Common
Stock in the Conversion. Based upon the issuance of 2,125,000 shares or
2,875,000 shares at the minimum and maximum of the Estimated Price Range, the
amount of the loan to the ESOP would be $1.7 million or $2.3 million,
respectively (or $2.6 million if the Estimated Price Range is increased by 15%)
to be repaid over a 10 year period at an interest rate of 8.25%. See "Management
of the Bank--Benefits--Employee Stock Ownership Plan and Trust."
The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition or establishment of
additional branches and the acquisition of other financial institutions or
diversification into other banking related businesses and for other business or
investment purposes, including possibly the payment of dividends and the
repurchase of the Company's Common Stock. The Company has no current
arrangements, understandings or agreements regarding any such transactions. The
Company, upon the Conversion, will be a unitary savings and loan holding
company, which under existing laws would generally not be restricted as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL"). See "Regulation--Holding
Company Regulation" for a description of certain regulations and proposed
regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the OTS, the Company, pursuant
to OTS regulations, 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 12-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 10 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. See "Regulation--Prompt
Corrective Regulatory Action." In addition, under current OTS policies,
repurchases may be allowed in the first year following Conversion and in amounts
greater than 5% in the second and third years following Conversion provided
there are valid and compelling business reasons for such repurchases and the OTS
does not object to such repurchases.
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 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
23
<PAGE>
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
Purchase Price in the Conversion. Such repurchases may have a dilutive effect
upon the interests of existing stockholders.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other considerations. See "The Conversion--Certain
Restrictions on Purchase or Transfer of Shares After Conversion."
The Company's Board of Directors intends to consider a policy of paying
cash dividends in the future. The payment of dividends or repurchase of stock,
however, would be prohibited if stockholders' equity would be reduced below the
amount required to maintain the Bank's liquidation account. See "Dividend
Policy" and "The Conversion--Liquidation Rights" and "--Certain Restrictions on
Purchase or Transfer of Shares After Conversion." The Company has committed to
the OTS not to make any tax-free distribution to stockholders in the form of a
return of capital within the first year following the consummation of the
Conversion.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Board of Directors intends to consider a policy of
paying cash dividends on the Common Stock in the future. However, no decision
has been made as to the amount or timing of such dividends, if any. Declarations
of dividends by the Board of Directors will depend upon a number of factors,
including the amount of net proceeds retained by the Company in the Conversion,
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 operations, tax considerations and general economic
conditions. No assurances can be given, however, that any dividends will be paid
or, if commenced, will continue to be paid.
The Bank will not be permitted to pay dividends on its capital stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account. See "The Conversion--Liquidation Rights." For information
concerning federal regulations that apply 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 Savings Institution
Regulation--Limitation on Capital Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory restrictions
on the payment of dividends to its stockholders. 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, or if
there is no such excess, to its net profits for the current and/or immediately
preceding fiscal year. Since the Company initially will have no significant
source of income other than dividends from the Bank and earnings from the net
proceeds retained by the Company, the payment of dividends by the Company may be
dependent, in part, upon dividends from the Bank, which is subject to various
tax and regulatory restrictions on the payment of dividends.
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock, and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval from the NASD to have its Common Stock quoted
on the National Market System of the Nasdaq Stock Market under the symbol "WYNE"
upon completion of the Conversion. One of the requirements for continued
quotation of the Common Stock on the Nasdaq Stock 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
24
<PAGE>
prices, subject to various securities laws and other regulatory requirements.
Sandler O'Neill has advised the Company that it intends to make a market in the
Common Stock following the completion of the Conversion, but it is under no
obligation to do so. While the Company has attempted to obtain commitments from
broker-dealers to act as market makers, and anticipates that prior to the
completion of the Conversion it will be able to obtain the commitment from at
least one other broker-dealer to act as market maker for the Common Stock, there
can be no assurance that there will be two or more market makers for the Common
Stock. Additionally, the development of a liquid public market 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. The number of active
buyers and sellers of the Common Stock at any particular time may be limited.
Under such circumstances, investors in the Common Stock could have difficulty
disposing of their shares on short notice and should not view the Common Stock
as a short-term investment. There can be no assurance that an active and liquid
trading market for the Common Stock will develop or that, if developed, it will
continue, nor is there any assurance that persons purchasing shares will be able
to sell them at or above the Purchase Price or that quotations will be available
on the Nasdaq Stock Market as contemplated.
25
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at December 31, 1995, and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, based upon
the sale of the number of shares indicated in the table and the other
assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------------------------------
3,306,250
2,125,000 2,500,000 2,875,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
---------- ------------ ------------- ------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)........................... $173,822 $173,822 $173,822 $173,822 $173,822
FHLB advances......................... 2,000 2,000 2,000 2,000 2,000
-------- -------- -------- -------- --------
Total deposits and borrowed funds..... $175,822 $175,822 $175,822 $175,822 $175,822
======== ======== ======== ======== ========
Equity:
Preferred Stock, $.01 par value,
2,000,000 shares authorized; none
to be issued........................ $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value,
8,000,000 shares authorized;
shares to be issued as reflected.... -- 21 25 29 33
Additional paid-in capital(3)........ -- 20,237 23,923 27,609 31,848
Equity, substantially restricted(4).. 17,299 17,299 17,299 17,299 17,299
Less:
Common stock acquired by the ESOP(5). -- (1,700) (2,000) (2,300) (2,645)
Common stock acquired by
the Stock Programs(6)............... -- (850) (1,000) (1,150) (1,323)
-------- -------- -------- -------- --------
Total equity.......................... $ 17,299 $ 35,007 $ 38,247 $ 41,487 $ 45,212
======== ======== ======== ======== ========
- -------------
<FN>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, or changes in market conditions,
general financial and economic 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) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Company's Stock Option Plans intended to be adopted
by the Company and presented for approval of stockholders at a meeting of
stockholders following the Conversion. If approved by the stockholders of
the Company, an amount equal to 10% of the shares of Common Stock issued in
the Conversion will be reserved for issuance upon the exercise of options
to be granted under the Stock Option Plans. See "Risk Factors--Possible
Dilutive Effect of Stock Programs and Stock Options," Footnote 3 to the
table under "Pro Forma Data" and "Management of the Bank--Benefits--Stock
Option Plans."
(4) The equity of the Bank will be substantially restricted after the
Conversion. See "The Conversion--Liquidation Rights" and
"Regulation--Federal Savings Institution Regulation--Limitations on Capital
Distributions."
(5) Assumes that 8% of the shares issued in the Conversion will be purchased by
the ESOP and that the funds used to acquire such shares will be borrowed
from the Company. The Common Stock acquired by the ESOP is reflected as a
reduction of equity. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
(6) Assumes that an amount equal to 4% of the shares of Common Stock issued in
the Conversion is purchased by the Stock Programs subsequent to the
Conversion through open market purchases. The Common Stock purchased by the
Stock Programs is reflected as a reduction of equity. Implementation of the
Stock Programs is subject to the approval of the Company's stockholders at
a meeting following the Conversion. See "Risk Factors--Possible Dilutive
Effect of Stock Programs and Stock Options," Footnote 2 to the tables under
"Pro Forma Data" and "Management of the Bank--Benefits--Stock Programs."
</FN>
</TABLE>
26
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $20.3 million and $27.6 million (or $31.9
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) all of the shares of Common Stock will be sold in
the Subscription Offering to persons with accounts opened on or before November
30, 1995 and the ESOP; (ii) directors, officers and employees of the Bank and
members of their immediate families (collectively, "Affiliates") will purchase
an aggregate of 100,000 shares of Common Stock; (iii) Sandler O'Neill will
receive a fee equal to 1.75% of the aggregate Purchase Price of the shares sold
in the Subscription Offering to persons with accounts opened on or before
November 30, 1995 and 3.0% of the aggregate Purchase Price of the shares sold to
other persons in the Subscription Offering and all shares sold in the Community
Offering, excluding shares purchased by Affiliates and the ESOP for which there
is no fee; and (iv) Conversion expenses, excluding the marketing fees paid to
Sandler O'Neill, will be approximately $667,000. Actual Conversion expenses may
vary from those estimated.
Pro forma net earnings and stockholders' equity have been calculated for
the year ended December 31, 1995 as if the Common Stock to be issued in the
Offerings had been sold at the beginning of the 1995 calendar year and the net
proceeds had been invested at 4.84%, which represents the yield on a one year
U.S. Treasury bill at February 22, 1996. OTS regulations specify that for
purposes of determining pro forma data, an assumption of a yield representing
the arithmetic average of the average yield on the Bank's interest-earning
assets and the average cost of deposits be used in calculating the pro forma
data. The Bank did not use this assumption in calculating its pro forma data
because management believes that the yield on the one-year U.S. Treasury bill
more accurately reflects reinvestment rates than the arithmetic average method.
The effect of withdrawals from deposit accounts for the purchase of Common Stock
has not been reflected. A combined effective Federal and state income tax rate
of 36% has been assumed for the period, resulting in an after-tax yield of
3.10% during the year ended December 31, 1995. 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, as adjusted to give effect to
the shares purchased by the ESOP in the case of the net income per share
calculations. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. As discussed under
"Use of Proceeds," the Company intends to retain 50% of the 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 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.
The following table summarizes historical data of the Bank and pro forma
data of the Company at or for the year ended December 31, 1995, based on the
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the Conversion.
The table below gives effect to the Stock Programs, which are expected to be
adopted by the Company following the Conversion and presented to stockholders
for approval at a meeting of stockholders. See Footnote 2 to the table and
"Management of the Bank--Benefits--Stock Programs." No effect has been given in
the table to the possible issuance of additional shares reserved for future
issuance pursuant to the Stock Option Plans which are expected to be adopted by
the Board of Directors of the Company and presented to stockholders for approval
at a meeting of stockholders, nor does book value give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or the bad debt reserve in
liquidation. See Footnote 3 to the table below, "The Conversion--Liquidation
Rights" and "Management of the Bank--Benefits--Stock Option Plans."
27
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------
2,125,000 2,500,000 2,875,000 3,306,250
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(5)
-------------- ------------- ------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds .................................................. $21,250 $25,000 $28,750 $33,063
Less: Offering expenses and commissions ......................... (992) (1,052) (1,112) (1,182)
------- ------- ------- -------
Estimated net proceeds .......................................... 20,258 23,948 27,638 31,881
Less: Common Stock acquired by ESOP ............................ (1,700) (2,000) (2,300) (2,645)
Common Stock acquired by Stock Programs .................. (850) (1,000) (1,150) (1,323)
------- ------- ------- -------
Estimated net proceeds, as adjusted ........................... $17,708 $20,948 $24,188 $27,913
======= ======= ======= =======
Consolidated net earnings:
Historical...................................................... $ 871 $ 871 $ 871 $ 871
Pro forma earnings on net proceeds, as adjusted ................ 549 649 750 865
Less: Pro forma ESOP adjustment(1) ............................. (109) (128) (147) (169)
Pro forma Stock Programs adjustment(2) ................... (109) (128) (147) (169)
------- ------- ------- -------
Pro forma net earnings......................................... $ 1,202 $ 1,264 $ 1,326 $ 1,398
======= ======= ======= =======
Per share net earnings:
Historical...................................................... $ 0.44 $ 0.38 $ 0.33 $ 0.29
Pro forma earnings on net proceeds, as adjusted ................ 0.28 0.28 0.28 0.28
Less: Pro forma ESOP adjustment(1) ............................. (0.06) (0.06) (0.06) (0.06)
Pro forma Stock Programs adjustment(2) ................... (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro forma net earnings per share............................... $ 0.61 $ 0.55 $ 0.50 $ 0.46
======= ======= ======= =======
Stockholders' equity:
Historical equity .............................................. $17,299 $17,299 $17,299 $17,299
Estimated net proceeds ......................................... 20,258 23,948 27,638 31,881
Less: Common Stock acquired by ESOP(1) ......................... (1,700) (2,000) (2,300) (2,645)
Common Stock acquired by Stock Programs(2) ............... (850) (1,000) (1,150) (1,323)
------- ------- ------- -------
Pro forma stockholders' equity(2)(3)(4) ....................... $35,007 $38,247 $41,487 $45,212
======= ======= ======= =======
Stockholders' equity per share:
Historical...................................................... $ 8.14 $ 6.92 $ 6.02 $ 5.23
Estimated net proceeds ......................................... 9.53 9.58 9.61 9.65
Less: Common Stock acquired by ESOP(1) ......................... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock Programs(2) ............... (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity per share(2)(3)(4) ............. $ 16.47 $ 15.30 $ 14.43 $ 13.68
======= ======= ======= =======
Purchase price as a percentage of pro forma
stockholders' equity per share ................................. 60.7% 65.4% 69.3% 73.1%
Purchase price to pro forma net earnings per share .............. 16.4x 18.2x 20.0x 21.7x
</TABLE>
- ----------
(1) It is assumed that 8% of the shares of Common Stock offered in the
Conversion 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 Company. The amount borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based upon
10 equal annual installments of principal, with an assumed annual interest
rate of 8.25%. The pro forma net earnings assumes that: (i) the Bank's
contribution to the ESOP is equivalent to the debt service requirement for
the year ended December 31, 1995, and was made at the end of the period;
(ii) 17,000, 20,000, 23,000 and 26,450 shares at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, were
committed to be released during the year
(footnotes continued on next page)
28
<PAGE>
ended December 31, 1995, at an average fair value of $10.00 per share; and
(iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net earnings per share calculations. See
"Management of the Bank--Benefits--Employee Stock Ownership Plan and
Trust." Under Statement of Position ("SOP") 93-6, the Company will
recognize compensation cost equal to the fair value of the ESOP shares
during the periods in which they become committed to be released. To the
extent that the fair value of the Bank's ESOP shares differs from the cost
of such shares, this differential will be charged or credited to
stockholders' equity.
(2) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Programs are approved by stockholders, the Stock
Programs intend to acquire an amount of Common Stock equal to 4% of the
shares of Common Stock issued in the Conversion, or 85,000, 100,000,
115,000 and 132,250 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or from
authorized but unissued shares of Common Stock or treasury stock of the
Company, if any. Funds used by the Stock Programs to purchase the shares
will be contributed to the Stock Programs by the Bank. In calculating the
pro forma effect of the Stock Programs, it is assumed that the required
stockholder approval has been received, that the shares were acquired by
the Stock Programs at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock Programs instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 3.9% and pro forma net earnings per share
would be $0.60, $0.54, $0.49 and $0.45 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, and pro forma
stockholders' equity per share would be $16.22, $15.12, $14.28 and $13.55
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that stockholder approval of the
Stock Programs will be obtained, or that the actual purchase price of the
shares will be equal to the Purchase Price. See "Management of the
Bank--Benefits--Stock Programs."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. If the Stock Option
Plans are approved by stockholders, an amount equal to 10% of the Common
Stock issued in the Conversion, or 212,500, 250,000, 287,500 and 330,625
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, will be reserved for future issuance
upon the exercise of options to be granted under the Stock Option Plans.
The issuance of Common Stock pursuant to the exercise of options under the
Stock Option Plans will result in the dilution of existing stockholders'
interests. Assuming stockholder approval of the Stock Option Plans and all
options were exercised at the end of the period at an exercise price of
$10.00 per share, the pro forma net earnings per share would be $0.55,
$0.49, $0.45 and $0.41, respectively, and the pro forma stockholders'
equity per share would be $15.88, $14.82, $14.03 and $13.34, respectively.
See "Management of the Bank--Benefits--Stock Option Plans."
(4) The equity of the Bank will continue to be substantially restricted after
the Conversion. See "Dividend Policy," "The Conversion--Liquidation Rights"
and "Regulation--Federal Savings Institution Regulation--Limitation on
Capital Distributions."
(5) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
29
<PAGE>
WAYNE SAVINGS BANK, F.S.B.
CONSOLIDATED STATEMENTS OF INCOME
The following consolidated statements of income of the Bank for each of the
years in the three-year period ended December 31, 1995, have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report
appears elsewhere herein. Such report includes an explanatory paragraph related
to changes in accounting principles. The consolidated statements of income
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans.......................................................... $ 9,209 $ 8,327 $ 9,265
Securities held to maturity ................................... 3,172 2,628 2,830
Securities available for sale ................................. 216 198 --
Short-term and other investments .............................. 539 680 538
------- ------- -------
Total interest income ....................................... 13,136 11,833 12,633
Interest expense:
Deposits (note 9) ............................................. 6,780 5,172 5,753
Federal Home Loan Bank advances ............................... 170 -- --
------- ------- -------
Total interest expense ...................................... 6,950 5,172 5,753
------- ------- -------
Net interest income before provision for loan losses ........ 6,186 6,661 6,880
Provision for loan losses (note 5) ............................. 152 316 286
------- ------- -------
Net interest income after provision for loan losses ......... 6,034 6,345 6,594
Other income (expense):
Loan fees and service charges ................................. 183 156 139
Net gain (loss) from sale of securities available for sale .... (363) 270 (3)
Other ......................................................... 337 294 360
------- ------- -------
Total other income .......................................... 157 720 496
Other expenses:
Compensation and employee benefits (note 11) .................. 2,260 2,114 2,021
Occupancy (note 13) ........................................... 370 376 355
Equipment ..................................................... 187 174 143
Data processing services ...................................... 202 188 151
Advertising ................................................... 283 103 138
Federal insurance premiums .................................... 368 378 330
Real estate owned operations, net ............................. 186 174 146
Other ......................................................... 977 925 871
------- ------- -------
Total other expenses ........................................ 4,833 4,432 4,155
------- ------- -------
Income before income tax expense and cumulative
effect of a change in accounting principle ................. 1,358 2,633 2,935
Income tax expense (note 10) ................................... 487 944 1,042
------- ------- -------
Income before cumulative effect of a change in
accounting principle ....................................... 871 1,689 1,893
Cumulative effect of a change in accounting principle
(notes 1 and 10) .............................................. -- -- 297
------- ------- -------
Net income................................................... $ 871 $ 1,689 $ 2,190
====== ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
on pages F-6 through F-22.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has conducted no activities since its formation and,
accordingly, has no results of operations. The Bank's results of operations are
primarily dependent on net interest income which is the difference between
interest income on loans, investments and other interest-earning assets and
interest expense on deposits and borrowings. Interest income on loans,
investments and other interest-earning assets is a function of the average
balances outstanding during the period and the average rates earned. Interest
expense is a function of the average amount of deposits and borrowings
outstanding during the period and average rates paid on such deposits and
borrowings. The Bank's net income is further affected by the level of its other
expenses, such as salaries and employee benefits, occupancy and equipment costs,
federal deposit insurance premiums and income taxes.
OPERATING STRATEGY
Management's strategy has been to operate as a community oriented financial
institution by offering a variety of financial services to meet the needs of the
communities it serves while maintaining capital in excess of regulatory
requirements and monitoring the sensitivity of the Bank's assets and liabilities
to interest rate fluctuations. The Board of Directors has sought to accomplish
these goals by: (i) attracting and maintaining low-cost savings and transaction
accounts, as well as money market accounts, which management believes provide
the Bank with a stable source of funds; (ii) focusing its lending on the
origination of one- to four-family, owner-occupied residential mortgage loans,
including home equity loans; (iii) supplementing its one- to four-family
residential lending activities with commercial real estate, multi-family,
construction and consumer loans in accordance with the Bank's underwriting
guidelines; (iv) purchasing short-to-intermediate term investment and
mortgage-backed securities to complement the Bank's lending activities; (v)
emphasizing shorter-term loans and investments and adjustable rate assets when
market conditions permit; and (vi) controlling growth.
As part of management's review of its assets and liabilities, the Bank
considers the interest sensitivity of its assets and liabilities and targets
what it believes to be an acceptable level of risk based on the Bank's business
focus, operating environment, capital and liquidity requirements, and
performance objectives. Management seeks to reduce the vulnerability of the
Bank's operating results to changes in interest rates and to manage the ratio of
interest rate sensitive assets to interest rate sensitive liabilities within
specified maturities or repricing periods. The Bank does not currently engage in
trading activities or use off-balance sheet derivative instruments to control
interest rate risk. Even though trading activities or use of off-balance sheet
derivative instruments may be permitted with the approval of the Board of
Directors, management does not intend to engage in such activities in the
immediate future.
In an effort to improve future earnings and reduce the interest sensitivity
of its investment portfolio, the Bank in December 1995 took advantage of the
window period as permitted under "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," a Special
Report issued by the Financial Accounting Standards Board ("FASB") in November,
1995, and transferred a significant amount of the Bank's mortgage-backed
securities from its held-to-maturity portfolio to available-for-sale portfolio.
Immediately upon transfer, a significant portion of the mortgage-backed
securities were sold at a loss and replaced with an equivalent amount of
mortgage-backed securities with different weighted average yields.
Notwithstanding the Bank's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that could have an
adverse effect on the earnings of the Bank. When interest-bearing liabilities
mature or reprice more quickly than interest-earning assets in a given period, a
significant increase in market interest rates could adversely affect net
interest income. Similarly, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could result
in a decrease in net interest income. Finally, a flattening of the "yield curve"
(i.e., a narrowing of the spread between long- and short-term interest rates),
could adversely impact net interest income to the extent that the Bank's assets
have a longer average term than its liabilities.
In managing the Bank's assets and liabilities, the Bank has taken certain
actions to decrease the sensitivity of its assets and liabilities to
fluctuations in interest rates. A significant component of the Bank's operating
strategy has been to maintain its interest rate spread by maintaining a core
deposit base. The Bank has sought to maintain and attract new deposits by
pricing its deposits competitively, but generally not among the highest interest
rates in its market area, and relying upon personalized customer service and
advertising. The Bank has maintained a core deposit
31
<PAGE>
base while employing this strategy. At December 31, 1995, the Bank had $55.5
million or 31.9% of its total deposits in low-cost savings and transaction
accounts and $23.1 million or 13.3% of total deposits in money market deposit
accounts, which management believes provide the Bank with a stable source of
funds. In 1995, certificate accounts increased by $22.8 million from $72.4
million at December 31, 1994 to $95.2 million at December 31, 1995, while the
average balance of the Bank's savings accounts decreased by $15.1 million. The
shift in the Bank's deposit liabilities from savings accounts to certificate
accounts was primarily due to intense competition for deposit accounts in the
Bank's primary market area which forced the Bank to increase the rates paid on
certificate accounts to maintain its total deposit liabilities at a stable
level. The increase in the average rate paid on deposit liabilities
substantially contributed to the narrowing of the Bank's net average interest
rate spread from 3.63% for the year ended December 31, 1994 to 3.13% for the
year ended December 31, 1995, and net interest margin from 3.82% for the year
ended December 31, 1994 to 3.42% for the year ended December 31, 1995.
In recent years, the competition for adjustable-rate loans has been intense
and the demand for adjustable-rate loans in the Bank's market area has been low.
Consequently, to reduce the Bank's vulnerability to changes in interest rates,
the Bank has sought to originate shorter-term loans and to diversify into other
lending products that yield higher returns than one- to four-family lending.
Shorter-term loan products include adjustable and fixed rate one- to four-family
loans and home equity loans with terms of up to 20 years. The Bank also offers a
variety of bi-weekly fixed-rate loans, which repay in a shorter period of time
because of the bi-weekly feature. At December 31, 1995, loans due after December
31, 1996, with adjustable interest rates totalled $46.2 million or 40.7% of
total loans receivable and loans due after December 31, 1996, with fixed rates
totalled $66.6 million or 58.6% of total loans receivable. Of the total
adjustable-rate loans at that date, $38.2 million, or 82.7% of total
adjustable-rate loans, consisted of one-year, three-year and five-year ARM
loans. Of total fixed rate loans at that date, $62.6 million or 94.5% of total
fixed rate loans had remaining terms of 15 years or less.
As part of its business plan and as a means to increase the Bank's interest
sensitive assets and the yield earned thereon, the Bank will begin modestly
increasing its originations of commercial real estate, multi-family and
construction loans as opportunities arise. The Bank will also begin offering, on
a limited basis, a greater variety of consumer loans in its primary market area,
including automobile loans, unsecured personal lines of credit and overdraft
protection. The Bank also intends to originate a moderate amount of commercial
business loans in its primary market area. The Bank has hired a new officer with
experience in consumer and commercial business lending to assist the Bank in
offering these new lending products. The Bank also purchases mortgage-backed
securities and investment securities to supplement its lending activities and to
help improve the Bank's interest rate sensitivity, as well as to provide for
liquidity. At December 31, 1995, the Bank had mortgage-backed securities with a
carrying value of $49.4 million and investment securities with a carrying value
of $12.6 million.
An interest rate sensitivity analysis approach used by management to
quantify interest rate risk is the net portfolio value ("NPV") analysis. In
essence, this approach calculates the difference between the present value of
liabilities and the present value of expected cash flows from assets and off-
balance sheet contracts. Under OTS regulations, an institution's "normal" level
of interest rate risk (in the event of an assumed change in interest rates) is a
decrease in the institution's NPV in an amount not exceeding 2% of the present
value of its assets. Thrift institutions with greater than "normal" interest
rate exposure must make a deduction from total capital available to meet
risk-based capital requirements. The amount of that deduction is one-half of the
difference between (i) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (ii) its "normal" level of exposure, which is 2%
of the present value of its assets. The rule will not become effective until the
OTS evaluates the process by which savings associations may appeal an interest
rate risk reduction determination. It is uncertain as to when this evaluation
may be completed. Savings institutions, however, with less than $300 million in
assets and a total risk-based capital ratio in excess of 12%, such as the Bank,
are generally not subject to this requirement. If the Bank had been subject to
this requirement at December 31, 1995, its interest rate risk would have been
considered "normal" and no adjustment to its risk-based capital would have been
required.
32
<PAGE>
The following table sets forth, at December 31, 1995, an analysis of the
Bank's interest rate risk as measured by the estimated changes in the NPV
resulting from instantaneous and sustained parallel shifts in the yield curve
((Plus/Minus) 400 basis points, measured in 100 basis point increments).
CHANGE IN
INTEREST RATES
IN BASIS POINTS
(RATE SHOCK) NET PORTFOLIO VALUE
------------ -----------------------------------------
CHANGE CHANGE
AMOUNT $ %
------- ------- ------
(DOLLARS IN THOUSANDS)
----------------------
400.......................... $14,873 $(6,892) (32.0)%
300.......................... 17,210 (4,554) (21.0)
200.......................... 19,279 (2,486) (11.0)
100.......................... 20,953 (812) (4.0)
--.......................... 21,765 -- --
(100)......................... 22,181 416 2.0
(200)......................... 22,339 574 3.0
(300)......................... 23,352 1,587 7.0
(400)......................... 24,700 2,935 13.0
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates, although there can be no assurance that
there would not be any such change. In addition, a change in U.S. Treasury rates
in the designated amounts accompanied by a change in the shape of the Treasury
yield curve would cause significantly different changes to the NPV than
indicated above.
33
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Bank at December 31, 1995 and the years ended December 31, 1995,
1994 and 1993. The yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average month-end balances. Management
does not believe that the use of average monthly balances instead of average
daily balances has caused any material differences in the information presented.
The yields and costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
AT DECEMBER 31, 1995 1995
----------------------- ----------------------------------
AVERAGE
YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST
-------- ------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-earning deposits and
short-term investments(1) ........... $ 26,931 5.56% $ 10,020 $ 539 5.38%
Loans receivable, net(2) ............. 111,988 8.04 114,403 9,209 8.05
Securities held-to-maturity ......... 3,841 6.30 53,033 3,172 5.98
Securities available-for-sale(3) .... 58,155 6.54 3,593 216 6.01
-------- ---- -------- ------- ----
Total interest-earning assets ....... 200,915 7.24 181,049 13,136 7.26
---- ------- ----
Non-interest-earning assets .......... 7,082 7,325
-------- --------
Total assets ....................... $207,997 $188,374
======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Money market deposit accounts ....... $ 23,120 3.13 $ 20,615 710 3.44
Savings accounts .................... 32,869 2.53 35,738 887 2.48
NOW accounts ........................ 17,958 2.25 16,963 401 2.25
Non-interest-bearing checking
accounts ........................... 4,699 -- 4,157 -- --
Certificate accounts ................ 95,157 4.62 88,096 4,782 5.43
-------- ---- --------- ------- ----
Total .............................. 173,803 3.66 165,569 6,780 4.09
FHLB advances ....................... 2,000 6.53 2,646 170 6.42
-------- ---- --------- ------- ----
Total interest-bearing liabilities .. 175,803 3.69 168,215 6,950 4.13
---- --------- ------- ----
Non-interest-bearing liabilities ..... 14,895 3,152
Equity ............................... 17,299 17,007
-------- --------
Total liabilities and equity ....... $207,997 $188,374
======== ========
Net interest income before provision
for loan losses ..................... $ 6,186
=======
Net interest rate spread(4) .......... 3.55% 3.13%
Net interest margin(5) ............... 3.42%
Ratio of interest-earning assets to
interest-bearing liabilities ........ 114.28% 107.63%
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1994 1993
--------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-earning deposits and
short-term investments(1) .......... $ 15,296 $ 680 4.45% $ 15,687 $ 538 3.43%
Loans receivable, net(2) ............ 107,051 8,327 7.78 110,839 9,265 8.36
Securities held-to-maturity ......... 48,088 2,628 5.46 45,990 2,830 6.15
Securities available-for-sale(3) .... 3,747 198 5.28 -- -- --
-------- ------- ---- -------- ------- ----
Total interest-earning assets ....... 174,182 11,833 6.79 172,516 12,633 7.32
------- ---- ------- ----
Non-interest-earning assets .......... 7,175 8,479
-------- --------
Total assets ....................... $181,357 $180,995
======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Money market deposit accounts ....... $ 20,471 595 2.91 $ 22,298 646 2.90
Savings accounts .................... 50,794 1,268 2.50 48,465 1,367 2.82
NOW accounts ........................ 18,335 425 2.25 17,188 472 2.25
Non-interest-bearing checking
accounts ........................... 3,462 -- -- 2,335 -- --
Certificate accounts ................ 70,703 2,884 4.08 74,659 3,268 4.38
-------- -------- ---- -------- ------- ----
Total .............................. 163,765 5,172 3.16 164,945 5,753 3.49
FHLB advances -- -- -- -- -- --
-------- -------- ---- -------- ------- ----
Total interest-bearing liabilities .. 163,765 5,172 3.16 164,945 5,753 3.49
-------- ---- ------- ----
Non-interest-bearing liabilities ..... 1,938 2,152
Equity ............................... 15,654 13,898
-------- --------
Total liabilities and equity ....... $181,357 $180,995
======== ========
Net interest income before provision
for loan losses ..................... $ 6,661 $ 6,880
======= =======
Net interest rate spread(4) .......... 3.63% 3.83%
Net interest margin(5) ............... 3.82% 3.99%
Ratio of interest-earning assets to ..
interest-bearing liabilities ........ 106.36% 104.59%
- ----------
<FN>
(1) Includes federal funds, interest-bearing deposits in other banks and
dividends on FHLB stock.
(2) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts and allowance for loan losses. Amount includes non-
accrual loans. See "Business of the Bank--Lending Activities."
(3) Includes related assets available for sale and unamortized discounts and
premiums and certificates of deposit.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
</FN>
</TABLE>
34
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes dueto
rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
COMPARED WITH COMPARED WITH
YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993
---------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------- -----------------
VOLUME RATE NET VOLUME RATE NET
------ ------ ------- ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and
short-term investments.................... $(359) $ 218 $ (141) $ (14) $ 156 $ 142
Loans receivable, net ...................... 584 298 882 (310) (628) (938)
Securities held-to-maturity ................ 283 261 544 137 (339) (202)
Securities available-for-sale .............. (9) 27 18 198 -- 198
----- ------ ------ ----- ----- -----
Total interest-earning assets .......... 499 804 1,303 11 (811) (800)
----- ------ ------ ----- ----- -----
INTEREST-BEARING LIABILITIES:
Money market deposit accounts .............. 3 112 115 (53) 2 (51)
Savings accounts ........................... (374) (7) (381) 69 (168) (99)
NOW accounts ............................... (13) (11) (24) 69 (116) (47)
Certificate accounts ....................... 809 1,089 1,898 (169) (215) (384)
----- ------ ------ ----- ----- -----
Total .................................. 425 1,183 1,608 (84) (497) (581)
----- ------ ------ ----- ----- -----
FHLB advances .............................. -- 170 170 -- -- --
----- ------ ------ ----- ----- -----
Total interest-bearing liabilities ..... 425 1,353 1,778 (84) (497) (581)
----- ------ ------ ----- ----- -----
Net change in net interest income............. $ (74) $ (549) $ (475) $ 95 $(314) $(219)
===== ====== ====== ===== ===== =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995, DECEMBER 31, 1994 AND
DECEMBER 31, 1993.
Total assets of the Bank increased $31.3 million or 17.7% to $207.9 million
at December 31, 1995 from $176.6 million at December 31, 1994. Total cash and
cash equivalents increased $23.8 million to $26.3 million, and investments and
mortgage-backed securities increased $8.3 million. Cash and cash equivalents
increased due to an increase in deposits (discussed below) coupled with a
decrease in loan demand. Loan demand for lending products offered by the Bank
has fluctuated in recent years. As discussed below, loan demand was up in fiscal
1994 and decreased in fiscal 1995. Management believes that the Bank's
investment in mortgage-backed and investment securities supplements its lending
activities. Recently, the Bank has decided to expand the lending products
offered by the Bank in an effort to increase loan originations in the future.
However, to the extent loan demand is low in the future, the Bank would continue
to supplement its investment in the origination of loans while analyzing means
of attracting new borrowers. See "Business of the Bank--Lending Activities."
Additionally, in December 1995 the Bank took advantage of the window period
permitted by a special report issued by FASB addressing SFAS No. 115 and
reclassified $51.4 million of mortgage-backed securities from held to maturity
to available for sale. The Bank then sold a significant amount of those
mortgage-backed securities in December 1995 and arranged to purchase an
additional $25.0 million of mortgage-backed securities with different weighted
average yields in an effort to improve future earnings and reduce the Bank's
exposure to interest rate risk. At December 31, 1995, the Bank was still
awaiting delivery of approximately $13.5 million in mortgage-backed securities,
which resulted in cash and cash equivalents being inflated by that amount until
the securities were delivered and paid for in January 1996. Management increased
its investments in investment and mortgage-backed securities during 1995 because
of low loan demand. Real estate owned decreased $373,000 or 38.5% to $597,000 at
December 31, 1995 from $970,000 at
35
<PAGE>
December 31, 1994 as a result of sales and write downs to fair value of
one- to four-family properties owned by the Bank.
Total assets of the Bank decreased $6.6 million or 3.6% to $176.6 million
at December 31, 1994 from $183.2 million at December 31, 1993. Total cash and
cash equivalents decreased $21.4 million to $2.5 million and investment and
mortgage-backed securities increased $8.1 million to $53.6 million at December
31, 1994 from $45.5 million at December 31, 1993. The decrease in cash and cash
equivalents was primarily due to a reduction in deposits and the Bank's
increased loan originations and purchases of investment and mortgage-backed
securities. Real estate owned decreased $368,000 or 27.5% to $970,000 at
December 31, 1994 from $1.3 million at December 31, 1993, primarily due to the
sale and write down to fair value of one- to four-family properties. Other
changes in assets between December 31, 1993 and December 31, 1994 included a
decrease of $217,000 in FHLB stock.
Total deposits increased $14.8 million, or 9.3% to $173.8 million at
December 31, 1995 from $159.0 million at December 31, 1994, while borrowed funds
increased to $2.0 million at December 31, 1995 from a zero balance at December
31, 1994. Other liabilities increased $13.6 million to $14.1 million at December
31, 1995 from $501,000 at December 31, 1994, which reflects the amount payable
related to the securities in the process of delivery described above. The
increase in total deposits was primarily the result of the Bank competitively
pricing its deposit products and aggressively marketing its checking account
programs. Total deposits decreased $7.8 million or 4.7% to $159.0 million at
December 31, 1994 from $166.8 million at December 31, 1993. This was primarily
due to the Bank's decision to allow funds to flow out because of a lack of loan
demand.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994 AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31,
1993.
General. Net income for the year ended December 31, 1995 decreased
$818,000, or 48.4% to $871,000 from $1.7 million for the year ended December 31,
1994 and decreased $501,000, or 22.8% from $2.2 million for the year ended
December 31, 1993. In 1995, the decrease in net income was primarily due to a
$363,000 loss on the sale of mortgage-backed securities sold in December 1995 in
connection with the Bank's decision to restructure its mortgage-backed
securities as compared to a $270,000 gain in the prior year. Net income was also
affected by an increase of $475,000 in interest expense over interest income and
an increase of $401,000 in other expenses. The Bank's return on average equity
decreased to 5.12% for the year ended December 31, 1995 compared to 10.79% for
the year ended December 31, 1994. In 1994, the decrease in net income was
primarily due to a $219,000 or 3.2% decrease in net interest income for 1994
compared with 1993 and a $270,000 increase in other expenses, which was offset
by a $98,000 decrease in income tax expense. The Bank adopted SFAS No. 109,
"Accounting for Income Taxes" as of January 1, 1993, resulting in a cumulative
effect of a change in accounting principle and income tax benefit of $297,000
for the year ended December 31, 1993.
Interest Income. Interest income for the year ended December 31, 1995
increased $1.3 million to $13.1 million at December 31, 1995, from $11.8 million
at December 31, 1994. The increase in interest income reflects an increase in
average interest earning assets of $6.9 million from $174.2 million for the year
ended December 31, 1994 to $181.0 million for the year ended December 31, 1995,
coupled with an increase in the average yield on interest earning assets to
7.26% in 1995 from 6.79% in 1994. Interest income on loans increased by $882,000
to $9.2 million for 1995 from $8.3 million for 1994, primarily due to a $7.4
million increase in the average balance of loans receivable from $107.1 million
for the year ended December 31, 1994 to $114.4 million for the year ended
December 31, 1995 and a 27 basis point increase in the average yield to 8.05%.
Interest income on investment and mortgage-backed securities increased $562,000
to $3.4 million in 1995 from $2.8 million in 1994, reflecting a $4.8 million
increase in the average balance of investment and mortgage-backed securities
from $51.8 million for the year ended December 31, 1994 to $56.6 million for the
year ended December 31, 1995 and a 53 basis point increase in the average yield
to 5.98%. These increases were partially offset by a decrease in the average
balance of interest-earning deposits and short-term investments of $5.3 million
from $15.3 million for the year ended December 31, 1994 to $10.0 million for the
year ended December 31, 1995.
Interest income decreased $800,000, or 6.33% to $11.8 million for the year
ended December 31, 1994 from $12.6 million for the year ended December 31, 1993.
This was primarily due to a decrease in the yield earned on the Bank's
interest-earning assets of 53 basis points, to 6.79% in 1994 from 7.32% in 1993,
resulting primarily from downward rate repricings on adjustable rate assets. The
decrease in the rate earned was partially offset by an increase in average
interest-earning assets of $1.7 million to $174.2 million for the year ended
December 31, 1994 from $172.5
36
<PAGE>
million for the year ended December 31, 1993. Interest income on loans
decreased $938,000 to $8.3 million for 1994 primarily due to a $3.8 million
decline in the average loan portfolio balance due to intense competition for
residential real estate loans. Interest income on investment and mortgage-
backed securities remained unchanged at $2.8 million, although the average
balance of investment and mortgage-backed securities increased in 1994 by $5.8
million. The effect of the higher average balance was offset by a decline in the
average yield on investments and mortgage-backed securities of 70 basis points.
This decline was due to a decline in market rates of interest.
Interest Expense. Interest expense on deposits increased $1.6 million or
31.1% to $6.8 million for the year ended December 31, 1995 from $5.2 million for
the year ended December 31, 1994. This increase reflects both an increase in the
average balance of interest bearing deposits of $1.8 million in 1995 compared to
1994, and a 93 basis point increase in the average rate paid on deposit
liabilities over the same period. The increase in deposits and the rate paid
thereon was primarily attributable to the Bank's certificate accounts, the
average balance of which increased by $17.4 million to $88.1 million in 1995
from an average balance of $70.7 million in 1994 and the average yield on which
increased 135 basis points from 4.08% in 1994 to 5.43% in 1995. The increase in
the rate paid on certificate accounts was in response to market conditions and
was intended to maintain existing accounts as opposed to attracting new accounts
to the Bank. At December 31, 1995, the Bank's certificate accounts had increased
to $95.2 million while the yield on certificate accounts was 4.62%. Interest
expense on borrowings increased $170,000 in 1995 compared to 1994 due to
management's decision to use borrowings to fund a portion of the Bank's asset
growth.
Interest expense decreased $581,000 or 10.1% to $5.2 million for the year
ended December 31, 1994 from $5.8 million in 1993. The decrease was primarily
the result of a $1.2 million decline in the average outstanding balance of total
interest-bearing liabilities and a 33 basis point decline in the average rate
paid on deposits from 3.49% for the year ended December 31, 1993 to 3.16% for
the year ended December 31, 1994, reflecting the lower interest rate
environment. In particular, the average rate paid on regular savings and
certificate accounts declined during this period by 32 basis points and 30 basis
points, respectively.
Net Interest Income. Net interest income before provision for loan losses
decreased $475,000 or 7.1% to $6.2 million for the year ended December 31, 1995
from $6.7 million for the year ended December 31, 1994. The positive effect of
an increase in average net interest earning assets and the average rate earned
thereon was offset by an increase in average interest-bearing liabilities and an
increase in the average rate paid on interest-bearing liabilities from 3.16% for
the year ended December 31, 1994 to 4.13% for the year ended December 31, 1995.
The Bank's interest rate spread decreased 50 basis points to 3.13% for the year
ended December 31, 1995 from 3.63% for the year ended 1994. The net interest
margin decreased from 3.82% for the year ended December 31, 1994 to 3.42% for
the year ended December 31, 1995. The percentage of average interest-earning
assets to average interest-bearing liabilities for the year ended December 31,
1995 was 107.63% as compared to 106.36% for the same period in 1994.
Compared to fiscal 1994, market interest rates were higher in fiscal 1995
across the U.S. Treasury yield curve. The Bank realized higher average yields on
its interest-earning assets primarily as a result of upward rate repricings on
adjustable-rate assets and the addition of new assets in the higher interest
rate environment. However, the Bank's interest-bearing liabilities, which had
increasing average balances, repriced more quickly in 1995 than interest-earning
assets. This had a negative effect on the Bank's average interest rate spread
and net interest margin in 1995 compared to 1994.
Net interest income before provision for loan losses for the year ended
December 31, 1994 decreased $219,000 or 3.2% to $6.7 million from $6.9 million
for the year ended December 31, 1993. The positive effect of an increase in
average net interest-earning assets was offset by a 53 basis point decline in
the average rate earned on interest-earning assets from 7.32% for the year ended
December 31, 1993 to 6.79% for the year ended December 31, 1994. Additionally,
the Bank's net interest income was adversely affected by a 20 basis point
decrease in the average interest rate spread from 3.83% for 1993 to 3.63% for
1994. The Bank's net interest margin declined by 17 basis points to 3.82% for
the year ended December 31, 1994 from 3.99% for the year ended December 31,
1993.
Provision for Loan Losses. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
The provision for loan losses decreased $164,000 or 51.9% for the year ended
December 31, 1995, compared to the year ended December 31, 1994. The Bank's
provision for loan losses was $152,000 for the year ended December 31, 1995,
compared to $316,000 for the year ended December 31, 1994. The provision for
loan losses for the year ended December 31, 1994 increased $30,000 or 10.5% from
a provision of $286,000 for the year ended December 31, 1993, which was due to
management's continuing reassessment of losses
37
<PAGE>
inherent in the loan portfolio. At December 31, 1995 and 1994, the Bank's
allowance for loan losses totaled $1.6 million and $1.5 million or 1.4% and 1.3%
of gross loans receivable and 64.9% and 42.3% of total non-performing loans,
respectively. Management believes that the current allowance for loan losses is
adequate to address the risks inherent in the Bank's loan portfolio.
The Bank establishes an allowance for loan losses based on an analysis of
risk factors in the loan portfolio. This analysis includes evaluation of
concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio (including loans being specifically
monitored by management), estimated fair value of underlying collateral, loan
commitments outstanding, delinquencies and other factors, including the loss
experience of similar portfolios in comparable lending markets.
The Bank will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Bank maintains its allowance for loan
losses at a level which it considers to be adequate to provide for losses, there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Bank's determination as to the amount of its allowance for loan
losses is subject to review by the OTS and the FDIC, as part of their
examination process, which may result in the establishment of an additional
allowance based upon their judgment of the information available to them at the
time of their examination.
Other Income. Other income decreased $563,000 or 78.2% to $157,000 for the
year ended December 31, 1995 from $720,000 for the year ended December 31, 1994.
This decrease was primarily attributable to a $363,000 loss on the sale of
mortgage-backed securities incurred in connection with the Bank's restructuring
of the mortgage-backed securities portfolio compared to a gain of $270,000 in
1994. Other income increased by $224,000 or 45.2% for the year ended December
31, 1994 from $496,000 for the year ended December 31, 1993 primarily due to a
loss of $3,000 on the sale of mortgage-backed securities incurred in 1993
compared to the gain recognized in 1994.
Other Expenses. Other expenses increased $401,000 or 9.1% to $4.8 million
for the year ended December 31, 1995 compared to $4.4 million for the year ended
December 31, 1994 and increased $277,000 or 6.7% for the year ended December 31,
1994 from $4.2 million for the year ended December 31, 1993. Compensation and
employee benefits increased $146,000 or 6.9% to $2.3 million for the year ended
December 31, 1995 from $2.1 million for the year ended December 31, 1994 and
increased $93,000 or 4.6% for the year ended December 31, 1994 from $2.0 million
for the year ended December 31, 1993. These increases in compensation and
benefits were the result of normal cost of living increases and merit raises. In
1995, advertising expenses increased $180,000 or 174.8% as a result of an
increased emphasis on loan promotion and a successful checking account campaign
through the first six months of the year. In 1995, data processing fees
increased $14,000 or 7.5% due to increases in the volume of transactions
processed, primarily as a result of the increase in the number of checking and
loan accounts. In 1994, data processing fees increased $37,000, or 24.5%
primarily due to the Bank's expansion of the use of services available from the
Bank's data processor. After the Conversion, the Bank's operating expenses can
be expected to increase with the addition of public company reporting expenses,
the cost of stock benefit plans and other compensation expenses incurred to
retain skilled and competent management and to compensate management for the
additional time and effort required to manage a public company.
Income Tax Expense. Income tax expense decreased by $457,000 to $487,000
for the year ended December 31, 1995 from $944,000 for the year ended December
31, 1994, primarily due to a $1.3 million decline in pre-tax income. Income tax
expense increased by $199,000 to $944,000 for the year ended December 31, 1994
from $745,000 for the year ended December 31, 1993, primarily due to a one-time
income tax benefit of $297,000 for the adoption of SFAS No. 109 for 1993, which
lowered income tax expense in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and securities and, to a lesser extent, borrowings and
proceeds from the sale of securities. While maturities and scheduled
amortization of loans and securities provide an indication of the timing of the
receipt of funds, other sources of funds such as loan prepayments and deposit
inflows are less predictable due to the effects of changes in interest rates,
economic conditions and competition.
38
<PAGE>
The primary investing activities of the Bank are the origination of real
estate and other loans and the purchase of mortgage-backed and other securities.
During the years ended December 31, 1995, 1994 and 1993, the Bank's
disbursements for loan originations totaled $16.1 million, $33.6 million and
$26.8 million, respectively. For the years ended December 31, 1995, 1994 and
1993, purchases of mortgage-backed securities totaled $46.6 million, $22.5
million and $26.8 million, respectively. These activities were funded primarily
by net deposit inflows, borrowings and principal repayments on loans and
securities.
For the years ended December 31, 1995 and 1993, the Bank experienced net
increases in deposits (including the effect of interest credited) of $14.8
million and $2.5 million, respectively. For the year ended December 31, 1994,
the Bank had a net decrease in deposits of $7.8 million. The increase in fiscal
1995 reflects the general increase in market interest rates which made deposit
products (particularly shorter term certificates of deposit) a more attractive
investment alternative for the Bank's customers and the increased marketing
efforts by the Bank. Proceeds from FHLB advances were $2.0 million in 1995 and
none in 1994 and 1993.
The Bank may borrow funds from the FHLB subject to certain limitations.
Based on the level of qualifying collateral available to secure advances at
December 31, 1995, the Bank's borrowing limit from the FHLB was approximately
$62.4 million, with unused borrowing capacity of $60.4 million at that date.
Other sources of liquidity include borrowings under repurchase agreements and
sales of available-for-sale securities. See "Business of the Bank--Sources of
Funds."
The Bank is required to maintain an average daily balance of liquid assets
and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulations. The minimum
required liquidity and short-term liquidity ratios are currently 5.0% and 1.0%,
respectively. For the year ended December 31, 1995, the Bank's liquidity ratio
was 9.7% and its short-term liquidity ratio was 15.6%.
The Bank's most liquid assets are cash and cash equivalents, which include
interest-bearing deposits and short-term highly liquid investments (such as
federal funds) with original maturities of less than three months that are
readily convertible to known amounts of cash. The level of these assets is
dependent on the Bank's operating, financing and investing activities during any
given period. At December 31, 1995 and 1994, cash and cash equivalents totaled
$26.3 million and $2.5 million, respectively.
At December 31, 1995, the Bank had outstanding loan origination commitments
of $2.7 million, no undisbursed construction loans in process, and unadvanced
lines of credit of $7.9 million. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination and other
commitments. Certificates of deposit scheduled to mature in one year or less
from December 31, 1995 totaled $51.5 million. Based on the Bank's most recent
experience and pricing strategy, management believes that a significant portion
of such deposits will remain with the Bank.
39
<PAGE>
REGULATORY CAPITAL RATIOS AT DECEMBER 31, 1995
PERCENT OF
AMOUNT ASSETS(1)
----------- ----------
(DOLLARS IN
THOUSANDS)
Tangible Capital
Total equity ....................................... $17,299
Net unrealized loss on securities .................. 95
-------
Tangible capital level ............................. 17,394 8.34%
Requirement ........................................ 3,128 1.50
------- -----
Excess ............................................. $14,266 6.84%
======= =====
Core Capital:
Total equity ....................................... $17,299
Net unrealized loss on securities .................. 95
-------
Core capital level ................................. 17,394 8.34%
Requirement ........................................ 6,256 3.00
------- -----
Excess ............................................. $11,138 5.34%
======= ====
Risk-based Capital:
Total equity ....................................... $17,299
Net unrealized loss on securities .................. 95
-------
Capital level ...................................... 17,394
Allowance for loan losses, subject to limitation ... 989
-------
Risk-based capital level ........................... 18,383 23.39%
Requirement ........................................ 6,287 8.00
------- -----
Excess ............................................. $12,096 15.39%
======= =====
- -----------
(1) Tangible capital levels are shown as a percentage of tangible assets. 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.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. However, SFAS No. 121 does not apply
to financial instruments, core deposit intangibles, mortgage and other servicing
rights or deferred tax assets. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995. Management does not expect that the adoption
of this statement will have a material impact on the Bank's earnings.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," an amendment to SFAS No. 65. SFAS No. 122 requires an
institution that purchases or originates mortgage loans and sells or securitizes
those loans with servicing rights retained to allocate the total cost of the
mortgage loans to the mortgage servicing
40
<PAGE>
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. In addition, institutions are required to assess
impairment of the capitalized mortgage servicing portfolio based on the fair
value of those rights on a stratum-by-stratum basis with any impairment
recognized through a valuation allowance for each impaired stratum. Capitalized
mortgage servicing rights should be stratified based upon one or more of the
predominate risk characteristics of the underlying loans such as loan type,
size, note rate, date of origination, term and/or geographic location. SFAS No.
122 is effective for fiscal years beginning after December 15, 1995. Management
does not expect that the adoption of this statement will have a material impact
on the Bank's earnings.
In November 1995 the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." This statement establishes financial accounting standards for
stock-based employee compensation plans. SFAS No. 123 permits the Bank to choose
either a new fair-value-based method or the current Accounting Principles Board
("APB") Opinion 25 intrinsic-value-based method of accounting for its
stock-based compensation arrangements. SFAS No. 123 requires pro forma
disclosures of net earnings and earnings per share computed as if the
fair-value-based method had been applied in financial statements of companies
that continue to follow current practice in accounting for such arrangements
under APB Opinion 25. SFAS No. 123 applies to all stock-based employee
compensation plans in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans. SFAS
No. 123 also applies to plans in which the employer incurs liabilities to
employees in amounts based on the price of the employer's stock (e.g. stock
option plans, stock purchase plans, restricted stock plans, and stock
appreciation rights). The statement also specifies the accounting for
transactions in which a company issues stock options or other equity instruments
for services provided by nonemployees or to acquire goods or services from
outside suppliers or vendors. The recognition provisions of SFAS No. 123 for
companies choosing to adopt the new fair-value-based method of accounting for
stock-based compensation arrangements may be adopted immediately and will apply
to all transactions entered into in fiscal years that begin after December 15,
1995. The disclosure provisions of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995, however, disclosure of the pro forma net
earnings and earnings per share, as if the fair-value-based method of accounting
for stock-based compensation had been elected, is required for all awards
granted in fiscal years beginning after December 31, 1994. Any effect that this
statement will have on the Bank will be applicable upon the consummation of the
Conversion.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family mortgage loans and
home equity loans. To a significantly lesser extent, the Bank invests in
commercial real estate, multi-family, construction loans (primarily for one- to
four-family home construction for the borrower) and various consumer loans. The
Bank's revenues are derived principally from interest on its mortgage loans, and
to a lesser extent, interest and dividends on investment and mortgage-backed
securities, and other fees. The Bank's primary sources of funds are deposits and
principal and interest payments on loans, and to a lesser extent, FHLB advances.
MARKET AREA AND COMPETITION
The Bank conducts its business through five banking offices, including its
administrative office, all of which are located in Passaic County, New Jersey.
The Bank's deposit base is drawn principally from Passaic County, primarily the
township of Wayne, a stable, residential community of approximately 50,000
persons located 20 miles west of New York City. Major corporations headquartered
or having substantial operations in Wayne include American Home Products, Singer
Electronic Systems Division, Singer-Kearfott Division, Fortunoffs, William
Paterson College, Sterns Department Store and State Farm Insurance. The Bank's
lending activities have been concentrated in Passaic, Morris and Bergen
Counties, New Jersey, areas which, based on U.S. Department of Labor Statistics,
collectively have an unemployment rate lower than the national average and a per
capita income figure which is greater than the national average. Recently, the
Bank has originated a greater number of one- to four-family, owner-occupied
loans outside of its primary market area as a result of its participation in a
loan search program. Participation in the loan search program has provided the
Bank with an additional source of loan originations at times when demand for the
Bank's lending products is low in its primary lending area. See "Lending
Activities--One- to Four-Family Lending."
41
<PAGE>
The Bank's primary market area is a highly competitive market for financial
services and the Bank faces intense competition both in making loans and in
attracting deposits. The Bank faces direct competition from a significant number
of financial institutions operating in its market area, many with a state-wide
or regional presence and in some cases a national presence. Many of these
financial institutions are significantly larger and have greater financial
resources than the Bank. The Bank's competition for loans comes principally from
savings associations, mortgage banking companies, commercial banks, credit
unions and insurance companies. Its most direct competition for deposits has
historically come from savings and loan associations and commercial banks. In
addition, the Bank faces increasing competition for deposits and other financial
products from non-bank institutions such as brokerage firms and insurance
companies in such areas as short-term money market funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
mortgage loans and home equity loans secured by one- to four-family residences.
At December 31, 1995, the Bank had total gross loans outstanding of $113.6
million, of which $87.6 million or 77.1% consisted of one- to four-family
residential mortgage loans, and $20.9 million, or 18.5% were home equity loans.
The remainder of the portfolio consists of $195,000 of multi-family mortgage
loans, or 0.2% of total gross loans, $3.6 million of commercial real estate
loans, or 3.2% of total gross loans, and $1.2 million of consumer loans or 1.1%
of total gross loans. The Bank had no construction loans at December 31, 1995.
At December 31, 1995, 40.7% of the Bank's mortgage loans had adjustable interest
rates.
The types of loans the Bank may originate are subject to federal law and
regulation. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, and legislative tax policies.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ------------------ -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- ------ -------- ------ -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family............. $ 87,579 77.10% $ 88,722 77.28% $ 89,602 83.27% $105,279 90.85% $101,192 90.54%
Home equity..................... 20,964 18.46 21,165 18.44 13,326 12.39 6,698 5.78 6,941 6.21
Multi-family ................... 195 0.17 541 0.47 495 0.46 283 0.24 227 0.20
Commercial ..................... 3,636 3.20 3,076 2.68 2,831 2.63 2,650 2.29 2,538 2.27
Construction ................... -- -- 170 0.15 -- -- -- -- -- --
Consumer ......................... 1,216 1.07 1,130 0.98 1,346 1.25 971 0.84 872 0.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans, gross ........... 113,590 100.00% 114,804 100.00% 107,600 100.00% 115,881 100.00% 111,770 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan funds ......... -- 111 -- -- --
Deferred loan origination fees.. 13 59 30 49 88
Allowance for loan losses ...... 1,589 1,543 1,237 974 986
-------- -------- -------- -------- --------
Total loans, net ............. $111,988 $113,091 $106,333 $114,858 $110,696
======== ======== ======== ======== ========
</TABLE>
42
<PAGE>
Loan Maturity. The following table shows the contractual maturity of
the Bank's gross loans at December 31, 1995. The table does not include
principal repayments or prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
----------------------------------------------------------------------
ONE- TO COMMERCIAL TOTAL
FOUR- HOME MULTI- REAL LOANS
FAMILY EQUITY FAMILY ESTATE CONSUMER RECEIVABLE
--------- --------- --------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less .......................................... $ 9 $ 8 $ -- $ -- $ 807 $ 824
--------- --------- --------- --------- -------- ---------
After one year:
More than one year to three years ........................ 1,999 351 -- -- 84 2,434
More than three years to five years ...................... 9,130 1,115 -- -- 14 10,259
More than five years to 10 years ......................... 25,656 12,902 58 381 191 39,188
More than 10 years to 20 years ........................... 14,067 5,406 -- 3,255 120 22,848
More than 20 years ....................................... 36,718 1,182 137 -- -- 38,037
--------- --------- --------- --------- -------- ---------
Total due after December 31, 1996 ........................ 87,570 20,956 195 3,636 409 112,766
--------- --------- --------- --------- -------- ---------
Total amount due ....................................... $ 87,579 $ 20,964 $ 195 $ 3,636 $ 1,216 113,590
========= ========= ========= ========= ======== =========
Less:
Deferred loan origination fees ......................... (13)
Allowance for loan losses .............................. (1,589)
---------
Total loans, net ......................................... $ 111,988
=========
</TABLE>
The following table sets forth at December 31, 1995, the dollar amount of
total gross loans receivable contractually due after December 31, 1996, and
whether such loans have fixed interest rates or adjustable interest rates. The
one- to four-family loans reflected as having fixed rates include fixed-rate
products and $25.9 million of balloon loans with contractual maturities of 5 to
7 years and amortization schedules of up to 30 years. All of the balloon loans
were originated prior to 1992.
DUE AFTER DECEMBER 31, 1996
--------------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family .............. $ 50,289 $ 37,281 $ 87,570
Home equity ...................... 15,452 5,504 20,956
Multi-family ..................... -- 195 195
Commercial ....................... 402 3,234 3,636
Consumer .......................... 409 -- 409
-------- -------- --------
Total ............................ $ 66,552 $ 46,214 $112,766
======== ======== ========
Loan Originations and Purchases. The Bank's mortgage lending activities are
conducted primarily through the Bank's offices. All loans originated by the Bank
are underwritten by the Bank pursuant to the Bank's policies and procedures. The
Bank originates both adjustable-rate and fixed-rate mortgage loans. The Bank's
ability to originate loans is dependent upon the relative customer demand for
fixed-rate or adjustable-rate mortgage loans, which is affected by the current
and expected future level of interest rates. Loan originations have decreased
from $33.6 million for the year ended December 31, 1994 to $16.1 million for the
year ended December 31, 1995, reflecting the decrease in refinancings during the
period and other economic factors. It is the general policy of the Bank to
retain all loans originated in its portfolio.
The Bank has sought to maintain a more stable level of loan originations by
participating in a loan origination program. For the year ended December 31,
1995, the Bank originated $6.8 million in loans through this program. All loans
originated through use of this program are one- to four-family loans and are
secured by properties located in New Jersey. Through this program, borrowers are
given information from participating lenders quoting their most favorable terms
for each loan. The borrower determines which institution provides the best loan
for the borrower's financing needs and upon choosing a lender, deals directly
with that lender throughout the loan origination process. The Bank pays an
annual marketing fee to the company that manages the loan origination program,
which enables the loan company to advertise continuously, giving participating
lenders consistent market exposure. If a loan is originated by the Bank to a
borrower who used the loan program to find the Bank, the Bank pays a 25 basis
point fee to the loan company at the time of the loan closing.
43
<PAGE>
The following table sets forth the Bank's loan originations, purchases, and
principal repayments for the periods indicated. During the periods indicated
there were no loan sales and no originations of multi-family loans.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Gross loans:
Beginning balance ....................... $ 113,091 $ 106,333 $ 114,858
Loans originated:
Real estate:
One- to four-family .................. 10,633 15,044 13,776
Home equity .......................... 4,685 14,872 12,121
Commercial ........................... -- 2,658 --
Construction and land ................ 100 170 --
Consumer .............................. 699 843 950
--------- --------- ---------
Total loans originated ............... 16,117 33,587 26,847
Loans purchased(1) ..................... 140 1,396 --
--------- --------- ---------
Total ................................ 129,348 141,316 141,705
Less:
Principal repayments ................... (16,483) (27,496) (34,307)
Transfer to REO ........................ (831) (312) (802)
Undisbursed loan funds ................. -- (111) --
Change in allowance for loan losses .... (46) (306) (263)
--------- --------- ---------
Ending balance loans receivable, net .... $ 111,988 $ 113,091 $ 106,333
========= ========= =========
- -----------
(1) All loans purchased consisted of one- to four-family loans.
Pursuant to Federal law the aggregate amount of loans that the Bank is
permitted to make to any one borrower or a group of related borrowers is
generally limited to 15% of unimpaired capital and surplus (25% if the security
for such loan has a "readily ascertainable" value or 30% for certain residential
development loans). At December 31, 1995, based on the above, the Bank's
loans-to-one borrower limit was approximately $2.6 million. On the same date,
the Bank had no borrowers with outstanding balances in excess of this amount. As
of December 31, 1995, the largest dollar amount outstanding to one borrower, or
group of related borrowers, was $2.2 million and was secured by a first mortgage
lien on an office building. The Bank's next largest loan to one borrower or
group outstanding totaled $550,000 and was secured by a first mortgage lien on a
single-family residence. These loans were performing in accordance with their
terms at December 31, 1995.
The Bank's lending is subject to its written underwriting standards and to
loan origination procedures. Decisions on loan applications are made on the
basis of detailed applications and property valuations (consistent with the
Bank's appraisal policy) by the Bank's independent appraisers. The loan
applications are designed primarily to determine the borrower's ability to repay
and the more significant items on the applications are verified through use of
credit reports, financial statements, tax returns and/or confirmations.
The Bank's President and Chief Lending Officer have joint authority to
approve real estate loans up to $500,000. The Chief Lending Officer, effective
January 1996, has the authority to approve consumer loans up to $15,000 and may
approve consumer loans in amounts up to $25,000 with the approval of the Bank's
President. The Board of Directors ratifies on a monthly basis all loans made by
the Bank.
Generally, the Bank requires title insurance or abstracts on its mortgage
loans as well as fire and extended coverage casualty insurance in amounts at
least equal to the principal amount of the loan or the value of improvements on
the property, depending on the type of loan. The Bank also requires flood
insurance to protect the property securing its interest when the property is
located in a flood plain.
One- to Four-Family Lending. The Bank currently offers both fixed-rate and
adjustable-rate mortgage loans secured by one- to four-family residences, with
maturities up to 30 years, including loans with bi-weekly payment options, for
retention in its portfolio. All such loans are secured by properties located in
the Bank's primary market
44
<PAGE>
area, or in other parts of New Jersey if originated through the loan
origination program. All one- to four-family loans are underwritten in
accordance with FHLMC/FNMA standards. Loan originations are obtained from the
Bank's branch offices, through the loan origination program, existing or past
customers, through advertising and, to a lesser extent, from referrals from real
estate brokers and attorneys.
At December 31, 1995, residential mortgage loans secured by one- to
four-family residences totalled $87.6 million or 77.1% of the Bank's total gross
loan portfolio. Of the one-to four-family residential mortgage loans
outstanding at that date, 48.6% were adjustable -rate loans. The Bank's one- to
four-family adjustable-rate mortgage ("ARM") loans are primarily indexed to the
U.S. Treasury Bill rates. The Bank currently offers one, three, five, seven and
ten-year ARM loans, with interest rates based on a spread above the one, three,
five, seven and ten-year U.S. Treasury Bill rates, respectively. The
Bank's ARM loans are subject to limitations of 2% per adjustment on interest
rate increases or decreases and lifetime caps of 6%.
The Bank originates one- to four-family residential loans in amounts up to
90% of the appraised value of the property securing the loan, although the Bank
may originate loans in amounts up to 95% of the appraised value for first-time
home buyers. Private mortgage insurance is required for all loans with a loan to
value ratio over 80%. The Bank's one- to four-family residential mortgage loans
do not provide for negative amortization. Residential mortgage loans in the
Bank's portfolio generally include due on sale clauses, which provide the Bank
with the contractual right to demand the loan immediately due and payable in the
event that the borrower transfers ownership of the property without the Bank's
consent. The Bank generally enforces its rights under these clauses. In recent
years, the Bank has sought to originate one- to four-family mortgage loans with
terms of 15 years or less, although the Bank does originate fixed rate loans
with terms up to 30 years. At December 31, 1995, one- to four-family loans with
terms of 15 years or less, including ARM loans, totalled $49.1 million or 56.1%
of total one - to four-family loans.
Upon receipt of a completed loan application from a prospective borrower
for a loan secured by one- to four-family residential real estate, a credit
report is ordered and income, financial and employment information is requested
and verified. An appraisal of the real estate intended to secure the proposed
loan is undertaken by an independent appraiser previously approved by the Bank.
It is the Bank's policy to require title insurance on all mortgage loans.
Borrowers also must obtain hazard insurance prior to closing. Potential
borrowers are qualified for one-year ARM loans based on the fully indexed rate.
Home Equity Loans. The Bank originates home equity loans, generally secured
by one- to four-family, owner-occupied residential properties on which the Bank
is the primary lender. The Bank's policy is to originate home equity loans in
amounts up to 75% of the appraised value of the property, less existing liens.
Home equity loans are originated with fixed or adjustable rates. Home equity
loans originated with fixed rates are for terms of 15 years or less and those
originated with adjustable rates may be made for terms up to 20 years. At
December 31, 1995, $20.9 million, or 18.5% of total gross loans receivable were
home equity loans. Payments of principal and interest are due monthly. The Bank
employs similar underwriting standards in making home equity loans as those
utilized for residential mortgage loans, except that borrowers applying for an
adjustable-rate home equity loan are qualified at the initial interest rate plus
4% and there is a 15% interest rate cap for the life of the loan. The Bank holds
both the first and second lien on a substantial amount of the properties
securing the Bank's home equity loans.
Commercial Real Estate and Multi-Family Loans. The Bank's policies provide
that it may originate multi-family mortgage loans and commercial real estate
loans. Due to market conditions in its primary market area and other factors,
the Bank originated no commercial real estate or multi-family loans during the
year ended December 31, 1995, though the Bank expects to increase these types of
lending in the future. In reaching its decision on whether to make a commercial
real estate or multi-family loan, the Bank considers a number of factors,
including: market conditions; the net operating income of the mortgaged premises
before debt service and depreciation; the debt service ratio (the ratio of net
operating income to debt service); and the ratio of loan amount to appraised
value. Commercial real estate loans and multi-family loans may be made up to 75%
of the appraised value of the property. Properties securing a loan are appraised
by an independent appraiser. In most cases, borrowers must personally guarantee
the loans. The Bank offers 5 or 7 year balloon loans with maximum terms of 20
years and three-year ARM loans that adjust every third year to the three-year
U.S. Treasury Bill plus 3.25%. There are no adjustment caps. At December 31,
1995, the Bank's loan portfolio included $3.6 million of commercial real estate
loans originated prior to 1995. The largest loan in this portfolio is a $2.2
million loan secured by a commercial office building in Wayne. This loan is a
five-year balloon loan made in 1988 which became due in December 1993 and
refinanced in 1994. This loan is currently performing in accordance with its
terms.
45
<PAGE>
When evaluating a multi-family or commercial real estate loan, the Bank
also considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar properties, and the Bank's
lending experience with the borrower. The Bank's underwriting policies require
that the borrower be able to demonstrate strong management skills and the
ability to maintain the property from current rental income. The borrower is
required to present evidence of the ability to repay the mortgage and a history
of making mortgage payments on a timely basis. In making its assessment of the
creditworthiness of the borrower, the Bank generally reviews the financial
statements and employment and credit history of the borrower, as well as other
related documentation.
Commercial real estate and multi-family loans are generally larger and
present a greater degree of risk than loans secured by one- to four-family
residences. Because payments on loans secured by commercial real estate and
multi-family properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or in the
economy. The Bank seeks to minimize these risks through its underwriting
standards, which require the loans to be qualified on the basis of the
property's income and debt service ratio. See "Risk Factors--Diversification of
Lending Activities."
Construction Lending. The Bank has, on a case by case basis, originated
loans for the development of property to existing customers in its primary
market area. The Bank's construction loans primarily have been made to finance
the construction of one- to four-family, owner-occupied residential properties.
As part of its business plan, the Bank may modestly increase its origination of
construction loans. The Bank's policies provide that construction loans may be
made in amounts up to 75% of the appraised value of the property for
construction. The Bank requires an independent appraisal of the property. The
Bank generally requires personal guarantees and a permanent loan commitment if
the Bank will not be making the permanent loan.
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction.
If the estimate of value proves to be inaccurate, the Bank may be confronted
with a project, when completed, having a value which is insufficient to ensure
full repayment.
Consumer Loans. The Bank's consumer loans generally consist of student
education loans and loans secured by savings accounts. At December 31, 1995, the
Bank's consumer loan portfolio consisted of $754,000 of passbook loans and
$462,000 of student education loans. All of the student education loans are
underwritten in accordance with, and are guaranteed by, the New Jersey Higher
Education Assistance Authority. The Bank has recently authorized the origination
on a limited basis of automobile loans up to $25,000, unsecured personal loans
up to $5,000 and overdraft lines of credit up to $2,500 in the Bank's primary
market area and intends to pursue opportunities to expand these areas of
lending.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
therefore are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At December 31, 1995, there were $10,000 of consumer loans
delinquent 90 days or more. There can be no assurance that delinquencies will
not increase in the future, particularly in light of the Bank's decision to
increase its efforts to originate a higher volume and greater variety of
consumer loans.
Commercial Business Loans. The Bank intends to pursue opportunities to
offer moderate amounts of commercial business loans, primarily to businesses
located in the Bank's primary market area. The Bank has hired a commercial loan
officer with experience in commercial lending to expand this area of the Bank's
portfolio. At December 31, 1995, the Bank did not have any commercial business
loans outstanding. Federally chartered savings institutions, such as the Bank,
are authorized to make secured or unsecured loans and letters of credit for
commercial, corporate, business and agricultural purposes and to engage in
commercial leasing activities, up to a maximum of 10% of total assets. The
Bank's commercial business lending policy will include credit file documentation
and analysis of the borrower's capacity to repay the loan and the adequacy of
the borrower's capital and collateral, as well
46
<PAGE>
as an evaluation of conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows will also be an important aspect
of the Bank's current credit analysis.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
Delinquencies and Classified Assets. Management and the Board of Directors
perform a monthly review of all delinquent loans. The procedures undertaken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and period of delinquency. The Bank generally requires that delinquent mortgage
loans be reviewed and that a written late charge notice be mailed no later than
the 16th day of delinquency. The Bank's policies provide that telephone contact
will be attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. It is the Bank's
policy to place all loans that are delinquent by three or more payments on
non-accrual status, resulting in the Bank no longer accruing interest on such
loans and reversing any interest previously accrued but not collected. A
non-accrual loan may be restored to accrual status when delinquent principal and
interest payments are brought current and future monthly principal and interest
payments are expected to be collected. Property acquired by the Bank as a result
of foreclosure on a mortgage loan is classified as "real estate owned" and is
recorded at the lower of the unpaid principal balance or fair value less costs
to sell at the date of acquisition and thereafter. Upon foreclosure, the Bank
generally requires an appraisal of the property and, thereafter, appraisals of
the property on an annual basis and external inspections on at least a quarterly
basis.
Federal regulations and the Bank's Classification of Assets Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank currently classifies
problem and potential problem assets as "Substandard," "Doubtful" or "Loss." An
asset is considered Substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as Doubtful have all of the
weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as Loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss allowance is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
recently adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial institutions
on both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Bank believes that it has established an adequate allowance for loan
losses, there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to materially increase at that time its
allowance for loan losses, thereby negatively affecting the Bank's financial
condition and earnings at that time. Although management believes that, based on
information currently available to it at this time, its allowance for loan
losses is adequate, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for loan losses may become
necessary.
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
47
<PAGE>
General valuation allowances, which is a regulatory term, represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
one or more assets, or portions thereof, as loss, it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
The Chief Lending Officer reviews and classifies the Bank's loans on a
quarterly basis and reports the results of the review to the Board of Directors.
The Bank classifies loans in accordance with the management guidelines described
above. At December 31, 1995, the Bank had $597,000 of REO, all of which was
originated by former management. At December 31, 1995, the Bank had $2.6 million
of assets classified as Special Mention, $3.1 million of assets classified as
Substandard, nothing classified as Doubtful and $260,000 classified as Loss
which amount is fully reserved for.
The following table sets forth delinquencies in the Bank's loan portfolio
as of the dates indicated. There were no delinquencies in the multi-family and
commercial real estate portfolios at the dates indicated.
AT DECEMBER 31, 1995
-----------------------------------------
60-89 DAYS 90 DAYS OR MORE(1)
-------------------- -------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
One- to four-family ................ 9 $361 26 $2,278
Home equity ........................ -- -- 4 162
Consumer ........................... -- -- 1 10
--- ---- -- ------
Total ......................... 9 $361 31 $2,450
=== ==== == ======
Delinquent loans to total
gross loans ....................... .32% 2.16%
==== ======
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
---------------------------------------- -------------------------------------------
60-89 DAYS 90 DAYS OR MORE(1) 60-89 DAYS 90 DAYS OR MORE(1)
------------------- -------------------- ------------------- ---------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family .................... 5 $380 34 $3,395 8 $610 35 $3,269
Home equity ............................ 1 23 6 223 -- -- 5 234
Consumer ............................... -- -- 3 27 -- -- 1 7
--- ---- --- ------ --- ---- --- ------
Total .............................. 6 $403 43 $3,645 8 $610 41 $3,510
=== ==== === ====== === ==== === ======
Delinquent loans to total
gross loans ........................... .35% 3.17% .57% 3.26%
==== ====== ==== ======
</TABLE>
- ----------
(1) Loans 90 days or more past due are included in non-accrual loans.
See "Lending Activities--Non-Accrual Loans and REO."
48
<PAGE>
Non-accrual Loans And REO. The table below sets forth information regarding
non-accrual loans (all loans 90 days or more delinquent) and REO held by the
Bank at the dates indicated. There were no non-accrual loans in the
multi-family, commercial or construction portfolios at the dates indicated.
AT DECEMBER 31,
----------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
One- to four-family ........... $2,278 $3,395 $3,269 $3,931 $5,507
Home equity ................... 162 223 234 242 514
Consumer ...................... 10 27 7 1 --
------ ------ ------ ------ ------
Total ........................ 2,450 3,645 3,510 4,174 6,021
REO, net(1)(2) ................ 597 970 1,338 1,830 546
------ ------ ------ ------ ------
Total non-performing assets .. $3,047 $4,615 $4,848 $6,004 $6,567
====== ====== ====== ====== ======
- ----------
(1) REO balances are shown net of related loss allowances.
(2) REO, net, at December 31, 1994, 1993, 1992 and 1991 included $0, $264,000,
$923,000 and $0, respectively, of in-substance foreclosed loans. Under SFAS
No. 114 "Accounting by Creditors for Impairment of a Loan," adopted January
1, 1995 by the Bank, loans that previously would have been classified as
in-substance foreclosures would be classified as impaired loans. There were
no loans considered to be impaired as of December 31, 1995.
Allowance For Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and changes in the nature and volume of its
loan activity. Such evaluation, which includes a review of all loans of which
full collectibility may not be reasonably assured, considers among other
matters, the estimated market value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance. 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 make additional provisions for losses on loans based upon
information available at the time of the review.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ............. $1,543 $1,237 $ 974 $ 986 $ 741
Provision for loan losses .................. 152 316 286 619 289
Charge-offs:
One- to four-family ....................... (106) (10) (23) (641) (44)
Recoveries ................................. -- -- -- 10 --
------ ------ ------ ------ -----
Balance at end of period ................... $1,589 $1,543 $1,237 $ 974 $ 986
====== ====== ====== ====== =====
Net charge-offs to average gross loans
receivable ................................ 0.09% 0.01% 0.02% 0.54% 0.04%
Allowance for loan losses as a percent
of gross loans receivable(1) .............. 1.40 1.34 1.15 0.84 0.88
Allowance for loan losses as a percent
of total non-performing loans(2) .......... 64.86 42.33 35.24 23.33 16.38
Non-performing loans as a percent of
gross loans receivable .................... 2.16 3.17 3.26 3.60 5.39
Non-performing assets as a percent of
total assets(3) ........................... 1.46 2.61 2.65 3.35 4.04
</TABLE>
(footnotes on next page)
49
<PAGE>
- ----------
(1) The allowance for loan losses as a percent of gross loans receivable
decreased to 0.84% in 1992 primarily due to an increase in gross loans
receivable of $4.0 million from $111.8 million at December 31, 1991 to
$115.8 million at December 31, 1992, the effect of which was partially
offset by the increase in the provision for loan losses of $330,000 from
$289,000 for 1991 to $619,000 for 1992. The allowance for loan losses as a
percent of gross loans receivable increased in 1993 primarily due to a
decrease in gross loans receivable of $8.2 million from $115.8 million at
December 31, 1992 to $107.6 million at December 31, 1993. The allowance for
loan losses as a percent of gross loans receivable increased in 1994
despite an increase in gross loans receivable of $7.2 million because of a
provision of $316,000 in 1994 and moderate charge-offs, which resulted in
the allowance for loan losses increasing from $1.2 million at December 31,
1993 to $1.5 million at December 31, 1994. A $1.2 million decrease in gross
loans receivable coupled with a modest increase in the allowance for loan
losses resulted in the allowance for loan losses as a percent of gross
loans receivable increasing to 1.40% at December 31, 1995.
(2) The ratio of the allowance for loan losses as a percent of total
non-performing loans increased from 16.38% to 23.33% and 35.24%, for the
years ended December 31, 1991, 1992 and 1993, respectively, due to
decreases in the Bank's non-performing loans, which decreased from $6.0
million at December 31, 1991 to $4.2 million and $3.5 million at December
31, 1992 and 1993, respectively and additions of $619,000 and $286,000 to
the allowance for loan losses for 1992 and 1993, respectively.
Non-performing loans increased by approximately $100,000 in 1994 to $3.6
million; however, the provision of $316,000 in 1994 resulted in the Bank's
allowance for loan losses as a percent of total non-performing loans to
further increase to 42.33% for the year ended December 31, 1994. The
allowance for loan losses as a percent of total non-performing loans
further increased to 64.86% for the year ended December 31, 1995 due
primarily to the $1.1 million reduction in non-performing loans from $3.6
million at December 31, 1994 to $2.5 million at December 31, 1995 and the
provision of $152,000 for 1995.
(3) Non-performing assets consist of non-accrual loans and REO.
The following tables set forth the amount of the Bank's allowance for loan
losses, the percent of allowance for loan losses to total allowance and the
percent of gross loans to total gross loans in each of the categories listed at
the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF GROSS OF GROSS OF GROSS
PERCENT OF LOANS IN PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH CATEGORY ALLOWANCE EACH CATEGORY ALLOWANCE EACH CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
------ --------- ----------- ------ --------- ----------- ------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ............. $1,030 64.82% 77.10% $ 979 63.46% 77.28% $1,084 87.63% 83.28%
Home equity ..................... 210 13.22 18.46 209 13.54 18.44 131 10.59 12.38
Multi-family .................... -- -- .17 1 .06 .47 1 .08 .46
Commercial ...................... 342 21.52 3.20 347 22.49 2.68 14 1.13 2.63
Construction .................... -- -- -- -- -- .15 -- -- --
Consumer ........................ 7 .44 1.07 7 .45 .98 7 .57 1.25
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan losses $1,589 100.00% 100.00% $1,543 100.00% 100.00% $1,237 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
AT DECEMBER 31,
------------------------------------------------------------------------
1992 1991
----------------------------------- -----------------------------------
PERCENT PERCENT
OF GROSS OF GROSS
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH CATEGORY ALLOWANCE EACH CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
------- ----------- ------------- ------ --------- --------------
(DOLLARS IN THOUSANDS)
One- to four-family .............. $895 91.90% 90.85% $908 92.08% 90.54%
Home equity ...................... 65 6.67 5.78 64 6.49 6.21
Multi-family ..................... 1 .10 .24 1 0.11 .20
Commercial ....................... 13 1.33 2.29 13 1.32 2.27
Consumer ......................... -- -- .84 -- -- .78
---- ------ ------ ---- ------ ------
Total allowance for loan losses $974 100.00% 100.00% $986 100.00% 100.00%
==== ====== ====== ==== ====== ======
</TABLE>
50
<PAGE>
SECURITIES PORTFOLIO
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest in commercial paper, corporate
debt securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. Additionally, the Bank must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. See "Regulation--Federal
Savings Institution Regulation--Liquidity." As a member of the FHLB, the Bank
also is required to maintain liquid assets at minimum levels which change from
time to time. See "Regulation--Federal Home Loan Bank System." The Bank's liquid
investments primarily include federal agency securities and federal funds.
The Board of Directors sets the investment policy of the Bank. This policy
dictates that investments will be made based on the safety of the principal, the
liquidity requirements of the Bank and the return on the investment and capital
appreciation. All investment decisions are made by the President and Chief
Executive Officer and are ratified by the Board of Directors of the Bank.
The Bank's investments include FHLB stock, mortgage-backed securities
insured or guaranteed by GNMA, FHLMC or FNMA and U.S. government agency
securities.
Mortgage-Backed and Related Securities. The Bank currently invests and
plans to continue to invest in mortgage-backed securities and utilizes such
investments to: (i) supplement mortgage lending; (ii) generate positive interest
rate spreads on large principal balances with minimal administrative expense as
compared to the competitive costs to originate loans; (iii) lower the credit
risk of the Bank as a result of the guarantees provided by FHLMC, FNMA, and
GNMA; (iv) provide the Bank with the flexibility to use these mortgage-backed
securities as collateral for financing in the capital markets; and (iv) increase
the Bank's liquidity. Mortgage-backed securities that are categorized as
available for sale are carried at fair value. At December 31, 1995,
mortgage-backed and related securities totalled $62.1 million, or 29.9% of total
assets. At December 31, 1995, 65.8% of the mortgage-backed and related
securities had adjustable-rates and 34.2% had fixed-rates. The mortgage-backed
and related securities in these portfolios had coupon rates ranging from 5.5% to
9.0% and had a weighted average yield of 6.4% at December 31, 1995. The
estimated fair value of the Bank's mortgage-backed securities available for sale
at December 31, 1995 was $58.2 million, which is $149,000 less than its
amortized cost of $58.3 million.
Related securities at December 31, 1995 consisted of two CMOs, which had a
net carrying value of $3.3 million at December 31, 1995 and were classified as
available for sale. A CMO is a special type of pass-through debt in which the
stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create investment security classes with
different maturities and, in some cases, amortization schedules, as well as a
residual interest, with each such class possessing different risk
characteristics. The Bank's CMOs are guaranteed by FHLMC. The Bank has not
purchased CMOs since 1993. The CMOs currently held by the Bank mature in 2007.
The OTS' "Statement of Policy on Securities Activities," set forth in
Thrift Bulletin 52 ("Bulletin"), requires depository institutions to establish
prudent policies and strategies for securities transactions, describes
securities trading and sales practices that are unsuitable when conducted in an
investment portfolio and sets forth certain factors that must be considered to
hold such investments. The Bulletin also establishes a framework for identifying
when certain mortgage derivative products are high-risk mortgage securities that
must be reported in a "trading" or "held for sale" account. The Bank believes
that it currently holds and reports its securities and loans in a manner
consistent with the Bulletin.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that result in nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize obligations of the Bank. In general, mortgage-backed securities
issued or guaranteed by FNMA and FHLMC and certain AA-rated and AAA-rated
mortgage-backed pass-through securities are weighted at no more than 20% for
risk-based capital purposes, and mortgage-backed securities issued or
guaranteed by GNMA are weighted at 0% for risk-based capital purposes, compared
to an assigned risk weighing of 50% to 100% for whole residential mortgage
loans. These types of securities allow the Bank to optimize regulatory capital
to a greater extent than non-securitized whole loans. See "Regulation--Federal
Savings Institution Regulation--Capital Requirements" for a discussion of the
OTS risk-based capital requirement.
51
<PAGE>
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed and value of such
securities. Specifically, investments in mortgage-backed and related securities
involve risks that actual prepayments may exceed prepayments estimated over the
life of the security that may result in a loss of any premiums paid for such
instruments thereby reducing the net yield on such securities. Conversely, if
interest rates increase, the market value of such securities may be adversely
affected. In contrast to mortgage-backed securities in which cash flow is
received (and, hence, prepayment risk is shared) pro rata by all securities
holders, the cash flows from the mortgages or mortgage-backed securities
underlying CMOs are segmented and paid in accordance with a predetermined
priority to investors holding various tranches of such securities or
obligations. A particular tranche of CMOs may therefore carry prepayment risk
that differs from that of both the underlying collateral and other tranches. If
the Bank were to invest in CMOs in the future, it would limit its investment to
CMOs in higher level tranches to attempt to limit the risk associated with the
investment in CMOs.
The following table sets forth certain information regarding the amortized
cost and estimated market values of the Bank's mortgage-backed and investment
securities at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and investment
securities held to maturity:
U.S. government and federal
agency obligations .................... $ -- $ -- $ 2,979 $ 2,943 $ -- $ --
GNMA ................................... -- -- 964 906 -- --
FNMA ................................... 1,885 1,890 8,375 7,788 4,581 4,650
FHLMC .................................. 1,956 1,879 37,986 35,342 28,995 29,256
------- ------- ------- ------- ------- -------
Total mortgage-backed and
investment securities held
to maturity........................... $ 3,841 $ 3,769 $50,304 $46,979 $33,576 $33,906
======= ======= ======= ======= ======= =======
Mortgage-backed and investment
securities available for sale:
CMOs ................................... $ 3,334 $ 3,156 $ 2,960 $ 3,360 $ 5,305 $ 5,277
U.S. government and federal
agency obligations .................... 12,501 12,553 -- -- -- --
GNMA ................................... 15,261 15,244 -- -- -- --
FNMA ................................... 13,335 13,374 -- -- 2,000 1,990
FHLMC .................................. 13,873 13,828 -- -- 4,126 4,232
------- ------- ------- ------- ------- -------
Total mortgage-backed and
investment securities
available for sale ................... $58,304 $58,155 $ 2,960 $ 3,360 $11,431 $11,499
======= ======= ======= ======= ======= =======
</TABLE>
52
<PAGE>
The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Bank's
securities held to maturity as of December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
---------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------ -------------------- -------------------- ------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
---- ----- ---- ----- ---- ----- ----- ----- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Held to maturity:
GNMA........................ $ -- --% $ -- --% $ -- --% $ -- --% $ -- --%
FNMA........................ -- -- -- -- -- -- 1,885 6.52 1,885 6.52
FHLMC....................... -- -- -- -- -- -- 1,956 6.11 1,956 6.11
---- --- ---- --- ---- --- ------ ---- ------ ----
Total securities
held to maturity ....... $ -- --% $ -- --% $ -- --% $3,841 6.32% $3,841 6.32%
==== === ==== === ==== === ====== ==== ====== ====
</TABLE>
The table below sets forth certain information regarding the estimated
market value, weighted average yields and contractual maturities of the Bank's
securities available for sale as of December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
------------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------ ------------------- -------------------- --------------------- --------------------
ESTIMATED WEIGHTED ESTIMATED WEIGHTED ESTIMATED WEIGHTED ESTIMATED WEIGHTED ESTIMATED WEIGHTED
MARKET AVERAGE MARKET AVERAGE MARKET AVERAGE MARKET AVERAGE MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ------- ----- ------ ----- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Available for sale:
GNMA................. $ -- --% $ -- --% $ -- --% $15,244 7.38% $15,244 7.38%
FNMA................. -- -- 1,814 6.69 8,175 7.06 3,385 6.54 13,374 6.97
FHLMC............. 207 8.04 1,857 6.89 1,093 7.67 10,671 7.19 13,828 7.31
CMOs.............. -- -- -- -- -- -- 3,156 6.04 3,156 6.04
U.S. government and
federal agency
obligations......... -- -- 12,053 6.51 500 5.79 -- -- 12,553 6.48
---- ---- ------- ---- ------ ---- ------- ---- ------- ----
Total securities
available for
sale............. $207 8.04% $15,724 6.57% $9,768 6.80% $32,456 7.22% $58,155 6.95%
==== ==== ======= ==== ====== ==== ======= ==== ======= ====
53
</TABLE>
<PAGE>
SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for use in
lending and for other general business purposes. In addition to deposits, the
Bank obtains funds from advances from the FHLB and other borrowings.
Deposits. The Bank offers a variety of deposit accounts having a wide range
of interest rates and terms. The Banks's deposits consist of regular savings,
NOW, money market and certificate accounts. See Note 9 to the Consolidated
Financial Statements. The Bank's deposits are obtained primarily from its market
area and it does not use brokers to obtain deposits. The Bank relies primarily
on aggressive marketing campaigns, customer service and long-standing
relationships with customers to attract and retain these deposits. The Bank pays
competitive interest rates on deposits, but generally does not pay the highest
interest rate among institutions in its market area.
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in its market area in obtaining funds and to respond with
flexibility to changes in customer demand. As certain customers have become more
interest rate conscious, the Bank has become more susceptible to short-term
fluctuations in deposit flows. The Bank has sought to offer various deposit and
checking options offering favorable features not offered by the Bank's
competitors and has marketed those products aggressively. Although the Bank's
efforts to maintain and increase its volume of deposits enabled it to increase
deposits in fiscal 1995, the ability of the Bank to attract and maintain those
accounts will continue to be affected by market conditions.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals) ........................ $ 8,002 $(13,063) $(3,432)
Interest credited on deposit accounts ............. 6,807 5,255 5,932
------- -------- -------
Total increase (decrease) in deposit accounts ... $14,809 $ (7,808) $ 2,500
======= ======== =======
</TABLE>
At December 31, 1995, the Bank had $6.0 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------ ------------
(DOLLARS IN THOUSANDS)
Three months or less ................... $2,334 5.17%
Over three through six months .......... 1,224 5.57
Over six through 12 months ............. 1,454 5.95
Over 12 months ......................... 940 5.40
------
Total ................................ $5,952
======
54
<PAGE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- --------------------------- ----------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposit accounts......... $ 20,615 12.45% 3.13% $ 20,471 12.50% 3.47% $ 22,298 13.52% 2.50%
Savings accounts...................... 35,738 21.58 2.53 50,794 31.02 2.52 48,465 29.38 2.52
NOW accounts.......................... 16,963 10.25 2.25 18,335 11.20 2.25 17,188 10.41 2.25
Non-interest-bearing accounts......... 4,157 2.51 -- 3,462 2.11 -- 2,335 1.42 --
-------- ------ -------- ----- -------- ------
Total............................. 77,473 46.79 93,062 56.83 90,286 54.73
-------- ------ -------- ----- -------- ------
Certificate accounts:
Six months or less.................. 17,458 10.54 4.91 14,358 8.77 3.84 17,527 10.63 2.89
Over 6 months through 12 months..... 30,145 18.21 5.71 18,821 11.49 4.32 23,829 14.45 3.39
Over 12 months through 36 months.... 32,543 19.66 5.73 28,680 17.51 4.49 25,954 15.73 4.39
Over 36 months...................... 7,950 4.80 5.52 8,844 5.40 5.38 7,349 4.46 6.06
-------- ------ -------- ----- -------- ------
Total certificate accounts........ 88,096 53.21 70,703 43.17 74,659 45.27
-------- ------ -------- ----- -------- ------
Total average deposits................ $165,569 100.00% $163,765 100.00% $164,945 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
55
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1995.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1995 AT DECEMBER 31,
----------------------------------------------------------------- -----------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE TWO THREE FOUR FIVE
YEAR YEARS YEARS YEARS YEARS 1995 1994 1993
---- ----- ----- ----- ----- ---- ---- ----
(DOLLARS IN THOUSANDS)
Certificate accounts:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 to 4.00%.............. $ 1,473 $ 1 $ -- $ -- $ -- $ 1,474 $23,578 $39,691
4.01 to 5.00%........... 14,855 1,513 1,290 370 -- 18,028 24,832 20,925
5.01 to 6.00%........... 28,719 9,894 3,558 1,297 654 44,122 20,117 8,748
6.01 to 7.00%........... 26,947 2,669 157 430 1,322 31,525 3,729 1,548
7.01 to 8.00%........... 8 -- -- -- -- 8 139 191
Over 8.01%.............. -- -- -- -- -- -- -- 2,121
------- ------- ------ ------ ------ ------- ------- -------
Total................. $72,002 $14,077 $5,005 $2,097 $1,976 $95,157 $72,395 $73,224
======= ======= ====== ====== ====== ======= ======= =======
</TABLE>
Borrowings. Although deposits are the Bank's primary source of funds, the
Bank's policy has been to utilize borrowings when they are a less costly source
of funds.
The Bank obtains advances from the FHLB upon the security of its capital
stock of the FHLB and certain of its mortgage loans and mortgage-backed
securities. See "Regulation--Federal Home Loan Bank System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. Regulations limit the amount
of FHLB advances to 30% of total assets without obtaining specific approval from
the Board of Directors of the FHLB. As of December 31, 1995, outstanding
advances from the FHLB amounted to $2.0 million.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the year ended December 31, 1995. The Bank had no FHLB
borrowings at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
1995
----------------------
(DOLLARS IN THOUSANDS)
FHLB advances:
<S> <C>
Average balance outstanding............................................. $2,646
Maximum amount outstanding at any month-end during the period........... 6,000
Balance outstanding at end of period.................................... 2,000
Weighted average interest rate during the period........................ 6.53%
</TABLE>
SUBSIDIARIES
The Bank has three wholly-owned subsidiaries, Wayne Savings Financial
Services Group, Inc. ("Financial Services"), Wayne Savings Asset Management
Corporation and 2300 Corp. Financial Services, which began operation in November
1989, markets, as a broker, financial products to the customers of the Bank and
the general public. The products offered include annuities, life insurance,
disability insurance, group life insurance, stocks, bonds and mutual funds,
financial planning, estate planning, asset management and allocation services.
Richard Len, a director of the Bank and the Company, serves as President of
Financial Services and Asset Management. See "Management of the Bank--Employment
Agreements." Neither Asset Management nor 2300 Corp. has conducted any
activities to date.
56
<PAGE>
PROPERTIES
The Bank conducts its business through four branch offices and one
administrative office, all of which are located in Passaic County, New Jersey.
The following table sets forth information relating to each of the Bank's
offices and other properties as of December 31, 1995. The total net book value
of the Bank's premises and equipment at December 31, 1995 was $3.3 million.
<TABLE>
<CAPTION>
NET BOOK
ORIGINAL VALUE OF
YEAR PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1995
- ---------------------------------------- ----- -------- ---------- -----------------
<S> <C> <C> <C> <C>
ADMINISTRATIVE OFFICE:
1195 Hamburg Turnpike Owned 1988 -- $2,226,163
Wayne, New Jersey
BRANCH OFFICES:
1501 Hamburg Turnpike Leased 1992 2001 --
Wayne, New Jersey
1504 Route 23 Leased 1959 2002 45,684
(Packanack Shopping Center)
Wayne, New Jersey
Valley Ridge Shopping Center Leased 1971 2000 4,835
Valley Road at Preakness Avenue
Wayne, New Jersey
5 Sicomac Avenue Leased 1992 2024 --
North Haledon, New Jersey
OTHER PROPERTIES:
1255 Hamburg Turnpike Owned 1962(1) -- 106,000
Wayne, New Jersey
- ----------
<FN>
(1) This property was acquired by the Bank to serve as the Bank's main office.
The Bank began building on the property in 1962 and used that facility
until 1992. The property is currently being leased by the Bank.
</FN>
</TABLE>
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, that
involve amounts which, in the aggregate, are believed by management to be
immaterial to the financial condition of the Bank.
PERSONNEL
As of December 31, 1995, the Bank, including Financial Services, had 46
full-time and eight part-time employees. The employees are not
represented by a collective bargaining unit, and the Bank considers its
relationship with its employees to be good. See "Management of the
Bank--Benefits" for a description of certain compensation and benefits programs
offered to the Bank's employees.
57
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a
calendar year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. The Bank has not been audited in the past five
years.
Bad Debt Reserve. Savings institutions such as the Bank which
meet certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, may be computed
using an amount based on the Bank's actual loss experience, or a percentage
equal to 8% of the Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve. The Bank's deduction with respect to non-qualifying loans must be
computed under the experience method which allows a deduction based on the
Bank's actual loss experience over a period of several years. Each year the Bank
selects the most favorable way to calculate the deduction attributable to an
addition to the tax bad debt reserve.
The Bank presently satisfies the qualifying thrift definitional tests.
If the Bank failed to satisfy such tests in any taxable year, it would be unable
to make additions to its bad debt reserve. Instead, the Bank would be required
to deduct bad debts as they occur and would additionally be required to
recapture its bad debt reserve deductions ratably over a multi-year
period. Among other things, the qualifying thrift definitional tests require the
Bank to hold at least 60% of its assets as "qualifying assets." Qualifying
assets generally include cash, obligations of the United States or any agency or
instrumentality thereof, certain obligations of a state or political subdivision
thereof, loans secured by interests in improved residential real property or by
savings accounts, student loans and property used by the Bank in the conduct of
its banking business. The Bank's ratio of qualifying assets to total assets
exceeded 60% through December 31, 1995. Although there can be no assurance that
the Bank will satisfy the 60% test in the future, management believes that this
level of qualifying assets can be maintained by the Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on qualifying
real property loans at the close of the taxable year to six percent of the
balance of the qualifying real property loans outstanding at the end of the
taxable year. Currently, the Bank's total reserve for bad debts on qualifying
real property loans is approximately $4.9 million, which is less than 6 percent
of its qualifying real property loans outstanding. Also, if the qualifying
thrift uses the percentage of taxable income method, then the qualifying
thrift's aggregate addition to its reserve for losses on qualifying real
property loans cannot, when added to the addition to the reserve for losses on
non-qualifying loans, exceed the amount by which: (i) 12 percent of the
amount that the total deposits or withdrawable accounts of depositors of the
qualifying thrift at the close of the taxable year exceeds (ii) the sum of the
qualifying thrift's surplus, undivided profits and reserves at the beginning of
such year. As of December 31, 1995, this overall limitation would not have
restricted the Bank's deduction for additions to its bad debt reserve. At
December 31, 1995, the Bank's bad debt reserve for tax purposes was $5.0
million.
Legislation is pending before Congress that would generally repeal,
effective for taxable years beginning after 1995, the above-described bad debt
deduction rules available to thrift institutions such as the Bank, but would
retain the experience method for thrift institutions having assets with average
adjusted bases of $500 million or less. The proposed tax legislation would not
require the recapture of bad debt reserve deductions taken prior to 1988, but
would require the recapture of at least some of the bad debt reserve deductions
taken by an affected thrift institution after 1987. The balance of pre-1988 bad
debt reserves would continue to be subject to provisions of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders. Bad debt reserve deductions required to be recaptured would
generally be taken into account ratably over the six-taxable year period
beginning with the first taxable year beginning after December 31, 1995.
However, if an institution maintains its residential loans at a level equal to
the average level of such loans for a period preceding 1995, the institution
would be permitted to defer recapture of its reserves until 1998. The Bank is
not able to predict whether or in what form the proposed tax
58
<PAGE>
legislation will be enacted or the effect that such enactment would have on the
Bank's federal income tax liability. In addition, there may be an impact on
state income tax liability as a result of the enactment of the proposed
legislation.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Bank. The Bank does not
intend to pay dividends that would result in a recapture of any portion of its
bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of
1986, as amended (the "Code") imposes a tax on alternative minimum taxable
income ("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction
using the percentage of taxable income method over the deduction that would have
been allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). In addition, for taxable years beginning
after December 31, 1986 and before January 1, 1996, an environmental tax of
0.12% of the excess of AMTI (with certain modifications) over $2.0 million is
imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT,
but may be subject to the environmental tax liability, if reenacted.
Dividends Received Deduction and Other Matters. 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 generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
STATE AND LOCAL TAXATION
New Jersey Taxation. The Bank files New Jersey income tax
returns. For New Jersey income tax purposes, savings institutions are presently
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 addition of interest income on State and municipal obligations).
Delaware Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempted 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.
59
<PAGE>
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as the deposit
insurer. The Bank is a member of the FHLB System and its deposit accounts are
insured up to applicable limits by the SAIF managed by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements. 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 regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming that the holding company form
of organization is utilized, the Company, as a savings and loan holding company,
will also be required to file certain reports with, and otherwise comply with
the rules and regulations of the OTS and of the Securities and Exchange
Commission (the "SEC") under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, its operations or the Bank's Conversion.
Congress currently has under consideration various proposals to eliminate the
federal thrift charter and abolish the OTS. The outcome of such legislation is
uncertain. Therefore, the Bank is unable to determine the extent to which
legislation, if enacted, would affect its business. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("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 federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institutions's capital or
assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans-to-one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
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. At December 31, 1995, the Bank's limit on loans-to-one
borrower was $2.6 million. At December 31, 1995, the Bank's largest aggregate
amount of loans-to-one borrower consisted of $2.2 million and the second largest
borrower had an aggregate balance of $550,000.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1995, the Bank maintained 88.4% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
60
<PAGE>
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 shareholders
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 that exceeds
all fully phased-in regulatory 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, after prior notice
to, 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. Any additional capital distributions
would require prior OTS approval. In the event the Bank's capital fell below its
capital requirements or the OTS notified it that it was in need of more than
normal 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
short-term borrowings. 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 December 31, 1995 was 9.7%, which exceeded the then applicable
requirements. The Bank has not been subject to monetary penalties for failure to
meet its liquidity requirements.
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is computed upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the year
ended December 31, 1995, totalled $54,000.
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations. For a discussion of the impact of proposed legislation on federal
branching laws, see "Risk Factors--Financial Institution Regulation and Possible
Legislation."
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 Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered 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
generally requires 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. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the Bank Holding Company Act ("BHC Act"). Further, no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require that such loans be
made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to
61
<PAGE>
such persons based, in part, on the Bank's capital position, and requires that
certain board approval procedures be followed. The OTS regulations, with certain
minor variances, apply Regulation O to savings institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders who
participate in the conduct of the affairs of a savings association, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on the institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the 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. Federal law also establishes criminal penalties for certain
violations.
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 recently adopted a final regulation and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. 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. The agencies
also issued a proposed rule regarding asset quality and earnings standards
which, if adopted in final, would be added to the Guidelines. 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 regulation establishes 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 also require that, in meeting the leverage, tangible and
risk-based capital standards, institutions must generally 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. 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 rate 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
62
<PAGE>
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 and 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 proposals issued by the other federal banking agencies and
evaluate the process by which an institution may appeal its interest rate risk
component.
At December 31, 1995, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. See "Regulatory 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 December 31, 1995, and pro forma amounts and percentages based
upon the issuance of the shares within the Estimated Price Range and assuming
that a portion of the net proceeds are retained by 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 a total risk- based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be "undercapitalized." A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 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
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. 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 condition, 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. Assessment rates currently range from 23 basis points to 31 basis
points. 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 action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated
63
<PAGE>
any applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
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 the 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. The Bank was in compliance with this
requirement with an investment in FHLB stock at December 31, 1995, of $1.6
million. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance.
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. For the years ended December 31, 1995, 1994 and 1993,
dividends from the FHLB to the Bank amounted to $118,000, $106,000 and $137,000,
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would likely also be reduced. Further,
there can be no assurance that the impact of recent or future legislation on the
FHLBs will not also cause a decrease in the value of the FHLB stock held by the
Bank.
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 $52.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $52.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $52.0
million. The first $4.3 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. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce the Bank's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but Federal
Reserve Board regulations require institutions to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, 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 Savings Institution Regulation--QTL 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 BHC Act, subject to the prior approval of the
64
<PAGE>
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, subject to limited grandfathering, restrict the activities of
such companies to those permissible for bank holding companies. See "Risk
Factors--Financial Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution, or holding company thereof, without prior written
approval of the OTS; and from acquiring or retaining, with certain exceptions,
more than 5% of the voting stock of a non-subsidiary holding company or savings
association. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, 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, except: (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.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading 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.
65
<PAGE>
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of those persons who
currently serve as directors of the Bank. Their names and biographical
information are set forth under "Management of the Bank--Directors." The Board
of Directors is divided into three classes. The directors shall be elected by
the stockholders of the Company for three year terms, or until their successors
are elected and qualified. One class of directors, consisting of Messrs. William
J. Lloyd, Harold P. Cook, III, and Ronald Higgins, has a term of office expiring
at the first annual meeting, a second class, consisting of Messrs. Thomas D.
Collins, William E. Vanderberg and Nicholas S. Gentile, Jr., has a term of
office expiring at the annual meeting to be held one year thereafter, and a
third class, consisting of Messrs. David M. Collins, Richard Len and Charles A.
Lota, expiring at the annual meeting to be held two years thereafter.
The following individuals hold the offices in the Company as set forth
below.
NAME AGE (1) POSITION(S) HELD WITH THE COMPANY
---- ------- ---------------------------------
Harold P. Cook, III..... 41 Chairman of the Board of Directors
William E. Vanderberg... 56 President, Chief Executive Officer and Director
Michael G. DeBenedette.. 45 Vice President and Secretary
Thomas D. Collins....... 61 Assistant Secretary
Johanna O'Connell....... 44 Vice President
Timothy P. Tierney...... 53 Vice President and Comptroller
- ----------
(1) At December 31, 1995.
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors. Since the formation of
the Company, none of the executive officers, directors or other personnel have
received remuneration from the Company. Information concerning the principal
occupations, employment and compensation of the directors and officers of the
Company during the past five years is set forth under "Management of the
Bank--Biographical Information." Executive officers of the Company will be
compensated as described below under "Management of the Bank."
MANAGEMENT OF THE BANK
DIRECTORS
Prior to the Conversion, the direction and control of the Bank, as a mutual
savings institution, has been vested in its Board of Directors. Upon conversion
of the Bank to stock form, each of the directors of the Bank will continue to
serve as a director of the converted Bank. Directors will serve for three-year
terms. The terms of the directors of the Bank will be staggered (as is the case
for the Company) so that one-third of the directors will be elected at each
annual meeting of stockholders. Since the Company will own all of the issued and
outstanding shares of capital stock of the Bank after the Conversion, directors
of the Company will elect the directors of the Bank.
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
---- ------ ------------------------------ ----- -------
<S> <C> <C> <C> <C>
William J. Lloyd.............. 72 Chairman of the Board of Directors 1961 1996
Harold P. Cook, III........... 41 Vice Chairman of the Board of Directors 1991 1996
Ronald Higgins................ 59 Director 1988 1996
William E. Vanderberg......... 56 President, Chief Executive Officer and Director 1989 1997
Thomas D. Collins............. 61 Director and Board Secretary 1981 1997
Nicholas S. Gentile, Jr....... 65 Director 1965 1997
David M. Collins.............. 56 Director 1981 1998
Richard Len................... 61 Director and President of Financial Services 1988 1998
Charles A. Lota............... 38 Director 1993 1998
</TABLE>
- ----------
(1) At December 31, 1995.
66
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION(S) HELD WITH THE BANK
---- ------- ------------------------------
<S> <C> <C>
Michael G. DeBenedette......................... 45 Executive Vice President, Chief Operating Officer
and Corporate Secretary
Johanna O'Connell.............................. 44 Senior Vice President and Chief Lending Officer
Timothy P. Tierney............................. 53 Vice President and Chief Financial Officer
</TABLE>
- ----------
(1) At December 31, 1995.
Each of the officers of the Bank will retain his office in the converted
Bank until the annual meeting of the Board of Directors of the Bank, held
immediately after the first annual meeting of shareholders subsequent to
Conversion, and until their successors are elected and qualified or until they
are removed or replaced. Officers are reelected annually.
BIOGRAPHICAL INFORMATION
Set forth below is certain information with respect to the directors and
executive officers of the Bank and the Company. Unless otherwise indicated, the
principal occupation listed for each person below has been his principal
occupation for the past five years.
DIRECTORS
William J. Lloyd has been a director of the Bank since 1961. Since 1992 he
has served as the Chairman of the Board of Directors. Mr. Lloyd retired in June
1986 as funeral director of the Richards Funeral Home, Riverdale, New Jersey,
where he had been employed for eight years.
Harold P. Cook, III has been a director of the Bank since 1991. Mr. Cook
has been a partner with the law firm Cook & DeLuccia since 1982 and also serves
as a municipal judge of various local communities and has also served as a
Zoning Board Attorney for the Township of Wyckoff since 1995. Mr. Cook has also
been active in real estate and other investments throughout Northern New Jersey.
Ronald Higgins has been a director of the Bank since January 1988. Mr.
Higgins has been a principal owner and insurance agent for RLM Insurance Agency
since 1967 and is a real estate entrepreneur.
William E. Vanderberg has been President and Chief Executive Officer of the
Bank since November 1987. He is also Vice President of both Financial Services
and Asset Management, two of the Bank's subsidiaries. Prior to joining the Bank,
from 1985 to 1987, Mr. Vanderberg was Chief Lending Officer of First Federal
Savings and Loan Association of Montclair, Montclair, New Jersey. From 1982 to
1985, he was special projects coordinator for Lincoln Federal Savings and Loan
Association, and Chief Operating Officer of Equity Savings and Loan Association,
Kearny, New Jersey. Since 1995, he has been a director of the Federal Home Loan
Bank of New York.
Thomas D. Collins has been a director since 1981. Since 1988, he has also
served as Secretary to the Board of Directors. Since 1960, he has been the
owner-manager of Town & Country Hardware Inc., located in Wayne, New Jersey.
Nicholas S. Gentile, Jr. has been a director of the Bank since 1965. Since
1982, Mr. Gentile has been involved as an independent builder and developer of
various properties in New Jersey. He has also been involved in construction
management. Mr. Gentile is President and Chief Executive Officer of Pompton
Lakes Building Supply Co.
David M. Collins has been a director since 1981. Mr. Collins has been an
educator in Wayne Township since 1967 and has also been involved in real estate
acquisitions and management.
Richard Len, C.L.U. Ch. F.C. has been a director of the Bank since 1988.
Mr. Len was self-employed as a financial planner and employee benefits
consultant as President of the Atlantic Financial Services Corporation. As of
November 1, 1989, he has been employed as President of two of the Bank's
subsidiaries, Financial Services and Asset Management.
Charles A. Lota, C.P.A., has been a director of the Bank since 1993. Mr.
Lota is a Certified Public Accountant and currently owns his own accounting firm
located in Wyckoff, New Jersey.
67
<PAGE>
DIRECTOR EMERITUS
Joseph J. DeLuccia served on the Bank's Board from 1965 to 1990 and
currently provides consulting services to the Board.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Michael G. DeBenedette, M.B.A., has been Executive Vice President, Chief
Operating Officer and Corporate Secretary of the Bank since March 1988. He also
serves as Secretary-Treasurer of Financial Services and Asset Management, two of
the Bank's subsidiaries. Prior to his employment at the Bank, Mr. DeBenedette
was First Vice President at the First Federal Savings and Loan Association of
Montclair, Montclair, New Jersey, where he was employed for 16 years.
Johanna O'Connell has been Senior Vice President and Chief Lending Officer
of the Bank since June 1989. Prior to her employment with the Bank, Ms.
O'Connell was employed since 1973 at Fellowship Savings and Loan Association,
Bergenfield, New Jersey, where she served as Executive Vice President, Chief
Lending Officer and Secretary from 1986 to 1989.
Timothy P. Tierney, C.P.A., has been Vice President and Chief Financial
Officer of the Bank since September 1994. Prior to his employment with the Bank,
Mr. Tierney was Vice President and Controller of Crestmont Federal Savings and
Loan Association, Edison, New Jersey, where he was employed for three years.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND THE COMPANY
The Board of Directors meets monthly and may have additional special
meetings upon the request of the President or at least four members of the
Board. During the year ended December 31, 1995, the Board of Directors met 12
times. No director attended fewer than 75% of the total number of board meetings
held and the total number of committee meetings held during the period.
The Board of Directors of the Bank has established various committees,
including the Interest Rate Risk Committee, the Audit Committee, the
Compensation Committee, and the Real Estate Committee.
The Interest Rate Risk Committee was comprised of Directors Thomas D.
Collins (Chairman), Harold P. Cook, III and Nicholas S. Gentile, Jr. for the
year ended December 31, 1995. The Committee met 2 times in 1995. The Committee
recommends the interest rate risk policy and the asset and liability management
policy of the Bank for approval by the Board. The Interest Rate Risk Committee
for the year ending December 31, 1996 consists of all members of the Board; Mr.
Charles A. Lota serves as Chairman.
The Audit Committee consisted of Directors Charles A. Lota (Chairman),
David M. Collins and Ronald Higgins for the year ended December 31, 1995. The
Committee met 4 times in 1995 and is responsible for establishing audit policy.
The Committee also reviews and reports to the Board on the Bank's financial
condition and reviews the audit reports of the Bank prepared by the independent
auditors. The Audit Committee for the year ending December 31, 1996 consists of
Messrs. Ronald Higgins (Chairman), Thomas D. Collins and Charles A. Lota.
The Compensation Committee was comprised of Directors Harold P. Cook, III
(Chairman), Thomas D. Collins and Charles A. Lota for the year ended December
31, 1995. The Committee met 7 times in 1995 and is responsible for establishing
compensation and employee benefit policies for the Bank's employees. The
Compensation Committee currently consists of all members of the Board; Mr. David
M. Collins serves as Chairman.
The Real Estate Committee consisted of Directors Ronald Higgins (Chairman),
David M. Collins and Nicholas S. Gentile, Jr. for the year ended December 31,
1995. The Committee met 7 times in 1995 and is responsible for reviewing all
plans relating to the buildings, and the grounds of the Bank. The Real Estate
Committee currently consists of Messrs. Nicholas S. Gentile, Jr. (Chairman),
Thomas D. Collins, Harold P. Cook, III and Richard Len.
The Company has also established an Audit Committee consisting of the same
directors as the Association's Audit Committee. The Company has also established
that the duties of the Pricing Committee and the Compensation Committee will be
conducted by the full Board of Directors.
DIRECTOR COMPENSATION
Fee Arrangements. Currently, all directors of the Bank, except Mr.
Vanderberg, are paid an annual retainer of $12,500. In addition, the Chairman of
the Board receives a fee of $1,404 per month, the Secretary of the Board
68
<PAGE>
receives a fee of $835 per month and all directors, except Mr. Vanderberg,
receive a fee of $400 per month, regardless of the number of meetings held by
the Board.
The Chairman of each committee of the Board of Directors of the Bank is
paid $50 per meeting if the Chairman prepares minutes for the committee meeting.
Following consummation of the Conversion, the Company will assume the
responsibility for payment of the retainer amount currently paid by the Bank.
The Chairman of the Board of the Company will receive a fee of $200 per meeting
attended. No committee fees will be paid by the Company.
The Bank maintains one Director Emeritus position that is currently filled
by Joseph J. DeLuccia, who served on the Board of Directors of the Bank from
1965 to 1990. Mr. DeLuccia is paid a fee for consulting services, not to exceed
$10,500 per year.
Directors' Consultation and Retirement Plan. The Board of Directors has
adopted the Wayne Savings Bank, F.S.B. Consultation and Retirement Plan for
Non-Employee Directors (the "Directors' Consultation Plan"). The purpose of the
Directors' Consultation Plan is to provide retirement benefits to Directors who
are neither officers nor employees of the Company or the Bank to ensure that the
Company and the Bank will have their continued service and assistance and to
recognize and reward them for their long service to the Bank.
In order to be eligible to participate in the plan, a director must have
attained age 65 and have performed at least ten years of service (including
years of service prior to the effective date of the plan) with the Bank at
retirement. The maximum annual retirement benefit payable under the plan is
$12,000 per year, for a period of up to ten years. However, generally a
participant must complete at least ten years of service after the effective date
of the plan to receive the maximum annual benefit. A participant will become
vested in 50% of the maximum annual retirement benefit after serving on the
Bank's Board of Directors for five years after the effective date of the plan.
The vested percentage in the benefit will increase by 10% for each year of
service completed thereafter, until 100% vesting occurs. For each year in which
the benefit is payable, the participant must be subject to a consultation
agreement under which the participant will be available for up to 11 days each
month to provide consultation services to the Bank. In the event of the death of
a participant prior to the completion of the payment period for the plan, a
death benefit will be paid to the participant's beneficiary in an amount equal
to the present value of the annual retirement benefit being paid to the
participant at the time of his death for the remaining number of a ten year
period commencing at the participant's retirement.
EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth the cash compensation
paid for services rendered in all capacities during the year ended December 31,
1995, to the Chief Executive Officer and other executive officers who received
compensation in excess of $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
--------------------------- ---------------------- ----------
OTHER RESTRICTED SECURITIES ALL
ANNUAL STOCK UNDERLYING LTIP OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
------------------ ---- -------- ------- ------------ ------ ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. Vanderberg......... 1995 $124,200 $72,777 -- -- -- -- $9,676
President and Chief
Executive Officer
Michael G. DeBenedette........ 1995 76,800 24,087 -- -- -- -- 3,425
Executive Vice President
and Chief Operating Officer
Johanna O'Connell............. 1995 84,450 23,808 -- -- -- -- 3,386
Senior Vice President and
Chief Lending Officer
Richard Len................... 1995 71,300 66,759 -- -- -- -- 5,829
President of Wayne
Savings Financial Services
Group, Inc.
</TABLE>
- ----------
(1) Under Annual Compensation, the column titled "Salary" includes amounts
deferred by the named executive officer pursuant to the Bank's 401(k) Plan
as hereinafter defined pursuant to which employees may defer up to
69
<PAGE>
15% of their compensation and executive officers may defer up to the
maximum limits under the Code not to exceed 15% and includes board fees of
$17,300 paid to Mr. Len. The column titled "Bonus" includes cash bonuses
paid to Messrs. Vanderberg and DeBenedette and Ms. O'Connell as well as
commissions paid to Mr. Len from Financial Services. The Board has decided
to discontinue the practice of paying cash bonuses to Messrs. Vanderberg,
DeBenedette and Ms. O'Connell effective upon completion of the Conversion.
(2) For 1995, there were no (a) perquisites over the lesser of $50,000 or 10%
of the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock. For 1995, the Bank had no restricted stock or stock
related plans in existence.
(3) Does not include awards pursuant to the Stock Programs, which may be
granted in conjunction with a meeting of stockholders of the Company, as
such awards were not earned, vested or granted in fiscal 1995. For a
discussion of the terms of the Stock Programs, see "--Benefits--Stock
Programs."
(4) Does not include options, which may be granted in conjunction with a
meeting of stockholders of the Company, as such options were not earned or
granted in 1995. For a discussion of the terms of the grants and vesting of
options, see "--Benefits--Stock Option Plans."
(5) For 1995, there were no payouts or awards under any long-term incentive
plan.
(6) Includes amounts contributed by the Bank under the Bank's 401(k) Plan and
reimbursement for insurance expenses.
EMPLOYMENT AGREEMENTS
Upon completion of the Conversion, the Bank and the Company intend to enter
into employment agreements with Mr. Vanderberg and the Company and Financial
Services intend to enter into employment agreements with Richard Len (each, an
"Executive"). These agreements are subject to the review and approval of the
Company, the Bank, and Financial Services, as applicable, and the OTS, and may
be amended as a result of such OTS review. These employment agreements are
intended to ensure that the Bank, the Company and Financial Services will be
able to maintain a stable and competent management base after the Conversion.
The continued success of the Bank, the Company and Financial Services depends to
a significant degree on the skills and competence of Messrs. Vanderberg and Len.
The proposed employment agreements are expected to provide for a three-year
term for Mr. Vanderberg and a two-year term for Mr. Len. It is expected that the
Bank employment agreement would provide that, commencing on the first
anniversary date and continuing each anniversary date thereafter, the Board of
Directors would review the agreement and the Executive's performance for
purposes of determining whether to extend the agreement for an additional year
so that the remaining term shall be three years, unless written notice of
non-renewal is given by the Board of Directors after conducting a performance
evaluation of the Executive. The terms of the Company and Financial Services
employment agreements shall be extended on a daily basis unless written notice
of non-renewal is given by the Board of the Company or Financial Services, as
appropriate. The agreements provide that the Executive's base salary will be
reviewed annually. The Bank's Board has approved an increase in Mr. Vanderberg's
base salary to $190,000, effective upon consummation of the conversion; however,
upon consummation of the Conversion, Mr. Vanderberg's participation in the cash
bonus plan currently in place will be discontinued. In addition to the base
salary, the agreements provide for, among other things, participation in stock
benefit plans and other fringe benefits applicable to executive personnel. The
agreements would provide for termination by Financial Services, the Bank or the
Company for cause as defined in the respective agreements, at any time. In the
event Financial Services, the Bank or the Company choose to terminate the
Executive's employment for reasons other than for cause, or in the event of the
Executive's resignation from the Bank, the Company or Financial Services, as
applicable, upon: (i) failure to re-elect or reappoint the Executive to his
current offices; (ii) a material change in the Executive's functions, duties or
responsibilities causing the Executive's position to become one of lesser
responsibility, importance or scope than that previously held (provided that no
breach shall be deemed to have occurred in the event Executive continues to
receive the same compensation and benefits as those being received by the
Executive immediately preceding the change in Executive's functions, duties or
responsibilities); (iii) a relocation of the Executive's principal place of
70
<PAGE>
employment by more than 15 miles; (iv) a material reduction in the benefits and
perquisites to the Executive; (v) liquidation or dissolution of the Bank or the
Company; or (vi) a breach of the agreement by the Bank or the Company, the
Executive or, in the event of death his beneficiary, would be entitled to
receive an amount equal to the remaining base salary payments due to the
Executive and the contributions that would have been made on the Executive's
behalf to any employee benefit plans of the Bank, the Company or Financial
Services, as applicable, during the remaining term of the agreement. The Bank,
the Company and/or Financial Services, as applicable, would also continue and
pay for the Executive's life, health and disability coverage for the remaining
term of the agreement. In addition to the employment agreement, the Company also
would provide Mr. Vanderberg with additional compensation upon his retirement or
other termination of his employment. An irrevocable grantor's trust may be
established as a funding mechanism for those benefits.
Under the agreements, if involuntary termination, or voluntary resignation
following any demotion, loss of title, office or significant authority or
responsibility and reduction in annual compensation or benefits or relocation of
his principal place of employment by more than 15 miles follows a change in
control of the Bank or the Company as defined in the proposed employment
agreements, it is expected that the Executive or, in the event of the
Executive's death, his beneficiary, would be entitled to a severance payment
equal to the greater of: (i) the payments due for the remaining terms of the
agreement; or (ii) three times the average (or two times the average for Mr.
Len) of the five preceding taxable years' compensation (except that the
Financial Services and Company agreements use a three year average in this
formula). It is expected that Financial Services, the Bank and the Company, as
appropriate, would also continue the Executive's life, health, and disability
coverage under the remaining term of the appropriate agreement. Notwithstanding
that the agreements would provide for a severance payment in the event of a
change in control, the Executive would only be entitled to receive a severance
payment under one agreement.
Payments to the Executive under the Bank's and Financial Services' proposed
agreements are expected to be guaranteed by the Company in the event that
payments or benefits are not paid by the Bank. Payment under the Company's
agreement would be made by the Company. All reasonable costs and legal fees paid
or incurred by the Executive pursuant to any dispute or question of
interpretation relating to the agreements would be paid by the Bank or Company,
respectively, if the Executive is successful on the merits pursuant to a legal
judgment, arbitration or settlement. It is also expected that the employment
agreements also provide that the Bank and Company shall indemnify the Executive
to the fullest extent allowable under federal and Delaware law, respectively. In
the event of a change in control of the Bank or Company, the total amount of
payments due under the agreements, based solely on cash compensation paid to
Executive over the past five fiscal years and excluding any benefits under any
employee benefit plan which may be payable, would be approximately $650,896.
CHANGE IN CONTROL AGREEMENTS
It is anticipated that upon completion of the Conversion, the Company and
the Bank will enter into two-year change in control agreements ("CIC
Agreements") with Messrs. DeBenedette, Tierney and Ms. O'Connell. Additionally,
Financial Services will enter into a two-year CIC Agreement with Mr. Gary Len.
The proposed CIC Agreements are expected to provide that commencing on the first
anniversary date and continuing on each anniversary thereafter, the Bank's CIC
Agreements may be renewed by the Board of Directors for an additional year. The
term of the Company's and Financial Services' CIC Agreements shall be extended
on a daily basis unless written notice of non-renewal is given by the Board of
Directors of the Company. It is also expected that the CIC Agreements with the
Company and Financial Services will provide that in the event involuntary
termination other than for cause, as defined in the CIC Agreements, or voluntary
resignation following any demotion, loss of title, office or significant
authority coupled with a reduction in compensation and benefits from those being
received by Executive immediately preceding the change in Executive's functions,
duties or responsibilities and reduction in annual compensation or material
reduction in benefits, or any relocation of the officer's principal place of
employment by more than 15 miles from its location immediately prior to the
change in control follows a change in control of the Bank or the Company, the
officer would be entitled to receive a severance payment equal to the greater of
(i) the payments due for the remaining term of the agreement; or (ii) two times
the officer's average annual compensation for the two taxable years preceding
termination. It is also expected that the Bank's CIC Agreement would have a
similar change in control provision; however, the officer would only be entitled
to receive a severance payment under one agreement. The Company, the Bank and
Financial Services, as applicable, would also continue, and pay for, the
officer's life, health and disability coverage for the remaining term of the
agreement. Payments to the officer under the Bank's CIC
71
<PAGE>
Agreements would be guaranteed by the Company in the event that payments or
benefits are not paid by the Bank. In the event of a change in control as
defined in the agreements, the total payments that would be due under the CIC
Agreements, based solely on the cash compensation paid to the three officers of
the Bank covered by the CIC Agreements over the past two calendar years and
excluding any benefits under any employee benefit plan which may be payable,
would be approximately $521,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
It is anticipated that the Bank's Board of Directors will, subsequent to
the Conversion, establish the Wayne Savings Bank, F.S.B. Employee Severance and
Retention Compensation Plan ("Severance Plan"), which would provide employees
designated by the Board with severance pay benefits in the event of a change in
control of the Bank or the Company following Conversion. Management personnel
with employment or CIC Agreements would not be eligible to participate in the
Severance Plan. It is anticipated that the Severance Plan would vest upon a
change in control in each participant a contractual right to the benefits such
participant is entitled to thereunder. It is anticipated that under the
Severance Plan, in the event of a change in control of the Bank or the Company,
eligible employees who are terminated from or terminate their employment within
one year (for reasons specified under the Severance Plan), would be entitled to
receive a severance payment. A participant whose employment has terminated would
be entitled to a cash severance payment equal to total compensation received by
the participant over the six month period immediately prior to the change in
control. The Severance Plan entitles participants to receive 50% of the total
benefit the participant is eligible to receive under the plan if the Board of
Directors has entered into any corporate action, the consummation of which would
result in a change in control, provided the participant is continually employed
by his employer from a date six months prior to the date of consummation up to
the date of consummation. Any benefit paid under this provision shall reduce, in
equal amount, any benefit otherwise or subsequently paid to the employee under
the Severance Plan. Such payments may tend to discourage takeover attempts by
increasing costs to be incurred by the Bank in the event of a takeover. No
employees have been designated for participation under this plan.
INSURANCE PLANS
All full-time employees, are covered as a group for comprehensive
hospitalization, including major medical, long-term disability, accidental death
and dismemberment insurance and group term life insurance.
BENEFITS
Pension Plan. The Bank maintains the Wayne Savings Bank, F.S.B. Pension
Plan ("Pension Plan"), which is a defined benefit pension plan, for the benefit
of salaried employees employed by the Bank prior to attaining age 60. The
Pension Plan is administered by the Bank. Upon consummation of the Conversion,
the Bank may freeze the Pension Plan, meaning that participants will cease the
accrual of additional benefits under the Pension Plan. The Bank annually
contributes an amount necessary to fully fund the actuarially determined minimum
funding requirements established by the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). Under the plan's funding method, the actuarial
present value of projected benefits of each individual is allocated on a level
basis over the expected future earnings period through the assumed retirement
date. The Bank makes a contribution to the plan for all eligible employees in
accordance with the plan's guidelines.
Employees of the Bank who have attained the age of 21, have completed six
months of service, and were hired prior to age 60 are eligible to participate in
the plan. Employee benefits under the plan begin vesting at 20% after the second
year of service and increase by 20% each year for the following four years
thereafter until full vesting occurs after six years. Payments made by the Bank
pursuant to and for the purpose of funding its obligations under the plan
totalled $88,000 for the 1995 plan year.
72
<PAGE>
The table below sets forth annual benefits under the Pension Plan assuming
retirement during 1995 at various levels of compensation and years of credited
service.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFIT
PAYABLE AT AGE 65
STRAIGHT LIFE ANNUITY BASIS TO AN EMPLOYEE RETIRING IN 1996
YEARS OF CREDITED SERVICE
FINAL AVERAGE -----------------------------------------------------------------------------
EARNINGS 15 20 25 30 35
- ------------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 9,225 $11,700 $ 13,500 $ 16,500 $ 17,500
75,000 14,850 19,200 21,750 25,200 28,665
100,000 20,475 25,800 31,125 36,450 41,790
125,000 26,100 33,300 40,500 47,700 54,915
150,000 31,725 40,800 49,895 58,950 68,040
200,000 37,350 55,800 60,625 81,450 94,290
250,000 42,975 72,300 87,375 103,950 120,540
300,000 48,600 87,300 106,125 126,450 146,790
</TABLE>
As of December 31, 1995, Mr. Vanderberg had 8 years, 3 months of credited
service, Mr. DeBenedette had 7 years, 9 months of credited service and Ms.
O'Connell had 6 years, 6 months of credited service.
Supplemental Executive Retirement Plan. The Bank intends to implement a
non-qualified Supplemental Executive Retirement Plan ("SERP") to provide certain
officers and highly compensated employees with additional retirement benefits.
The benefits provided under the SERP will make up the benefits lost to the SERP
participants due to application of limitations on compensation and maximum
benefits applicable to the Bank's Pension Plan, 401(k) Plan and the ESOP.
Benefits will be provided under the SERP at the same time and in the same form
as the benefits will be provided under the Pension Plan, 401(k) Plan and ESOP.
The Bank may establish an irrevocable grantor's trust in connection with
the SERP. This trust would be funded with contributions from the Bank for the
purpose of providing the benefits promised under the terms of the SERP. The SERP
may hold a variety of assets, including employer stock, other securities,
insurance contracts and cash. The SERP participants have only the rights of
unsecured creditors with respect to the trust's assets, and will not recognize
income with respect to benefits provided by the SERP until such benefits are
received by the participants. The assets of the trust are subject to the claims
of the Bank's creditors solely in the event of the Bank's insolvency, thereby
foregoing any tax consequences to the participants until assets are distributed
to participants. Earnings on the trust's assets are taxable to the Bank. The
trustee may invest the trust's assets in the Company's stock.
401(K) Plan. The Bank has a 401(k) salary deferral plan (the "401(k) Plan")
for the benefit of its employees. The 401(k) Plan provides for participation by
all employees of the Bank. Voluntary salary deferrals made by the employees are
deposited in an interest-bearing account. The Bank matches 50% of the employee's
contributions up to the first 6% of the employee's salary. Under the 401(k)
Plan, the Bank may make a special employer contribution in addition to its
matching contributions. To date, the Bank has not made a special contribution.
The determination of whether to make a special contribution and the amount of
the special contribution is established by the Bank's Board of Directors. All
participants in the 401(k) Plan are fully vested in their 401(k) Plan account
balance upon entry into the Plan. Upon the employee's retirement, disability or
death, the entire balance of an employee's account may be paid in a lump sum
amount or in monthly installments over a period of up to 10 years.
The 401(k) Plan has been amended to increase the number of investment
options provided to participants, by including an Employer Stock Fund. The
401(k) Plan, as amended, permits participants to direct that all or a portion of
their account be invested in such fund. All assets of the 401(k) Plan are held
in trust. Each participant who directs the trustee to invest all or part of his
account in the Employer Stock Fund will have assets in his account applied to
the purchase of shares of the Common Stock. A participant in the 401(k) Plan who
elects to purchase Common Stock in the Conversion through 401(k) Plan will
receive the same subscription priority, and be subject to the same individual
purchase limitations, for such a purchase as if such participant had elected to
purchase Common Stock in the Conversion using funds not in the 401(k) Plan. See
"The Conversion-Limitations on Common Stock Purchases."
Employee Stock Ownership Plan and Trust. The Bank has established for
eligible employees an ESOP and related trust to become effective upon
Conversion. Full-time employees employed with the Bank as of January 1,
73
<PAGE>
1996 and full-time employees of the Company or the Bank employed after such
date, who have been credited with at least 1,000 hours during a twelve month
period and who have attained the age of twenty-one will become participants. The
ESOP intends to purchase 8% of the Common Stock issued in the Conversion. As
part of the Conversion and in order to fund the ESOP's purchase of the Common
Stock to be issued in the Conversion, the ESOP intends to borrow funds from the
Company equal to 100% of the aggregate purchase price of the Common Stock. The
loan will be repaid principally from the Company's or the Bank's contributions
to the ESOP over a period of ten years and the collateral for the loan will be
the Common Stock purchased by the ESOP. Subject to receipt of any necessary
regulatory approvals or opinions, the Bank may make contributions to the ESOP
for repayment of the loan as the participants are all employees of the Bank, or
to reimburse the Company for contributions made by it. Contributions to the ESOP
will be discretionary; however, the Company or the Bank intend to make annual
contributions to the ESOP in an aggregate amount at least equal to the principal
and interest requirement on the debt. The interest rate for the loan is expected
to be 8.25%. There can be no assurance that the OTS will permit the Company to
make the loan to the ESOP, or to guarantee and provide additional collateral in
the event the ESOP loan is obtained from a third party.
Shares purchased by the ESOP will initially be pledged as collateral for
the loan, and will be held in a suspense account until released for allocation
among participants as the loan is repaid. The pledged shares will be released
annually from the suspense account in an amount proportional to the repayment of
the ESOP loan for each plan year. The released shares will be allocated among
the accounts of participants on the basis of the participant's compensation for
the year of allocation. Participants generally become 100% vested in their ESOP
account after five years of credited service or if their service was terminated
due to death, early retirement, permanent disability or a change in control.
Prior to the completion of five years of credited service, a participant who
terminates employment for reasons other than death, retirement, disability, or
change in control of the Bank or Company will not receive any benefit.
Forfeitures will be reallocated among remaining participating employees, in the
same proportion as contributions. Benefits may be payable upon death,
retirement, early retirement, disability or separation from service.
In connection with the establishment of the ESOP, a Committee of the Board
of Directors was appointed to administer the ESOP (the "ESOP Committee"). An
unrelated corporate trustee for the ESOP will be appointed prior to the
Conversion and continuing thereafter. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP trustee,
subject to its fiduciary duty, must vote all allocated shares held in the ESOP
in accordance with the instructions of the participating employees. Under the
ESOP, unallocated shares will be voted in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock as long as such vote is in accordance with the provisions of
ERISA.
Stock Option Plans. Following the conversion, the Board of Directors of the
Company intends to adopt stock-based benefit plans which would provide for the
granting of stock options to eligible officers, employees and directors of the
Company and the Bank. Stock options are intended to be granted under either a
separate stock option plan for officers and employees (the "Incentive Option
Plan") and a separate option plan for outside directors (the "Directors' Option
Plan") (collectively, the "Option Plans") or under a single Master Stock-Based
Benefit Plan which would incorporate the benefits and features of the Incentive
Option Plan and Directors' Option Plan as well as the Stock Programs described
below. At a meeting of stockholders of the Company following the Conversion,
which under applicable OTS regulations, may be held no earlier than six months
after the completion of the Conversion, the Board of Directors intends to
present the Option Plans or the Master Stock-Based Benefit Plan to stockholders
for approval and has reserved an amount equal to 10% of the shares of Common
Stock issued in the Conversion or 287,500 shares (based upon the issuance of
2,875,000 shares), for issuance under the Option Plans or Master Stock-Based
Benefit Plan. OTS regulations provide that no individual officer or employee of
the Bank may receive more than 25% of the options granted under the Option Plans
or Master Stock-Based Benefit Plan and non-employee directors may not receive
more than 5% individually, or 30% in the aggregate of the options granted under
the Option Plans or the Master Stock-Based Benefit Plan.
The stock option benefits provided under the Incentive Option Plan or
Master Stock-Based Benefit Plan will be designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a propriety
interest in the Company as an incentive to contribute to the success of the
Company and reward key employees for outstanding performance. All employees of
the Company and its subsidiaries will be eligible to participate in such plans.
The Incentive Option Plan or Master Stock-Based Benefit Plan will provide for
the grant of: (i) options to purchase the Company's Common Stock intended to
qualify as incentive stock options under Section
74
<PAGE>
422 of the Code ("Incentive Stock Options"); (ii) options that do not so qualify
("Non-Statutory Stock Options"); and (iii) Limited Rights (discussed below)
which will be exercisable only upon a change in control of the Bank or the
Company. Unless sooner terminated, the Incentive Option Plan or Master
Stock-Based Benefit Plan will be in effect for a period of ten years from the
earlier of adoption by the Board of Directors or approval by the Company's
Stockholders. Subject to stockholder approval, the Company intends to grant
options with Limited Rights under the Incentive Option Plan or Master
Stock-Based Benefit Plan at an exercise price equal to the fair market value of
the underlying Common Stock on the date of grant. Upon exercise of Limited
Rights in the event of a change in control, the employee will be entitled to
receive a lump sum cash payment equal to the difference between the exercise
price of the related option and the fair market value of the shares of common
stock subject to the option on the date of exercise of the right in lieu of
purchasing the stock underlying the option. It is anticipated that all options
granted to officers and employees contemporaneously with stockholder approval of
such plans will be intended to be Incentive Stock Options to the extent
permitted under Section 422 of the Code.
Under the Incentive Option Plan or Master Stock-Based Benefit Plan, it is
expected that the Compensation Committee (consisting only of directors who are
not also officers of the Company or the Bank) will determine which officers and
employees will be granted options and Limited Rights, whether such options will
be incentive or non-statutory stock options, the number of shares subject to
each option, the exercise price of each non-statutory stock option, whether such
options may be exercised by delivering other shares of Common Stock and when
such options become exercisable. It is expected that the per share exercise
price of an incentive stock option will be required to be at least equal to the
fair market value of a share of Common Stock on the date the option is granted.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, an employee will not be deemed to have received
taxable income upon grant or exercise of any Incentive Stock Option, provided
that such shares received through the exercise of such option are not disposed
of by the employee for at least one year after the date the stock is received in
connection with the option exercise and two years after the date of grant of the
option. No compensation deduction would be able to be taken by the Company as a
result of the grant or exercise of Incentive Stock Options, provided such shares
are not disposed of before the expiration of the period described above (a
"disqualifying disposition"). In the case of a Non-Statutory Stock Option and in
the case of a disqualifying disposition of an Incentive Stock Option, an
employee will be deemed to receive ordinary income upon exercise of the stock
option in an amount equal to the amount by which the exercise price is exceeded
by the fair market value of the Common Stock purchased by exercising the option
on the date of exercise. The amount of any ordinary income deemed to be received
by an optionee upon the exercise of a Non-Statutory Stock Option or due to a
disqualifying disposition of an Incentive Stock Option would be a deductible
expense for tax purposes for the Company. In the case of Limited Rights, upon
exercise, the option holder would have to include the amount paid to him or her
upon exercise in his gross income for federal income tax purposes in the year in
which the payment is made and the Company would be entitled to a deduction for
federal income tax purposes of the amount paid.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, stock options would become vested and exercisable
in the manner specified by the Company, subject to applicable OTS regulations,
which require that options begin vesting no earlier than one year from the date
of stockholder approval of the Incentive Option Plan or Master Stock-Based
Benefit Plan and thereafter vest at a rate of no more than 20% per year. Options
granted in connection with the Incentive Option Plan or Master Stock-Based
Benefit Plan could be exercisable for three months following the date on which
the employee ceases to perform services for the Bank or the Company, except that
in the event of death or disability, options accelerate and become fully vested
and may be exercisable for up to one year thereafter or such longer period as
determined by the Company. However, any Incentive Stock Options exercised more
than three months following the date the employee ceases to perform services as
an employee would be treated as a Non-Statutory Stock Option as described above.
In the event of retirement, if the optionee continues to perform services as a
director or consultant on behalf of the Bank, the Company or an affiliate,
unvested options would continue to vest in accordance with their original
vesting schedule until the optionee ceases to serve as a consultant or director.
If the Incentive Stock Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, in the event of death, disability or normal
retirement, the Company, if requested by the optionee, could elect, in exchange
for vested options, to pay the optionee, or beneficiary in the event of death,
the amount by which the fair market value of the Common Stock exceeds the
exercise price of the options on the date of the employee's termination of
employment.
75
<PAGE>
Under the Directors' Option Plan or Master Stock-Based Benefit Plan
contemplated, the exercise price per share of each option granted may be equal
to the fair market value of the shares of Common Stock on the date the option is
granted. All options granted to outside directors under the Directors' Option
Plan or Master Stock-Based Benefit Plan would be Non-Statutory Stock Options
and, pursuant to applicable OTS regulations, would vest and become exercisable
commencing one year after the date of shareholder approval of the Directors'
Option Plan or Master Stock -Based Benefit Plan at the rate of 20% per year, and
would expire upon the earlier of ten years following the date of grant or one
year following the date the optionee ceases to be a director or consulting
director. In the event of the death or disability of a participant, all
previously granted options would immediately vest and become fully exercisable.
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of stock options granted under a plan adopted
within one year after conversion. If permitted by OTS regulations in effect at
the time a change in control occurs, the Incentive Option Plan and the
Directors' Option Plan or Master Stock-Based Benefit Plan described above
provide for accelerated vesting of previously granted options in the event of a
change in control of the Company or the Bank. A change in control would be
defined in the contemplated Incentive Option Plan, Master Stock-Based Benefit
Plan or the Directors' Option Plan generally to occur when a person or group of
persons acting in concert acquires beneficial ownership of 20% or more of any
class of equity security of the Company or the Bank or in the event of a tender
or exchange offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which resulted in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.
Stock Programs. Following the Conversion, the Company or the Bank intends
to establish performance based Stock Programs as a method of providing officers,
employees and non-employee directors of the Bank and Company with a proprietary
interest in the Company in a manner designed to encourage such persons to remain
with the Bank or the Company. The benefits intended to be granted under the
Stock Programs may be provided for under either a separate plan for officers and
employees and a separate plan for outside directors or under the Master
Stock-Based Benefit Plan which would incorporate the benefits and features of
such separate Stock Program plans and the Stock Option Plans discussed above.
The Company intends to present the Stock Programs or Master Stock-Based Benefit
Plan for stockholder approval at a meeting of stockholders, which pursuant to
applicable OTS regulations, may be held no earlier than six months after the
completion of the Conversion.
Subject to stockholder approval, the Bank or the Company expects to
contribute funds to the Stock Programs or Master Stock-Based Benefit Plan to
enable such plans to acquire, in the aggregate, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, or 115,000 shares (based upon
the issuance of 2,875,000 shares). These shares would be acquired through open
market purchases by a trustee for the plan, if permitted, or from authorized but
unissued shares. Although no specific award determinations have been made, the
Company anticipates that, if stockholder approval is obtained, it would provide
awards to its directors and employees to the extent permitted by applicable
regulations. OTS regulations provide that no individual employee may receive
more than 25% of the shares of any plan and non-employee directors may not
receive more than 5% of any plan individually or 30% in the aggregate for all
directors.
The Compensation Committee of the Bank's Board of Directors would
administer the Stock Programs or Master Stock-Based Benefit Plan described
above. The Stock Programs or Master Stock-Based Benefit Plan are expected to be
self-administered for grants or allocations made to non-employee directors,
which would not be performance-based. Under the Stock Programs or Master
Stock-Based Benefit Plan, awards would be granted in the form of shares of
Common Stock held by the plans. Awards will be non-transferable and
non-assignable. Allocations and grants to officers and employees under the Stock
Programs or Master Stock-Based Benefit Plan may be made in the form of base
grants and allocations based on performance goals established by the
Compensation Committee. In establishing such goals, the Committee may utilize
the annual financial results of the Bank, actual performance of the Bank as
compared to targeted goals such as the ratio of the Bank's net worth to total
assets, the Bank's return on average assets, or such other performance standards
as determined by the Committee with the approval of the Board of Directors.
Performance allocations would be granted upon the achievement of performance
goals and base grants and performance allocations would vest in annual
installments established by the Committee. Pursuant to applicable OTS
regulations, base grants and allocations will commence vesting one year after
the date of shareholder approval of the plan and thereafter at the rate of 20%
per year.
76
<PAGE>
In the event of death, grants would be 100% vested. In the event of
disability, grants would be 100% vested upon termination of employment of an
officer or employee, or upon termination of service as a director. In the event
of retirement, if the participant continues to perform services as a Director or
consultant on behalf of the Bank, the Company or an affiliate or, in the case of
a retiring Director, as a consulting director, unvested grants would continue to
vest in accordance with their original vesting schedule until the recipient
ceases to perform such services at which time any unvested grants would lapse.
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of shares granted under the Stock Programs or
Master Stock-Based Benefit Plan described above. If permitted by OTS regulations
at the time a change in control occurs, the Stock Programs or Master Stock-Based
Benefit Plan would provide for accelerated vesting in the event of a change in
control of shares granted under the Stock Programs or Master Stock-Based Benefit
Plan. A change in control is expected to be defined in the Stock Programs or
Master Stock- Based Benefit Plan generally to occur when a person or group of
persons acting in concert acquires beneficial ownership of 20% or more of a
class of equity securities of the Company or the Bank or in the event of a
tender or exchange offer, merger or other form of business combination, sale of
all or substantially all of the assets of the Company or the Bank or contested
election of directors which results in the replacement of a majority of the
Board of Directors by persons not nominated by the directors in office prior to
the contested election.
When shares become vested in accordance with the Stock Programs or Master
Stock-Based Benefit Plan described above, the participants would recognize
income equal to the fair market value of the Common Stock at that time. The
amount of income recognized by the participants would be a deductible expense
for tax purposes for the Bank. When shares become vested and are actually
distributed in accordance with the Stock Programs or Master Stock-Based
Benefit Plan, the participants would receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of grants could
direct the voting of the shares awarded to them. Shares not subject to grants
and shares allocated subject to the achievement of performance and high
performance goals will be voted by the trustee of the Stock Programs or Master
Stock-Based Benefit Plan in proportion to the directions provided with respect
to shares subject to grants. Vested shares are distributed to recipients as soon
as practicable following the day on which they are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs or Master Stock-Based Benefit Plan after the Conversion, the
interests of existing shareholders would be diluted. See "Pro Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.
The Bank currently makes loans to executive officers and directors on the
same terms and conditions offered to the general public. The Bank's policy
provides that all loans made by the Bank to its executive officers and directors
be made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. Any loan made to an
executive officer or director must be approved by the Board of Directors prior
to its being committed. As of December 31, 1995, eight of the Bank's executive
officers and directors had eight loans outstanding, totalling $910,000 in the
aggregate.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no less
favorable to the Company than could have been obtained by it in arm's-length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the Company not having any interest in the
transaction.
77
<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares of
Common Stock are issued at the minimum and maximum of the Estimated Price Range
and that sufficient shares will be available to satisfy their subscriptions. The
table also sets forth the total expected beneficial ownership of Common Stock as
to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED PRICE OF THE ESTIMATED PRICE
RANGE(1) RANGE(1)
---------------------- -----------------------
AS A PERCENT AS A PERCENT
NUMBER OF OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
------ -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
William J. Lloyd ............................... $ 25,000 2,500 .12% 2,500 .09%
Harold P. Cook, III ............................ 150,000 15,000 .71 15,000 .52
William E. Vanderberg .......................... 150,000 15,000 .71 15,000 .52
Thomas D. Collins .............................. 100,000 10,000 .47 10,000 .35
Nicholas S. Gentile, Jr ........................ 1,000 100 .01 100 .01
David M. Collins ............................... 45,000 4,500 .21 4,500 .16
Ronald Higgins ................................. 100,000 10,000 .47 10,000 .35
Richard Len .................................... 150,000 15,000 .71 15,000 .52
Charles A. Lota ................................ 50,000 5,000 .24 5,000 .17
Joseph J. DeLuccia ............................. 150,000 15,000 .71 15,000 .52
Michael G. DeBenedette ......................... 30,000 3,000 .14 3,000 .10
Johanna O'Connell .............................. 20,000 2,000 .10 2,000 .07
Timothy P. Tierney ............................. 10,000 1,000 .05 1,000 .03
-------- ------ ---- ------ ----
All Directors and Executives
Officers as a group
(13 persons) .................................. $981,000 98,100 4.61% 98,100 3.41%
======== ====== ==== ====== ====
</TABLE>
- -----------
(1) Includes proposed subscriptions, if any, by associates. Does not
include subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8.0% of the shares issued in the Conversion. See "--Director
Compensation" and "--Executive Compensation."
THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK 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 December 4, 1995, the Bank's Board of Directors unanimously adopted (and
subsequently amended) the Plan pursuant to which the Bank will be converted from
a federally chartered mutual savings bank to a federally chartered stock savings
bank. It is currently intended that all of the outstanding capital stock of the
Bank will be held by the Company, which is incorporated under Delaware law. The
Plan has been approved by the OTS, subject to, among other things, approval of
the Plan by the Bank's members. A special meeting of members has been called for
this purpose to be held on June 24, 1996.
The Company has received conditional OTS approval to become a savings and
loan holding company and to acquire all of the Common Stock of the Bank to be
issued in the Conversion. The Company plans to retain 50% of the net Conversion
proceeds. The Conversion will be effected only upon completion of the sale of
all of the shares of Common Stock of the Company (or the Bank, if the holding
company form of organization is not utilized) to be issued pursuant to the Plan.
78
<PAGE>
The Plan provides that the Board of Directors of the Bank may, at any time
prior to the issuance of the Common Stock and for any reason, decide not to use
a holding company form. In the event such a decision is made, the Bank will
withdraw the Company's registration statement from the SEC and take steps
necessary to complete the Conversion without the Company, including filing any
necessary documents with the OTS. In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, if permitted by the OTS, the Bank
will issue and sell the common stock of the Bank and subscribers will be
notified of the elimination of a holding company and resolicited (i.e., be
permitted to affirm their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their funds will be promptly refunded with interest at the Bank's
passbook rate of interest; or be permitted to modify or rescind their
subscription), and notified of the time period within which the subscriber must
affirmatively notify the Bank of his intention to affirm, modify or rescind his
subscription. The following description of the Plan assumes that a holding
company form of organization will be used in the Conversion. In the event that a
holding company form of organization is not used, all other pertinent terms of
the Plan as described below will apply to the conversion of the Bank from the
mutual to stock form of organization and the sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, and
Other Members. Subject to the prior rights of holders of subscription rights,
Common Stock not subscribed for in the Subscription Offering will be offered
concurrently in a Community Offering with a preference to be given to natural
persons residing in Passaic, Bergen, Morris or Sussex counties in the State of
New Jersey to whom a copy of the Prospectus and an order form have been
delivered. It is anticipated that all shares not subscribed for in the
Subscription and Community Offerings will be offered for sale by the Company to
the general public in a Syndicated Community Offering. 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 or in the Syndicated Community
Offering. See "--Community Offering" and "--Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be issued in the
Conversion, currently estimated to be between $21.3 million and $28.8 million,
will be determined based upon an independent appraisal of the estimated pro
forma market value of the Common Stock of the Company giving effect to the
Conversion. All shares of Common Stock to be issued and sold in the Conversion
will be sold at the same price. The independent appraisal will be affirmed or,
if necessary, updated at the completion of the Subscription and Community
Offerings, if all shares are subscribed for, or at the completion of the
Syndicated Community Offering. The appraisal has been performed by FinPro, a
consulting firm experienced in the valuation and appraisal of savings
institutions. See "--Stock Pricing" for additional information as to the
determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at each branch of the Bank,
as well as the Bank's administrative office, and at the Northeast Region and
Washington, D.C. offices of the OTS. The Plan is also filed as an Exhibit to the
Registration Statement of which this Prospectus is a part, copies of which may
be obtained from the SEC. See "Additional Information."
PURPOSES OF CONVERSION
The Bank, as a federally chartered mutual savings bank, does not have
shareholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be structured in the form used
by commercial banks, other business entities and a growing number of savings
institutions. The Conversion will enhance the Bank's ability to expand its
current operations, acquire other financial institutions or branch offices,
provide affordable home financing opportunities to the communities it serves,
access capital markets, or diversify into other financial services to the extent
allowable by applicable law and regulation.
In particular, the increase in the Bank's capital as a result of the
Conversion will enhance the ability of the Bank to meet the needs of the
communities it serves by, among other things, permitting the Bank to increase
its one- to four-family residential mortgage lending, subject to the demand for
such loans, competitive considerations and other relevant factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Operating Strategy" and "Business of the Bank--Market Area and
Competition." As discussed above, the net proceeds from the sale of the Common
Stock will also permit the Bank to increase its presence in the
79
<PAGE>
communities it serves through the acquisition or establishment of branch
offices or the acquisition of smaller financial institutions, although the Bank
has no current understandings or agreements for the acquisition of any specific
financial institutions or the acquisition or establishment of any branch
offices.
The holding company form of organization will provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had GAAP capital of $17.3 million, or 8.3% of assets at
December 31, 1995. Assuming that $28.8 million (based on the maximum of the
estimated pro forma market value of the Common Stock) of gross proceeds are
realized from the sale of Common Stock (see "Pro Forma Data" for the basis of
this assumption) and assuming that the Company uses 50% of the net Conversion
proceeds to purchase the capital stock of the Bank, the Bank's GAAP capital
would increase to $27.7 million or a ratio of GAAP capital to total assets, on a
pro forma basis, of 12.7% after the Conversion. The investment of the net
proceeds from the sale of the Common Stock will provide the Bank with additional
income to further increase its capital position. The additional capital may also
assist the Bank in offering new programs and expanded services to its customers.
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 any required regulatory approvals 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 or the possible issuance of authorized but unissued shares to the
Stock Programs. 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. See "Management of the
Bank--Benefits."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings bank has both a deposit account
in the institution and a pro rata ownership interest in the net worth of the
institution based upon the balance in his account, which interest may only be
realized in the event of a liquidation of the institution. However, this
ownership interest is tied to the depositor's account and has no tangible market
value separate from such deposit account. Any depositor who opens a deposit
account obtains a pro rata ownership interest in the net worth of the
institution 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 institution, which is lost to the extent that the balance in the account
is reduced. Consequently, mutual savings institution depositors normally have no
way to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings institution is liquidated. In
such event, the depositors of record at that time, as owners, would share pro
rata in any residual surplus and reserves after other claims, including claims
of depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED OR GUARANTEED 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 deposit
account the seller may hold in the institution.
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.
80
<PAGE>
The Directors serving the Bank at the time of 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 Bank.
All officers of the Bank at the time of Conversion will retain their positions
after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of 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 continue
to 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 and certain
borrowers of the Bank are members of, and have voting rights in, the Bank as to
all matters requiring membership action. Upon Conversion, depositors and
borrowers will cease to be members and will no longer be entitled to vote at
meetings of the Bank. Upon Conversion, all voting rights in the Bank will be
vested in the Company as the sole stockholder of the Bank. Exclusive voting
rights with respect to the Company will be vested in the holders of Common
Stock. Depositors of and borrowers from 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 has received an opinion of counsel with regard to
federal income taxation and New Jersey taxation which indicates that the
adoption and implementation of the Plan of Conversion set forth herein will not
be taxable for federal or New Jersey tax purposes to the Bank, its Eligible
Account Holders, or its Supplemental Eligible Account Holders or the Company,
except as discussed below. See "--Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts 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
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the pro forma market value of the Common Stock giving effect to
the Conversion, as determined on the basis of an independent valuation. The Bank
and the Company have retained FinPro to make such valuation. For its services in
making such appraisal, FinPro will receive a fee of $25,000, plus the
reimbursement of reasonable expenses. The Bank 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 its acting in bad faith.
An appraisal has been made by FinPro in reliance upon the information
contained in this 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 similarly situated publicly-traded savings associations and
savings institutions located in the Bank's primary market area and the State of
New Jersey; the aggregate size of the offering of the Common Stock; the impact
of Conversion on the Bank's net worth and earnings potential; the proposed
dividend policy of the Company and the Bank; and the trading market for
securities of comparable institutions and general conditions in the market for
such securities.
On the basis of the foregoing, FinPro has advised the Company and the Bank
that, in its opinion, dated March 5, 1996 the estimated pro forma market value
of the Common Stock ranged from a minimum of $21.3 million to a
81
<PAGE>
maximum of $28.8 million with a midpoint of $25.0 million. Based upon the
Valuation Range, the Board of Directors has established the Estimated Price
Range of $21.3 million to $28.8 million, with a midpoint of $25.0 million, and
the Company expects to issue between 2,125,000 and 2,875,000 shares of Common
Stock at the Purchase Price of $10.00 per share. The Board of Directors of the
Company and the Bank have reviewed the appraisal of FinPro and in determining
the reasonableness and adequacy of such appraisal consistent with OTS
regulations and policies, have reviewed the methodology and reasonableness of
the assumptions utilized by FinPro in the preparation of such appraisal.
SUCH 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 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
SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES
AT OR ABOVE THE PURCHASE PRICE. SEE "RISK FACTORS--ABSENCE OF MARKET FOR COMMON
STOCK."
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the number
of shares of Common Stock to be issued in the Conversion may be increased to
3,306,250 shares due to regulatory considerations, changes in market conditions
or general financial and economic conditions, without the resolicitation of
subscribers. See "--Subscription Offering and Subscription Rights," "--Community
Offering" and "--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 Estimated Price Range to fill unfilled orders in the
Subscription and Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank and Company and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors including those which would be involved in a
change in the maximum subscription price would cause FinPro to conclude that the
value of the Common Stock at the price so determined is incompatible with its
estimate of the pro forma market value of the Common Stock at the conclusion of
the Subscription and Community Offerings.
If, based on FinPro's estimate, the pro forma market value of the Common
Stock as of such date is not more than 15% above the maximum and not less than
the minimum of the Estimated Price Range, then (1) with the approval of the OTS,
the number of shares of Common Stock to be issued in the Conversion may be
increased or decreased, pro rata to the increase or decrease in value, without
resolicitation of subscriptions, to no more than 3,306,250 shares or no less
than 2,125,000 shares; and (2) all shares purchased in the Subscription and
Community Offerings will be purchased for the Purchase Price of $10.00 per
share. If the number of shares issued in the Conversion is increased due to an
increase of up to 15% in the Estimated Price Range to reflect regulatory
considerations, changes in market conditions or general financial and economic
conditions, persons who subscribed for the maximum number of shares will not be
given the opportunity to subscribe for an adjusted maximum number of shares,
except for the ESOP which will be able to subscribe for such adjusted amount.
See "--Limitations on Common Stock Purchases."
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the OTS,
may terminate the Plan and return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by cash, check, bank draft or money
order, cancel withdrawal authorizations, extend or hold a new Subscription and
Community Offering, establish a new Estimated Price 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 June 24, 1998.
If all shares of Common Stock are not sold through the Subscription and
Community Offerings, and in the event that the Board of Directors determines to
offer additional shares, then the Bank and the Company may offer the remaining
shares in a Syndicated Community Offering that would occur as soon as
practicable following the close of
82
<PAGE>
the Subscription and Community Offerings but may commence during the
Subscription and Community Offerings subject to prior rights of subscribers. All
shares of Common Stock will be sold at the same price per share in the
Syndicated Community Offering as in the Subscription and Community Offerings.
See "--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, the Company and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors, including those which would be involved in a
cancellation of the Syndicated Community Offering, would cause FinPro to
conclude that the aggregate value of the Common Stock at the Purchase Price is
incompatible with its estimate of the aggregate consolidated pro forma market
value of the Common Stock of the Company at the time of the Syndicated Community
Offering. Any change which would result in an aggregate purchase price which is
below or more than 15% above the Estimated Price Range would be subject to OTS
approval. If such confirmation is not received, the Bank may extend the
Conversion, extend, reopen or commence new Subscription and Community Offerings
or Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the OTS or
take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Price Range or more than 15%
above the maximum of such range, and the Company and the Bank determine to
continue the Conversion, subscribers will be resolicited (i.e., be permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. A resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days, or if following the Syndicated
Community Offering, 90 days, unless further extended by the OTS for periods up
to 90 days not to extend beyond June 24, 1998. If such resolicitation is not
effected, the Bank will return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by cash, check, bank draft or money
order.
Copies of the appraisal report of FinPro, including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the
administrative office of the Bank and the other locations specified under
"Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum or more than 15% above the maximum
of the Estimated Price Range, and the total number of shares to be issued in the
Conversion is not less than 2,125,000 or greater than 2,875,000 (or 3,306,250 if
the Estimated Price Range is increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of such range, if the Plan is not
terminated by the Company and the Bank after consultation with the OTS,
purchasers will be resolicited (i.e., permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded, or be permitted to modify or rescind their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. If the number of shares issued in the Conversion is increased due to an
increase of up to 15% in the Estimated Price Range to reflect changes in market
conditions or general financial and economic conditions, persons who subscribed
for the maximum number of shares will not be given the opportunity to subscribe
for an adjusted maximum number of shares, except for the ESOP which will be able
to subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and pro forma net earnings and
stockholders' equity on a per share basis while increasing Company's pro forma
net earnings and stockholders' equity
83
<PAGE>
on an aggregate basis. A decrease in the number of shares to be issued in
the Conversion would increase both a subscriber's ownership interest and pro
forma net earnings and stockholders' equity on a per share basis while
decreasing the Company's pro forma net earnings and stockholders' equity on an
aggregate basis. For a presentation of the effects of such changes, see "Pro
Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts with a balance of $50 or more ("Qualifying Deposit(s)") as of
September 30, 1994 ("Eligible Account Holders"); (2) the ESOP; (3) holders of
Qualifying Deposits as of March 31, 1996 ("Supplemental Eligible Account
Holders"); and (4) members of the Bank, consisting of depositors of the Bank as
of April 30, 1996, the Voting Record Date, and borrowers with loans outstanding
as of November 7, 1994 which continue to be outstanding as of the Voting Record
Date other than those members which qualify as Eligible Account Holders and
Supplemental Eligible Account Holders ("Other Members"). 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 and minimum 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 Eligible Account Holder will
receive, without payment therefor, first priority, non-transferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $150,000 of the Common Stock offered, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the 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 maximum purchase limitation and exclusive of an increase in the shares
issued pursuant to an increase in the Estimated Price Range of up to 15%. See
"--Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the qualifying deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied exclusive of any increase in the shares
issued pursuant to an increase in the Estimated Price Range of up to 15%. If the
amount so allocated exceeds the amount subscribed for by any one or more
remaining Eligible Account Holders, the excess shall be reallocated (one or more
times as necessary) among those remaining Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. 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 year
preceding September 30, 1994.
Priority 2: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, non-transferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including any increase in the
number of shares of Common Stock to be issued in the Conversion after the date
hereof as a result of an increase of up to 15% in the maximum of the Estimated
Price Range and provided further that any such increase in the number of shares
to be issued in the Conversion will first be allocated to satisfy the ESOP's
subscriptions of 8.0% of the total number of shares to be issued. See
"--Limitations
84
<PAGE>
on Common Stock Purchases." The ESOP intends to purchase 8% of the shares
to be issued in the Conversion, or 170,000 shares and 230,000 shares, based on
the issuance of 2,125,000 shares and 2,875,000 shares, respectively.
Subscriptions by the ESOP will not be aggregated with shares of Common Stock
purchased directly by or which are otherwise attributable to any other
participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or associates
thereof. See "Management of the Bank--Benefits--Employee Stock Ownership Plan
and Trust."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
non-transferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $150,000 of the Common Stock offered, one-tenth of
one percent (.10%) of the total offering of shares of Common Stock or fifteen
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the 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 maximum
purchase limitation and exclusive of an increase in the shares issued pursuant
to an increase in the Estimated Price Range of up to 15%. See "--Limitations on
Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied exclusive of any
increase in the shares issued pursuant to an increase in the Estimated Price
Range of up to 15%. If the amount so allocated exceeds the amount subscribed for
by any one or more remaining Supplemental Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those remaining
Supplemental Eligible Account Holders whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights
received by Eligible Account Holders will be applied in partial satisfaction to
the subscription rights to be received as a Supplemental Eligible Account
Holder.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority non-transferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of the amount permitted to be purchased in the Community
Offering, currently $150,000 of the Common Stock offered, or one-tenth of one
percent (.10%) of the total offering of shares of Common Stock, subject to the
overall maximum purchase limitation and exclusive of an increase in shares
issued pursuant to an increase in the Estimated Price Range of up to 15%.
In the event that Other Members exercise subscription rights for a number
of shares of Conversion Stock which, when added to the shares of Conversion
Stock subscribed for by the Eligible Account Holders, the ESOP and the
Supplemental Eligible Account Holders is in excess of the total number of such
shares being issued, the subscriptions of such Other Members will be allocated
among the subscribing Other Members so as to permit each subscribing Other
Member, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation equal to the lesser of 100 shares or the number
of shares subscribed for by the Other Member. Any shares remaining after that
allocation will be allocated among the subscribing Other Members whose
subscriptions remain unsatisfied pro rata in the same proportion that the number
of votes of a subscribing Other Member on the Voting Record Date bears to the
total votes on the Voting Record Date of all subscribing Other Members whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more remaining Other
85
<PAGE>
Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on June 21, 1996, unless extended for up to 45 days by the Bank or
such additional periods with the approval of the OTS. Subscription rights which
have not been exercised prior to the Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all 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 cancelled. If an extension beyond the
45-day period following the Expiration Date is granted, the Bank will resolicit
subscribers by notifying subscribers of the extension of time and of any rights
of subscribers to modify or rescind their subscriptions and, unless an
affirmative response is received, have their funds returned promptly with
interest. Such extensions may not go beyond June 24, 1998.
COMMUNITY OFFERING
Concurrent with the Subscription Offering, to the extent that shares remain
available for purchase after satisfaction of all subscriptions of the Eligible
Account Holders, the ESOP, the Supplemental Eligible Account Holders and Other
Members, the Bank has determined to offer shares pursuant to the Plan to certain
members of the general public. Any such shares available will be available for
purchase by the general public, with preference given to natural persons
residing in Passaic, Bergen, Morris or Sussex counties in the State of New
Jersey (such natural persons referred to as "Preferred Subscribers") to whom a
Prospectus and order form have been delivered, subject to the right of the
Company to accept or reject any such orders, in whole or in part, in their sole
discretion. Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to the number of the shares offered
in the Subscription and Community Offerings that could be purchased for $150,000
at the Purchase Price, subject to the maximum purchase limitation and exclusive
of shares issued pursuant to an increase in the Estimated Price Range by up to
15%. See "--Limitations on Common Stock Purchases." This amount may be increased
to up to a maximum of 5% or decreased to less than the number of shares that
could be purchased for $150,000 at the Purchase Price at the sole discretion of
the Company and the Bank.
THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN THEIR
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 after completion of the Subscription
and Community Offerings, such stock will be allocated first to each Preferred
Subscriber whose order is accepted by the Bank in an amount equal to the lesser
of 100 shares or the number of shares subscribed for by each such Preferred
Subscriber, if possible. Thereafter, unallocated shares will be allocated among
the Preferred Subscribers whose orders remain unsatisfied on a 100 shares per
order basis until all such orders have been filled or the remaining shares have
been allocated. If there are any shares remaining, shares will be allocated to
other persons of the general public who purchase in the Community Offering
applying the same allocation method described above for Preferred Subscribers.
Persons in Non-qualified States or Foreign Countries. The Company and the
Bank 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 reside. However, the Bank and the Company are not required
to offer stock in the Subscription 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; or (ii) the Company or the Bank 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 and
the Bank or their officers, directors or trustees register as a broker, dealer,
salesman or selling agent, under the securities laws of such state, or a request
to register or otherwise qualify the subscription rights or Common Stock for
sale or submit any filing with respect thereto in such state. Where the number
of persons eligible to subscribe for shares in one state is small, the Bank and
the Company will base their decision as to whether or not to offer the Common
Stock in such state on a
86
<PAGE>
number of factors, including the size of accounts 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.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a marketing
advisor in connection with the offering of the Common Stock and Sandler O'Neill
has agreed to use its best efforts to assist the Company with its solicitation
of subscriptions and purchase orders for shares of Common Stock in the
Offerings. Sandler O'Neill is not obligated to take or purchase any shares of
Common Stock in the Offerings. Based upon negotiations between the Bank and the
Company, Sandler O'Neill will receive a fee equal to 1.75% of the aggregate
Purchase Price of Common Stock sold in the Subscription Offering to persons with
accounts opened on or before November 30, 1995 and 3.0% of the aggregate
Purchase Price of Common Stock sold to other persons in the Subscription
Offering and all shares sold in the Community Offering, excluding in each case
subscriptions or purchases by any director, officer or employee of the Bank or
the Company or members of their immediate families or the Company's and the
Bank's employee plans for which Sandler O'Neill will not receive a fee. In the
event that the Company enters into selected dealers' agreements with one or more
NASD member firms in connection with a Syndicated Community Offering, the Bank
will pay a fee to such selected dealer, any sponsoring dealers' fees, and a
management fee to Sandler O'Neill of 1.5% of the aggregate Purchase Price for
shares sold by the NASD member firm pursuant to such selected dealer's
agreement; provided, however, that any fees payable to Sandler O'Neill for
Common Stock sold by Sandler O'Neill pursuant to any such selected dealer's
agreement shall not exceed 3.0% of the aggregate Purchase Price and that the
aggregate fees payable to Sandler O'Neill and any other selected dealer shall
not exceed 7.0% of the aggregate Purchase Price of the shares sold by such
selected dealer under any such agreement. Fees to Sandler O'Neill and to any
other broker-dealer may be deemed to be underwriting fees and Sandler O'Neill
and such broker-dealers may be deemed to be underwriters. Sandler O'Neill will
also be reimbursed for its reasonable out-of-pocket expenses, including legal
fees up to a maximum of $65,000. In the event the Conversion is not consummated
or Sandler O'Neill ceases, under certain circumstances after the subscription
solicitation activities are commenced, to provide assistance to the Company,
Sandler O'Neill will be entitled to be reimbursed for its reasonable
out-of-pocket expenses incurred prior to termination as described above. The
Company and the Bank have agreed to indemnify Sandler O'Neill for reasonable
costs and expenses in connection with certain claims or liabilities, including
certain liabilities under the Securities Act. Sandler O'Neill has received
advances towards its fees and expenses totalling $25,000. Total marketing fees
to Sandler O'Neill are expected to be $324,600 and $445,400 at the minimum and
the maximum of the Estimated Price Range, respectively. See "Pro Forma Data" for
the assumptions used to arrive at these estimates.
Sandler O'Neill will also perform conversion and records management
services for the Bank in the Conversion and is expected to receive a fee for
this service of approximately $15,000, plus reimbursement of reasonable
out-of-pocket expenses to be billed to the Bank. Sandler O'Neill has received
advances towards its fee of $5,000.
Directors and executive officers of the Company and Bank may participate in
the solicitation of offers to purchase Common Stock. Other employees of the Bank
may participate in the Offering in ministerial capacities or providing clerical
work in effecting a sales transaction. 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 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 IN SUBSCRIPTION AND COMMUNITY OFFERINGS
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 the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a Prospectus.
87
<PAGE>
To purchase shares in the Subscription and Community Offerings, an executed
stock order form and certification form, together with the required payment for
each share subscribed for or appropriate authorization for withdrawal from a
deposit account maintained at the Bank (which may be given by completing the
appropriate blanks in the stock order form), must be received by the Bank at any
of its offices by 12:00 noon, Eastern Time, on the Expiration Date. Stock order
forms which are not received by such time or are executed defectively or are
received without full payment (or appropriate withdrawal instructions) are not
required to be accepted. In addition, the Bank is not obligated to accept orders
submitted on photocopied or facsimilied stock order forms and will not accept
stock order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, the Company shall have the right, in its sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay for
the shares of Common Stock for which they subscribe in the Community Offering at
any time prior to 48 hours before the completion of the Conversion. The Company
and the Bank have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that they will do so. Once
received, an executed stock order form may not be modified, amended or rescinded
without the consent of the Bank unless the Conversion has not been completed
within 45 days after the end of the Subscription and Community Offerings, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (September 30,
1994) and/or the Supplemental Eligibility Record Date (March 31, 1996) and/or
the Voting Record Date (April 30, 1996) must list all accounts on the stock
order form giving all names in each account and the account number as of the
applicable record date.
Payment for subscriptions may be made (i) in cash if delivered in person at
any office of the Bank; (ii) by check, bank draft or money order; or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank. No
wire transfers will be accepted. Interest will be paid on payments made by cash,
check, bank draft or money order at the Bank's passbook rate of interest from
the date payment is received until the completion or termination of the
Conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the Purchase
Price from his deposit account, the Bank will do so as of the effective date of
the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be cancelled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.
The ESOP and other employee plans will not be required to pay for the
shares subscribed for at the time subscriptions are made, but rather, may pay
for such shares of Common Stock subscribed for at the Purchase Price upon
consummation of the Conversion.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Common Stock in the Subscription and
Community Offerings, provided that such IRAs are not maintained at the Bank.
Persons with self-directed IRAs maintained at the Bank must have their accounts
transferred to an unaffiliated institution or broker to purchase shares of
Common Stock in the Subscription and Community Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and 10%
shareholders who use self- directed IRA funds to purchase shares of Common Stock
in the Subscription and Community Offerings make such purchases for the
exclusive benefit of the IRAs.
Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the last address of such persons appearing on the records of
the Bank, or to such other address as may be specified in properly completed
stock order forms, as soon as practicable following consummation of the sale of
all shares of Common Stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law.
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, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other
88
<PAGE>
Members of the Bank, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his 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 (INCLUDING FORFEITURE) 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.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. THE COMPANY AND
THE BANK RESERVE THE RIGHT TO REJECT ORDERS IN WHOLE OR PART IN THEIR SOLE
DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Sandler O'Neill nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering; however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing." Subject
to overall maximum purchase limitations, no person, together with any associate
or group of persons acting in concert, will be permitted to subscribe in the
Syndicated Community Offering for more than the total number of shares offered
in the Conversion that could be purchased for $150,000 at the Purchase Price,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range of up to 15%; provided, however, that shares of Common
Stock purchased in the Community Offering by any persons, together with
associates of or persons acting in concert with such persons, will be aggregated
with purchases in the Syndicated Community Offering and be subject to a maximum
purchase limitation of 1.0% of the shares offered, exclusive of an increase in
shares issued pursuant to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed, once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
89
<PAGE>
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the approval
of the OTS. Such extensions may not be beyond June 24, 1998. See "--Stock
Pricing" above for a discussion of rights of subscribers, if any, in the event
an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently the number of shares of the
Common Stock offered that could be purchased for $150,000 at the Purchase
Price, one-tenth of one percent (.10%) of the total offering of shares of
Common Stock, or fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the denominator is
the total amount of Qualifying Deposits of all Eligible Account Holders in
each case on the Eligibility Record Date subject to the overall maximum
purchase limitation described in (8) below and exclusive of an increase in
the total number of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of
the shares of Common Stock issued in the Conversion, including shares
issued in the event of an increase in the Estimated Price Range of 15%, and
intends to purchase 8% of the shares of Common Stock issued in the
Conversion;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently the number
of shares of the Common Stock offered that could be purchased for $150,000
at the Purchase Price, one-tenth of one percent (.10%) of the total
offering of shares of Common Stock, or fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is
the amount of the Qualifying Deposit of the Supplemental Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of
all Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall maximum purchase limitation
described in (8) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering currently the number of shares of the
Common Stock offered that could be purchased for $150,000 at the Purchase
Price or one-tenth of one percent (.10%) of the total offering of
shares of Common Stock, subject to the overall maximum purchase limitation
described in (8) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons acting in
concert with such persons, may purchase in the Community Offering up to the
number of shares of the Common Stock offered in the Conversion that could
be purchased for $150,000 at the Purchase Price, subject to the overall
maximum purchase limitation described in (8) below and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons acting in
concert with such persons, may purchase in the Syndicated Offering up to
the number of the shares of Common Stock offered in the Conversion that
could be purchased for $150,000 at the Purchase Price, subject to the
overall maximum purchase limitation described in (8) below and exclusive of
an increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%, and provided further that shares of
Common Stock purchased in the Community Offering by any persons, together
with associates of and persons acting in concert with such persons, will be
aggregated with purchases in the Syndicated Community Offering in applying
the $150,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members may purchase stock in the Community Offering and
Syndicated Community Offering subject to the purchase limitations
90
<PAGE>
described in (6) and (7) above, provided that, except for the ESOP,
the maximum number of shares of Common Stock subscribed for or purchased in
all categories by any person, together with associates of and groups of
persons acting in concert with such persons, shall not exceed the overall
maximum purchase limitation of 1.0% of the shares of Common Stock offered
in the Conversion, exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to 15%; and
(9) No more than 33% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the Bank and
their associates in the aggregate, excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% at
the sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit. In addition, the Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the overall maximum purchase limitation referred to above up to 9.99%, provided
that orders for shares exceeding 5% of the shares being offered in the
Subscription and Community Offerings shall not exceed, in the aggregate, 10% of
the shares being offered in the Subscription and Community Offerings. Requests
to purchase additional shares of Common Stock under this provision will be
determined by the Boards of Directors and, if approved, allocated on a pro rata
basis giving priority in accordance with the priority rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than 1%
but the individual amount permitted to be subscribed for may be reduced by the
Bank to less than $150,000, subject to paragraphs (2), (4) and (5) above without
the further approval of members or resolicitation of subscribers. An individual
Eligible Account Holder, Supplemental Eligible Account Holder or Other Member
may not purchase individually in the Subscription Offering the overall maximum
purchase limit of 1.0% of the shares offered, but may make such purchase,
together with associates of and persons acting in concert with such person, by
also purchasing in other available categories, subject to availability of shares
and the overall maximum purchase limitation for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the Adjusted Maximum number of shares; (ii) in the event
that there is an oversubscription by Eligible Account Holders, to fill
unfulfilled subscriptions of Eligible Account Holders exclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfulfilled subscriptions of Supplemental
Eligible Account Holders, exclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unfulfilled
subscriptions of Other Members exclusive of the Adjusted Maximum; and (v) to
fill unfulfilled subscriptions in the Community Offering to the extent possible
exclusive of the Adjusted Maximum and with preference to Preferred Subscribers.
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
trustee 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 has
a substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity; and (iii) any relative or spouse of such person, 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 of each
other 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 Executive Officers and Directors," "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 in its present
mutual form, each depositor would receive his pro rata share of any assets of
the Bank remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining
91
<PAGE>
assets would be in the same proportion as the value of his deposit account
was to the total value of all deposit accounts in the Bank at the time of
liquidation. After the Conversion, each depositor, in the event of a complete
liquidation, would have a claim as a creditor of the same general priority as
the claims of all other general creditors of the Bank. However, except as
described below, his claim would be solely in the amount of the balance in his
deposit account plus accrued interest. He would not have an interest in the
value or assets of the Bank above that amount.
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 surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the 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 the 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 Qualifying Deposit held in
the Bank on September 30, 1994 and March 31, 1996, respectively. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account for each of his Qualifying Deposits
based on the proportion that the balance of each such Qualifying Deposit on the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
bore to the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Bank. For Qualifying
Deposits in existence at both dates separate subaccounts shall be determined on
the basis of the Qualifying Deposits in such accounts on such record date.
If, however, on any annual closing date of the Bank, commencing after
September 30, 1994, and March 31, 1996, the amount in any Qualifying Deposit is
less than the amount in such Qualifying Deposit on September 30, 1994 and March
31, 1996 or any other annual closing date, then the interest in the liquidation
account relating to such Qualifying Deposit would be reduced from time to time
by the proportion of any such reduction, and such interest will cease to exist
if such Qualifying Deposit is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related Qualifying Deposit. 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 stockholder of the
Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel with
respect to federal income taxation, and an opinion of an independent accountant
with respect to New Jersey income and franchise taxation, to the effect that the
Conversion will not be a taxable transaction to the Company, the Bank, Eligible
Account Holders, or Supplemental Eligible Account Holders except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Bank's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the Bank or
the Company upon the purchase of the Bank's capital stock by the Company or to
the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of deposit accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' deposit accounts in the Bank immediately after the Conversion will
be the same as the basis of their deposit accounts immediately prior to the
Conversion; (v) the tax basis of each Eligible Account Holder's and Supplemental
Eligible Account Holder's interest in the liquidation account will be zero; (vi)
no gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the distribution to them of non-transferable
subscription rights to purchase shares of the Common Stock, provided that the
amount to be paid for the Common Stock is equal to the fair market value of such
stock; and (vii) the tax basis to the stockholders of the Common Stock of the
Company purchased in the Conversion will be the amount paid therefore and the
holding period for the shares of Common Stock purchased by such persons will
begin on the date on which their subscription rights are exercised. Muldoon,
Murphy & Faucette has opined that the Conversion will not be a taxable
transaction to the Company, the Bank, Eligible Account Holders
92
<PAGE>
or Supplemental Eligible Account Holders for New Jersey income and/or
franchise tax purposes. Certain portions of both the federal and the state and
local tax opinions are based upon the assumption that the subscription rights
issued in connection with the Conversion will have no value. The Company and the
Bank have received a letter issued by FinPro stating that pursuant to FinPro's
valuation, FinPro is of the belief that subscription rights issued in connection
with the Conversion will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS and the IRS could disagree with
conclusions reached therein. FinPro has stated in its letter that, pursuant to
its valuation, FinPro is of the belief that the subscription rights do not have
any value, based on the fact that such rights are acquired by the recipients
without cost, are non-transferable 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. Such valuation is not binding on
the IRS or New Jersey taxing authority. If the subscription rights granted to
Eligible Account Holders or Supplemental Eligible Account Holders are deemed to
have an ascertainable value, receipt of such rights could be taxable to those
Eligible Account Holders or Supplemental Eligible Account Holders who receive
and/or 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.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the Bank
will be final. The Plan provides that the Bank's Board of Directors shall have
the discretion to interpret and apply the provisions of the Plan to particular
circumstances and that such interpretation or application shall be final. Any
and all interpretations, applications and determinations will be made by the
Board of Directors on the basis of such information and assistance as was then
reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of Directors
at any time prior to the Special Meeting with the concurrence of the OTS. The
Plan may be amended at any time after the approval of members with the approval
of the OTS and no further approval of the members will be necessary unless
otherwise required by the OTS. By adoption of the Plan, the Bank's members will
be deemed to have authorized amendment of the Plan under the circumstances
described above.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of the Bank and Company 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 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 will
also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
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 Company or 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 the Option Plans or Master
Stock-Based Benefit Plan to be established after the Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations, 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,
93
<PAGE>
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 10 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. Under current OTS policies, repurchases may be allowed
in the first year following Conversion and in amounts greater than 5% in the
second and third years following Conversion provided there are valid and
compelling business reasons for such repurchases and the OTS does not object to
such repurchases.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, a new
Federal Stock Charter and Bylaws to be adopted by members of the Bank. The Plan
also provides for the concurrent formation of a holding company, which form of
organization may or may not be utilized at the option of the Board of Directors
of the Bank. See "The Conversion--General." In the event that the holding
company form of organization is utilized, as described below, certain provisions
in the Company's Certificate of Incorporation and Bylaws and in its management
remuneration entered into in connection with the Conversion, together with
provisions of Delaware corporate law, may have anti-takeover effects. In the
event that the holding company form of organization is not utilized, the Bank's
Federal Stock Charter and Bylaws and management remuneration 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, the Board of Directors 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 which is not approved by the
Board of Directors but which 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
might 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. See "Additional Information" as to how to obtain a copy of these
documents.
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
Exchange Act, 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 this provision limiting voting rights may only
be amended upon the vote of 80% of the outstanding shares of voting stock (after
giving effect to the limitation on voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered
94
<PAGE>
term, with approximately one-third of the total number of directors being
elected each year. The Company's Certificate of Incorporation and Bylaws provide
that the size of the Board 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, may 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 stockholder
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.
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 stockholders 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
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 8,000,000 shares of Common Stock and 2,000,000 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 rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of additional shares pursuant to the
terms of the Stock Programs and upon exercise of stock options to be issued
pursuant to the terms of the Option Plans, all of which are to be established
and presented to stockholders at a meeting of stockholders of the Company to be
held not earlier than six months following consummation of the Conversion.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of 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 certain 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, 80% approval of shareholders is required in connection with any
transaction 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
Interested Stockholder became an Interested Stockholder or (ii) if the proposed
transaction meets certain conditions set forth therein which are designed to
afford the shareholders a fair price in consideration for their shares in which
case, if a stockholder vote is required, approval of only a majority of the
outstanding shares of voting stock would be sufficient. 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, or other disposition to or with any Interested Stockholder
or Affiliate of 25% or more of the assets
95
<PAGE>
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 Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 3.41% of the
shares of the Common Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock sold in the
Conversion. Additionally, if at a meeting of stockholders following the
Conversion stockholder approval of the proposed Stock Programs and Options Plans
is received, the Company expects to acquire 4% of the Common Stock issued in the
Conversion on behalf of the Stock Programs and expects to issue an amount equal
to 10% of the Common Stock issued in the Conversion under the Option Plans to
directors and executive officers. As a result, assuming the Stock Programs and
Option Plans are approved by stockholders, directors, executive officers and
employees have the potential to control the voting of approximately 25.4% of the
Company's Common Stock, thereby enabling them to prevent the approval of the
transactions requiring the approval of at least 80% of the Company's outstanding
shares of voting stock described hereinabove.
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 bank 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 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
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder 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 AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN 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.
96
<PAGE>
The provisions of the employment agreements and CIC Agreements with
officers, the Severance Plan, the Stock Programs and the Option Plans to be
established may also discourage takeover attempts by increasing the costs to be
incurred by the Bank and the Company in the event of a takeover. See "Management
of the Bank--Employment Agreements" and "--Benefits--Stock Option Plans and
- --Stock Programs."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest 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
The state of Delaware has 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 acquirer to engage in certain 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 stockholder 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, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by 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 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 does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S FEDERAL STOCK CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions permitted
by federal regulations to protect the interests of the converted Bank and its
stockholders from any hostile takeover. Such provisions may, indirectly, inhibit
a change in control of the Company, as the Bank's sole stockholder. See "Risk
Factors--Certain Anti-Takeover Provisions" and "Anti-Takeover Effects of the
Company's Certificate of Incorporation and Bylaws and Management's Remuneration
Adopted in Conversion."
The Bank's Federal Stock Charter will contain 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 for a period of five years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the Federal Stock Charter provision will not be counted
as outstanding for voting purposes. This limitation shall not apply to any
97
<PAGE>
transaction in which the Bank forms a 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. 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
Federal Stock 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 Federal Stock 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.
Finally, for five years, stockholders will not be permitted to call a special
meeting of stockholders relating to a change in control of the Bank or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
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 these 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, except as described in "Description of Capital Stock of the
Bank--Preferred Stock," for the issuance or use of the shares of undesignated
preferred stock (the "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 financings 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 a future takeover attempt. The Board of Directors
does not intend to issue any Preferred Stock except on terms which the Board
deems to be in the best interest 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.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, 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 for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by the OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions; (b) would be manipulative or deceptive; (c)
would subvert the fairness of the conversion; (d) would be likely to result in
injury to the savings institution; (e) would not be consistent with economical
home financing; (f) would otherwise violate law or regulation; or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. 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 stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
Common Stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations.
98
<PAGE>
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 Change
in Bank Control Act. 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. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally in-sured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. 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.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 8,000,000 shares of Common Stock having
a par value of $.01 per share and 2,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). The Company currently
expects to issue 2,875,000 shares of Common Stock (or 3,306,250 in the event of
an increase of 15% in the Estimated Price Range) and no shares of Preferred
Stock in the Conversion except as discussed above in "Restrictions on
Acquisition of the Company and the Bank." Each share of the Company's Common
Stock will have the same relative rights as, and will be identical in all
respects with, each other share of Common Stock. Upon payment of the Purchase
Price for the common stock, in accordance with the Plan, all such stock will be
duly authorized, fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
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" and "Regulation." 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 the Company's Certificate of
Incorporation 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
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 mutual savings bank, 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.
Subsequent to Conversion, voting rights will be 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
99
<PAGE>
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 stockholder 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.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 8,000,000 shares of
common stock, par value $1.00 per share, and 2,000,000 shares of preferred
stock, par value $1.00 per share, 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 will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. After the Conversion, the Board of Directors
will be authorized to approve the issuance of Common Stock up to the amount
authorized by the Federal Stock Charter without the approval of the Bank's
stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be 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 therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held, subject
to the right of shareholders to cumulate their votes for the election of
directors. During the five-year period after the effective date of the
Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the Company's
Certificate of Incorporation and Bylaws and Management Remuneration Adopted in
Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of 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 and Supplemental 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 therefor, the common
stock will be fully paid and non-assessable.
100
<PAGE>
EXPERTS
The consolidated financial statements of the Bank and its subsidiary as of
December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995, 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.
The report of KPMG Peat Marwick LLP refers to a change in the method of
accounting for income taxes, effective January 1, 1993, and certain investments
in debt and equity securities, effective December 31, 1993.
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 valuation with respect
to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal and New Jersey state
income tax consequences of the Conversion will be passed upon for the Bank and
the Company by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to
the Bank and the Company. Muldoon, Murphy & Faucette will rely as to certain
matters of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell.
Certain legal matters will be passed upon for Sandler O'Neill by Breyer &
Aguggia, 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 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; each
such statement is qualified by reference to such contract or document.
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 andat the Office of the Regional 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, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
OTS under Section 12(g) of the Exchange Act and, upon such registration, the
Bank and the holders of its stock will become subject to the same obligations
and restrictions.
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.
101
<PAGE>
WAYNE SAVINGS BANK, F.S.B. and SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report of KPMG Peat Marwick LLP..................... F-1
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--
December 31, 1995 and 1994.............................................. F-2
Consolidated Statements of Income--Years ended
December 31, 1995, 1994 and 1993........................................ 30
Consolidated Statements of Changes in Equity--Years ended
December 31, 1995, 1994 and 1993........................................ F-3
Consolidated Statements of Cash Flows--Years ended
December 31, 1995, 1994 and 1993................................... F-4 - F-5
Notes to Consolidated Financial Statements--
December 31, 1995, 1994 and 1993.................................. F-6 - F-22
All schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements.
The financial statements of Wayne Bancorp, Inc. (the Holding Company) have
been omitted because the Holding Company has not yet issued any stock, has no
assets and no liabilities, and has not conducted any business other than that of
an organizational nature.
102
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Wayne Savings Bank, F.S.B.:
We have audited the accompanying consolidated statements of financial
condition of Wayne Savings Bank, F.S.B. and Subsidiary as of December 31, 1995
and 1994, and the related consolidated statements of income, changes in equity,
and cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Bank'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 Wayne
Savings Bank, F.S.B. and Subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in note 1 to the consolidated financial statements, Wayne
Savings Bank, F.S.B. and Subsidiary changed their method of accounting for
income taxes, effective January 1, 1993, and certain investments in debt and
equity securities, effective December 31, 1993.
KPMG PEAT MARWICK LLP
Short Hills, New Jersey
February 9, 1996
F-1
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
-------- --------
IN THOUSANDS
<S> <C> <C>
Cash and due from banks ........................................................ $ 899 $ 933
Interest-bearing deposits in other banks ....................................... 20,563 765
Federal funds sold ............................................................. 4,800 800
-------- --------
Total cash and cash equivalents .............................................. 26,262 2,498
Securities held to maturity, estimated market value of $3,769 in 1995
and $46,979 in 1994 (note 3) .................................................. 3,841 50,304
Securities available for sale (note 4) ......................................... 58,155 3,360
Loans receivable, net (note 5) ................................................. 111,988 113,091
Premises and equipment, net (note 7) ........................................... 3,271 3,408
Real estate owned, net (note 8) ................................................ 597 970
Federal Home Loan Bank of New York stock, at cost .............................. 1,568 1,367
Interest and dividends receivable (note 6) ..................................... 987 827
Other assets (note 10) ......................................................... 1,328 839
-------- --------
Total assets ................................................................. $207,997 $176,664
======== ========
LIABILITIES AND EQUITY
Deposits (note 9) .............................................................. $173,822 $159,013
Federal Home Loan Bank advances ................................................ 2,000 --
Advance payments by borrowers for taxes and insurance .......................... 769 891
Other liabilities (note 10) .................................................... 14,107 501
-------- --------
Total liabilities ............................................................ 190,698 160,405
Equity:
Retained earnings--substantially restricted (notes 10 and 12) ................. 17,394 16,523
Net unrealized loss on securities available for sale, net of taxes (note 4) ... (95) (264)
-------- --------
Total equity ................................................................. 17,299 16,259
-------- --------
Commitments and contingencies (note 13)
Total liabilities and equity ................................................. $207,997 $176,664
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
RETAINED SECURITIES TOTAL
EARNINGS AVAILABLE FOR SALE EQUITY
-------- ------------------ --------
IN THOUSANDS
<S> <C> <C> <C>
Balance at December 31, 1992 .................................... $12,644 $ -- $12,644
Net income ..................................................... 2,190 -- 2,190
Net unrealized gain (loss) on securities available for sale,
net of taxes--adoption of SFAS No. 115 ........................ -- 171 171
------- ------ -------
Balance at December 31, 1993 .................................... 14,834 171 15,005
Net income ..................................................... 1,689 -- 1,689
Change in net unrealized gain (loss) on securities
available for sale, net of taxes .............................. -- (435) (435)
------- ------ -------
Balance at December 31, 1994 .................................... 16,523 (264) 16,259
Net income ...................................................... 871 -- 871
Unrealized gain on securities transferred from
held to maturity to available for sale, net of taxes .......... -- 13 13
Change in net unrealized gain (loss) on securities
available for sale, net of taxes .............................. -- 156 156
------- ------ -------
Balance at December 31, 1995 .................................... $17,394 $ (95) $17,299
======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- ------
IN THOUSANDS
<S> <C> <C> <C>
Cash flows from operating activities:
Income before cumulative effect of a change in
accounting principle ....................................................... $ 871 $ 1,689 $ 1,893
Cumulative effect of a change in accounting
principle .................................................................. -- -- 297
-------- -------- --------
Net income ............................................................... 871 1,689 2,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans and real estate
owned .................................................................... 300 425 374
Depreciation .............................................................. 167 160 139
Net accretion of discounts and amortization
of premiums .............................................................. 29 (99) 22
Decrease (increase) in deferred loan fees ................................. 46 29 (30)
(Increase) decrease in interest and dividends
receivable ............................................................... (160) (111) 111
Increase in other assets .................................................. (572) (188) (319)
Increase (decrease) in other liabilities .................................. 13,606 91 (631)
Net loss on sale of real estate owned ..................................... (120) (77) (151)
(Gain) loss on sale of securities available
for sale ................................................................. 363 (270) 3
-------- -------- --------
Net cash provided by operating activities ............................... 14,530 1,649 1,708
Cash flows from investing activities:
Purchase of securities held to maturity ..................................... (16,273) (22,460) (26,795)
Maturity of securities held to maturity ..................................... 6,000 -- --
Purchase of securities available for sale ................................... (30,288) -- --
Proceeds from sales of securities available for sale......................... 25,100 6,179 2,060
Principal repayments on securities held to maturity ......................... 6,908 6,034 7,269
Principal repayments on securities available for sale ....................... 81 1,781 18,488
Net (increase) decrease in loans receivable ................................. 239 (5,934) 7,494
Loans purchased ............................................................. (140) (1,396) --
Additions to premises and equipment ......................................... (30) (154) (85)
Proceeds from sale of real estate owned ..................................... 1,151 563 1,330
Sale (purchase) of Federal Home Loan Bank stock ............................. (201) 217 (356)
-------- -------- --------
Net cash (used) provided by investing
activities ............................................................. (7,453) (15,170) 9,405
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
IN THOUSANDS
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits.................... $14,809 $ (7,808) $ 2,500
Federal Home Loan Bank advances acquired............... 2,000 -- --
Decrease in advance payments by borrowers for
taxes and insurance....................... (122) (101) (216)
------- -------- -------
Net cash provided (used) by financing
activities ....................................... 16,687 (7,909) 2,284
------- -------- -------
Net increase (decrease) in cash and
cash equivalents ................................. 23,764 (21,430) 13,397
Cash and cash equivalents at beginning of year.......... 2,498 23,928 10,531
------- -------- -------
Cash and cash equivalents at end of year................ $26,262 $ 2,498 $23,928
======= ======== =======
Supplemental disclosures of cash flow information--
cash paid during the year for:
Federal and state income taxes........................ $ 345 $ 933 $ 1,005
======= ======== =======
Interest.............................................. $ 6,956 $ 5,174 $ 5,763
======= ======== =======
Supplemental information of noncash investing
activities--transfer of loans receivable to real
estate owned........................................... $ 831 $ 312 $ 802
======= ======== =======
Transfer of securities held to maturity to securities
available for sale..................................... $51,380 $ -- $11,031
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Wayne Savings
Bank, F.S.B. (the Bank) and its wholly-owned subsidiary, Wayne Savings Financial
Services Group, Inc. (the Subsidiary). The Bank accounts for the Subsidiary
under the equity method of accounting. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Business
The Bank, a federally chartered mutual savings bank, provides a full range
of banking services to individual and corporate customers through its branches
in northern New Jersey. The Bank is subject to competition from other financial
institutions; it is also subject to the regulations of certain regulatory
agencies and undergoes periodic examinations by those regulatory authorities.
The Subsidiary provides financial and investment planning services and market
securities, life and health insurance products.
Basis of Financial Statement Presentation
As more fully described in Note 2, the Bank plans to convert from a mutual
to stock form of ownership. As a stock institution and as a result of the public
offering of the stock of the holding company upon completion of its stock
offering, the holding company will be subject to the reporting requirements of
the Securities Exchange Act of 1934.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated statements of financial condition for the periods then ended.
Actual results could differ significantly from those estimates and assumptions.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
settlement of loans. In connection with the determination of the allowances for
loan losses and real estate owned (REO), management generally obtains
independent appraisals for significant properties.
Cash and Cash Equivalents
Cash and cash equivalents, for purposes of the consolidated statements of
cash flows, consist of cash and due from banks, interest-bearing deposits in
other banks and Federal funds sold.
Federal Home Loan Bank of New York Stock
The Bank, as a member of the Federal Home Loan Bank of New York (FHLB),
is required to hold shares of capital stock of the FHLB based on a specified
formula.
Securities Held to Maturity
Securities held to maturity are carried at outstanding principal balance,
adjusted for amortization of premiums and accretion of discounts. Premiums and
discounts are recognized using the level yield method over the estimated lives
of the securities. Securities held to maturity are carried at outstanding
principal balance because it is management's intention, and the Bank has the
ability, to hold them to maturity.
F-6
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Securities Available for Sale
On December 31, 1993, the Bank adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). SFAS 115 requires that securities that are held for
indefinite periods of time but not intended to be held to maturity be classified
as available for sale. Securities held for indefinite periods of time include
securities that management intends to use as part of its asset/liability
management strategy, including liquidity management strategy, and may be sold in
response to changes in interest rates, liquidity needs, and other factors.
Securities available for sale are carried at fair value and unrealized gains and
losses, net of related tax effect, on such securities are excluded from
earnings, but are included in equity. Upon realization, such gains or losses are
included in earnings using the specific identification method.
In November 1995, the Financial Accounting Standards Board issued "Special
Report--A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" within which there was offered
transition guidance permitting an enterprise to reassess the appropriateness of
all of its securities before December 31, 1995. The Bank reassessed its
classifications and on December 13, 1995, it transferred securities previously
classified as held to maturity, with an amortized cost of $51,380,000, to the
available for sale classification. The related unrealized gain on the securities
transferred, net of related tax effect was approximately $19,000 which has been
recognized and reported as a separate component of equity.
Loans Receivable
Loans receivable are stated at unpaid principal balance less net deferred
loan origination and commitment fees and the allowance for loan losses.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114) and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures" (SFAS 118) were adopted prospectively
by the Bank on January 1, 1995. These statements address the accounting for
impaired loans and specify how allowances for loan losses related to these
impaired loans should be determined. The adoption of the statements did not
affect the level of the overall allowance for loan losses or the operating
results of the Bank. Income recognition and charge-off policies were not changed
as a result of the adoption of SFAS No. 114 and SFAS No. 118.
The Bank has defined the population of impaired loans to be all nonaccrual
commercial real estate and multi-family loans. Impaired loans are to be
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 future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
consumer loans, are specifically excluded from the impaired loan portfolio.
There were no loans classified as impaired by the Bank at December 31, 1995.
The accrual of interest income on loans is discontinued when certain
factors indicate reasonable doubt as to the timely collectibility of such income
(generally when loans are greater than ninety days delinquent). Interest income
previously accrued on these loans, but not yet received, is reversed in the
current period. Any interest subsequently collected is credited to income in the
period of recovery.
Loan Origination and Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is recognized in interest income using the level-yield method
over the contractual lives of the specifically identified loans adjusted for
prepayments.
F-7
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Allowance for Loan Losses
The adequacy of the allowance for loan losses is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and current economic conditions. Additions to the
allowance arise from charges to operations through the provision for loan losses
or from the recovery of amounts previously charged off. The allowance is reduced
by loan charge-offs. Loans are charged off when management believes there has
been permanent impairment of their carrying values.
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 in the Bank's market area. In addition, various regulatory agencies,
as an integral part of their routine 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.
Real Estate Owned
Real estate acquired through foreclosure or by deed in lieu of foreclosure
is carried at the lower of fair value or cost at the time of acquisition, with
any excess charged to the allowance for loan losses. Subsequently, such assets
are reported at the lower of their new cost basis or fair value less estimated
costs to sell. An allowance for REO losses is maintained for such estimated
costs to sell and any subsequent declines in fair value. Gains and losses from
sales of such properties are recognized as incurred. Carrying costs are
generally expensed as incurred. Additions to the allowance for REO losses, gains
and loss from sales of REO and carrying costs are all included in real estate
owned operations, net on the consolidated statements of income.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets or leases. Repair and maintenance items are expensed
and improvements are capitalized.
Income Taxes
The Bank and its wholly-owned subsidiary file a consolidated Federal income
tax return. State income tax returns are filed on a separate basis.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the asset and liability method of accounting
for income taxes. Under the asset and liability method of SFAS 109, 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. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Effective January 1, 1993 the Bank adopted SFAS 109 and has separately
reported the cumulative effect of that change in the method of accounting for
income taxes in the consolidated statements of income (see note 10).
Pension Plan
Pension plan costs based on the actuarial computation of current and future
benefits for employees are charged to expense and funded based on the maximum
amount that can be deducted for Federal income tax purposes.
F-8
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Reclassifications
Certain amounts relating to the 1994 and 1993 consolidated financial
statements have been reclassified to conform to the 1995 presentation.
(2) PLAN OF CONVERSION
On December 4, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent acquisition of the
Bank by a holding company formed by the Bank, subject to approval by regulatory
authorities. The conversion is expected to be accomplished through the sale of
the holding company's common stock in an amount equal to the pro forma market
value of the holding company and the Bank and the Subsidiary after giving effect
to the conversion. A subscription offering of the shares of common stock will be
made initially to each depositor of the Bank who had a deposit account balance
of at least $50 as of September 30, 1994 (the "Eligible Account Holders"), the
employee stock ownership plan; depositors of the Bank, other than Eligible
Account Holders, whose deposit accounts at the Bank total $50 or more as of
March 31, 1996 (the "supplemental eligible account holders") and other members
of the Bank, consisting of depositors of the Bank as of the voting record date
and borrowers with loans outstanding as of November 7, 1994, which continue to
be outstanding as of the voting record date.
Any shares of common stock not sold in the subscription offering are
expected to be made available for sale at the same price per share to the
general public in a community offering which may be commenced simultaneously
with the subscription offering; thereafter, remaining shares, if any, are
expected to be sold in a syndicated community offering.
At the time of conversion the Bank will establish a liquidation account in
an amount equal to its total equity as of the date of the latest statement of
condition appearing in the final prospectus used in connection with the
conversion. The liquidation account will be maintained for the benefit of
eligible account holders or supplemental eligible account holders who continue
to maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible account holders or
supplemental eligible account holders have reduced their qualifying deposits as
of each anniversary date. Subsequent increases will not restore an eligible
account holder's or supplemental eligible account holder's interest in the
liquidation account. In the unlikely event of a liquidation of the Bank (a
circumstance not envisioned or expected by management), each eligible account
holder or supplemental eligible account holder would be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts of all eligible account
holders or supplemental eligible account holders then holding qualifying
deposits in the Bank.
Office of Thrift Supervision (OTS) regulations impose limitations on all
capital distributions, such as cash dividends, payments to repurchase or
otherwise acquire shares, payments to stockholders of another institution in a
cash-out merger and other distributions charged against capital.
Costs to be incurred that are directly associated with the conversion are
to be deferred and are to be deducted from the proceeds of the shares sold in
the conversion. If the conversion is not completed, all costs would be charged
to expense at the conclusion of the offering process. At December 31, 1995,
conversion related costs incurred to date amounted to $76,000, with such costs
being deferred in an account included in other assets.
F-9
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) SECURITIES HELD TO MATURITY
A summary of securities held to maturity at December 31, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC........................................ $1,956 $-- $77 $1,879
FNMA......................................... 1,885 5 -- 1,890
------ --- --- ------
$3,841 $ 5 $77 $3,769
====== === === ======
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC........................................ $37,986 $20 $2,664 $35,342
FNMA......................................... 8,375 -- 587 7,788
GNMA......................................... 964 -- 58 906
U. S. Government agencies..................... 2,979 -- 36 2,943
------- --- ------ -------
$50,304 $20 $3,345 $46,979
======= === ====== =======
</TABLE>
There were no sales of securities held to maturity for the years ended
December 31, 1995, 1994 and 1993.
The contractual maturities of mortgage-backed securities generally exceed
ten years; however, the effective lives are expected to be shorter due to
anticipated prepayments.
F-10
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) SECURITIES AVAILABLE FOR SALE
A summary of securities available for sale at December 31, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC........................................ $13,828 $100 $145 $13,873
FNMA......................................... 13,374 62 23 13,335
GNMA......................................... 15,244 -- 17 15,261
Collateralized mortgage obligations........... 3,156 -- 178 3,334
U. S. Government Agencies..................... 12,553 52 -- 12,501
------- ---- ---- -------
$58,155 $214 $363 $58,304
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Collateralized mortgage obligations.......... $ 3,360 $-- $400 $ 2,960
======= === ==== =======
</TABLE>
AMORTIZED COST ESTIMATED FAIR VALUE
-------------- --------------------
Securities available for sale:
Due after one year through five years.... $12,009 $12,053
Due after five years through ten years... 492 500
Mortgage-backed securities............... 45,803 45,602
------- -------
Total................................. $58,304 $58,155
======= =======
Proceeds from sales of securities available for sale were $25,100,000 for
the year ended December 31, 1995 with gross realized gains of $90,000 and gross
realized losses of $453,000. Proceeds from sales of securities available for
sale were $6,179,000 during the year ended December 31, 1994 with gross realized
gains of $270,000. For the year ended December 31, 1993 proceeds from sales of
securities available for sale were $2,060,000 with gross realized losses of
$3,000.
F-11
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LOANS RECEIVABLE, NET
A summary of loans receivable at December 31, 1995 and 1994 is as follows:
1995 1994
-------- --------
IN THOUSANDS
Real estate mortgage:
Conventional one-to-four family ................ $ 87,579 $ 88,722
Multi-family ................................... 195 541
Commercial ..................................... 3,636 3,076
Construction ................................... -- 170
Home equity loans ............................... 20,964 21,165
Student loans ................................... 462 513
Passbook loans .................................. 754 617
-------- --------
Total loans ................................... 113,590 114,804
Less:
Deferred loan fees ............................. 13 59
Construction loans in process .................. -- 111
Allowance for loan losses ...................... 1,589 1,543
-------- --------
$111,988 $113,091
======== ========
At December 31, 1995, 1994, and 1993 loans in the amount of $2,450,000,
$3,645,000 and $3,510,000, respectively, were on a nonaccrual status. If these
loans had continued to realize interest in accordance with their contractual
terms, approximately $253,000, $310,000 and $323,000 of interest income would
have been realized for the years ended December 31, 1995, 1994 and 1993,
respectively. Interest income realized on nonaccrual loans was $160,000,
$105,000 and $94,000, respectively for the years ended December 31, 1995, 1994
and 1993.
A summary of loans to directors and officers for the years ended December
31, 1995 and 1994 is as follows:
1995 1994
---- ----
IN THOUSANDS
Balance at beginning of year......................... $901 $577
Additions............................................ 105 357
Payments............................................. 96 33
---- ----
Balance at end of year............................... $910 $901
==== ====
The terms and conditions of loans to directors and officers are no less
favorable to the Bank than they would have been for similar transactions with
other borrowers.
An analysis of the allowance for loan losses for the years ended December
31, 1995, 1994, and 1993 is as follows:
1995 1994 1993
------ ------ ------
IN THOUSANDS
Balance at beginning of year............. $1,543 $1,237 $ 974
Provision charged to operations.......... 152 316 286
Loans charged off........................ (106) (10) (23)
------ ------ ------
Balance at end of year................... $1,589 $1,543 $1,237
====== ====== ======
F-12
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LOANS RECEIVABLE, NET--(CONTINUED)
The Financial Accounting Standards Board has issued SFAS No. 114 and 118.
The new statements, which are effective for financial statements issued for
fiscal years beginning after December 15, 1994, require impaired loans to be
measured at the present value of expected future cash flows by discounting those
cash flows generally at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The new statements also require
troubled debt restructurings involving a modification of terms to be remeasured
on a discounted basis. The Bank adopted these statements on January 1, 1995. The
adoption of these statements did not have a material impact on results of
operations or financial position.
(6) INTEREST AND DIVIDENDS RECEIVABLE
A summary of interest and dividends receivable at December 31, 1995 and
1994 is as follows:
1995 1994
---- ----
IN THOUSANDS
Loans, net of reserve for uncollected interest of $345
in 1995 and $544 in 1994........................................ $569 $514
Securities held to maturity and securities available for sale.... 393 290
Other interest earning assets.................................... 25 23
---- ----
$987 $827
==== ====
(7) PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, 1995 and 1994 are summarized as
follows:
1995 1994
------ ------
IN THOUSANDS
Land................................................. $ 497 $ 497
Buildings and improvements........................... 2,776 2,772
Leasehold improvements............................... 281 271
Furnishings and equipment............................ 934 918
------ ------
Total............................................. 4,488 4,458
Accumulated depreciation and amortization............ 1,217 1,050
------ ------
$3,271 $3,408
====== ======
Depreciation of premises and equipment charged to occupancy expense for the
years ended December 31, 1995, 1994, and 1993 amounted to $167,000, $160,000 and
$139,000, respectively.
(8) REAL ESTATE OWNED, NET
A summary of REO net, at December 31, 1995 and 1994 is as follows:
1995 1994
---- ----
IN THOUSANDS
Total Real Estate Owned.............................. $766 $1,210
Allowance for losses................................. (169) (240)
---- ------
$597 $ 970
==== ======
F-13
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) REAL ESTATE OWNED, NET--(CONTINUED)
An analysis of the allowance for REO losses for the years ended December
31, 1995, 1994 and 1993 is as follows:
DECEMBER 31,
---------------------------
1995 1994 1993
---- ---- ----
IN THOUSANDS
Balance, beginning of year.................... $240 $221 $232
Provision charged to income................... 148 109 88
Charge-offs................................... (229) (90) (99)
Recoveries.................................... 10 -- --
---- ---- ----
Balance, end of period........................ $169 $240 $221
==== ==== ====
(9) DEPOSITS
Deposit account balances at December 31, 1995 and 1994 are summarized as
follows:
<TABLE>
<CAPTION>
CURRENT
1995 STATED
WEIGHTED RATE AT
AVERAGE DECEMBER 31,
RATE 1995 1995 1994
------- ------------ ---- ----
IN THOUSANDS
<S> <C> <C> <C> <C>
Non-interest bearing demand accounts................. -- -- $ 4,699 $ 3,093
NOW accounts......................................... 2.25% 2.25% 17,958 18,775
Money market deposit accounts........................ 3.13 2.50-3.40 23,120 19,468
Savings accounts..................................... 2.53 2.50 32,661 45,043
Club accounts........................................ 2.50 2.50 208 214
-------- --------
78,646 86,593
-------- --------
Certificates of deposit.............................. -- 2.01-3.00 -- 484
-- 3.01-4.00 1,474 23,094
-- 4.01-5.00 18,028 24,832
-- 5.01-6.00 44,122 20,117
-- 6.01-7.00 31,525 3,729
-- 7.01-over 8 139
-------- --------
Total certificates of deposit..................... 5.54 95,157 72,395
Accrued interest payable............................. 19 25
-------- --------
$173,822 $159,013
======== ========
</TABLE>
The weighted average interest rate on deposits at December 31, 1995, 1994
and 1993 was 3.66%, 3.10% and 2.82%, respectively.
The aggregate amount of certificates of deposit in denominations of
$100,000 or more totaled $5,952,000 and $5,114,000 at December 31, 1995, and
1994, respectively. Deposits over $100,000 are not insured by the Federal
Deposit Insurance Corporation.
F-14
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEPOSITS--(CONTINUED)
At December 31, 1995, certificates of deposit have scheduled maturities as
follows:
IN THOUSANDS
One year or less........................................... $51,489
One year to three years.................................... 35,646
Three years or more........................................ 8,022
-------
$95,157
=======
Interest expense on deposits for the years ended December 31, 1995, 1994
and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
IN THOUSANDS
<S> <C> <C> <C>
NOW and money market demand accounts....................... $1,111 $1,020 $1,118
Savings accounts and certificates of deposit............... 5,669 4,152 4,635
------ ------ ------
$6,780 $5,172 $5,753
====== ====== ======
</TABLE>
At December 31, 1995, the Bank had pledged approximately $749,000 of
mortgage-backed securities as collateral for municipal deposits.
(10) INCOME TAXES
As discussed in note 1, the Bank adopted SFAS 109 as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes was a
benefit of $297,000 and was determined as of January 1, 1993 and is reported
separately in the consolidated statements of income.
Income tax expense for the years ended December 31, 1995, 1994 and 1993
consists of the following:
1995 1994 1993
---- ---- ----
IN THOUSANDS
Current:
Federal.................................... $422 $ 942 $ 963
State...................................... 36 85 85
---- ------ ------
458 1,027 1,048
Deferred.................................... 29 (83) (6)
---- ------ ------
$487 $ 944 $1,042
==== ====== ======
The following table presents a reconciliation between the effective income
tax expense and the computed "expected" Federal income tax expense which is
computed by applying the normal Federal income tax rate of 34% to income before
income tax expense for the years ended December 31, 1995, 1994 and 1993,
respectively.
1995 1994 1993
---- ---- ----
IN THOUSANDS
Computed "expected" Federal income tax expense..... $462 $895 $ 998
Increase (decrease) in taxes resulting from:
New Jersey savings institution tax,
net of Federal income tax effect.................... 24 56 56
Other items, net..................................... 1 (7) (12)
---- ---- ------
Income tax expense.................................. $487 $944 $1,042
==== ==== ======
Effective tax rate................................... 36% 36% 36%
==== ==== ======
F-15
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) INCOME TAXES--(CONTINUED)
Retained earnings at December 31, 1995 includes approximately $4,293,000 of
income that has not been subject to tax because of deductions for bad debts
allowed for income tax purposes. Deferred income taxes have not been provided on
such bad debt deductions since the Bank does not intend to use the accumulated
bad debt deductions for purposes other than to absorb loan losses. If this
portion of retained earnings is used for any purpose other than to absorb bad
debt losses, taxes would be imposed on such amounts. If triggered, the tax
liability related to the appropriated earnings would have been $1,545,000 at
December 31, 1995.
Recent proposed tax legislation would repeal the reserve method of
accounting for bad debts by thrift institutions. Under the legislation the Bank
would be required to recapture its post-1987 additions to its tax bad debt
reserve. Since this liability has been accrued for under SFAS 109, this proposed
legislation would not materially impact the financial statements.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are as follows:
1995 1994
---- ----
IN THOUSANDS
Deferred tax assets:
Allowance for loan losses--book...................... $541 $493
Nonaccrual loan interest............................ 87 122
Unrealized loss on securities available for sale.... 53 143
Other............................................... 10 22
---- ----
Total gross deferred tax assets................... 691 780
---- ----
Deferred tax liabilities:
Allowance for loan losses--tax....................... 263 223
Bank premises, furniture and equipment,
principally due to differences in depreciation...... 135 127
Other................................................ 66 84
---- ----
Total gross deferred tax liabilities............... 464 434
---- ----
Net deferred tax asset............................. $227 $346
==== ====
Management believes it is more likely than not that the Bank will realize
the benefit of net deductible temporary differences and that such net deductible
temporary differences will reverse during periods in which the Bank generates
net taxable income. Management has projected that the Bank will generate
sufficient taxable income to utilize the net deferred tax asset as no valuation
allowance is considered necessary.
F-16
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) BENEFIT PLANS
The Bank has a qualified, noncontributory defined benefit pension plan (the
Plan) covering all eligible employees. Retirement benefits are based on a
formula utilizing years of service and average monthly compensation. It is the
Bank's policy to fund the Plan for the maximum amount that can be deducted for
Federal income tax purposes, subject to the minimum funding requirements of the
Employee Retirement Income Security Act of 1974.
The following table sets forth the Plan's funded status and amounts
recognized in the Bank's consolidated financial statements at December 31, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
IN THOUSANDS
<S> <C> <C>
Actuarial present value of benefit obligations at December 31:
Accumulated benefit obligation including vested benefits
of $698 and $582 at December 31, 1995 and 1994, respectively.............. $724 $619
==== ====
Projected benefit obligation for service rendered to date.................. (840) (801)
Plan assets at fair value, primarily certificates of deposit held
at other banks at December 31............................................. 937 809
---- ----
Plan assets in excess of projected benefit obligation................... 97 8
Unrecognized net (gain) obligation.......................................... (78) 10
Unrecognized net loss subsequent to transition.............................. 10 13
---- ----
Prepaid asset (included in other assets)................................ $ 29 $ 31
==== ====
</TABLE>
Net periodic pension cost includes the following components for the years
ended December 31, 1995, 1994, and 1993, respectively:
1995 1994 1993
---- ---- ----
IN THOUSANDS
Service cost.................................... $ 82 $ 78 $ 79
Interest cost................................... 59 56 51
Return on plan assets........................... (56) (52) (46)
Amortization of net obligation.................. 4 6 7
---- ---- ----
Net periodic pension cost.................... $ 89 $ 88 $ 91
==== ==== ====
The discount rate and rate of increase in future compensation levels used
in computing the actuarial present value of the projected benefit obligation
were 7% and 5% in 1995, 1994, and 1993. The expected long-term rate of
return on assets was 7% for all years.
Employee Savings Plan
The Bank has an employee savings plan (the Savings Plan), pursuant to
Section 401(k) of the Internal Revenue Code, for all eligible employees. The
Bank matches 50% of employee contributions up to the first 6% of an employee's
salary. The Bank's contribution during the years ended December 31, 1995, 1994,
and 1993 amounted to $33,000, $30,000, and $31,000, respectively.
F-17
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) REGULATORY MATTERS
On August 9, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) was signed into law. FIRREA imposes more
stringent capital requirements on the Bank. In addition, FIRREA includes
provisions for changes in the Federal regulatory structure, including a new
deposit insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to non-investment grade corporate debt and
certain other investments. FIRREA also increases the required ratio of
housing-related assets in order to qualify as a savings association.
The legislation requires the Bank to have a minimum regulatory tangible
capital ratio equal to 1.5% of adjusted total assets, a minimum 3% leverage
(core) capital ratio and an 8.0% risk-based capital ratio. At December 31, 1995
the Bank exceeded each of these minimum capital ratio levels.
The OTS has incorporated an interest rate risk component that may require
that an amount be added to an institution's risk-based capital requirement. The
OTS has postponed the date on which the component will first be deducted from an
institution's total capital until an appeals process is developed for the
measurement of an institution's interest rate risk. In the opinion of
management, the Bank would continue to exceed its risk-based minimum capital
requirement under the new rule.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was
signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1992. In
addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the Federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the OTS
or by the FDIC, including requirements to raise additional capital, sell assets,
or sell the entire institution. Once an institution becomes "critically
undercapitalized" it is generally placed in receivership or conservatorship
within 90 days.
To be considered "well capitalized," an institution must generally have a
leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%,
and a total risk-based capital ratio of at least 10%. At December 31, 1995, the
Bank is considered "well capitalized".
(13) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
Commitments
The Bank is party to financial instruments and commitments with
off-balance-sheet credit risk in the normal course of business. These financial
instruments and commitments include unused home equity lines of credit,
commitments to extend credit, and commitments to purchase securities. These
commitments and instruments involve, to varying degrees, elements of risk in
excess of the amounts recognized in the consolidated financial statements.
The Bank's maximum exposure to credit losses in the event of nonperformance
by the other party to these financial instruments and commitments is represented
by the contractual amount. The Bank uses the same credit policies in granting
commitments and conditional obligations as it does for financial instruments
recorded in the consolidated statements of financial condition.
F-18
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK--(CONTINUED)
At December 31, 1995 and 1994 financial instruments and commitments whose
contractual amounts represent off-balance-sheet credit risk are as follows:
1995 1994
------ ------
IN THOUSANDS
Unused home equity lines of credit
(primarily floating rate)
Commitments to extend credit: ............ $7,868 $6,337
To originate mortgage loans:
Fixed rate ........................... 829 459
Variable rate ........................ 447 3,573
To purchase mortgage loans:
Fixed rate ........................... 1,400 1,820
Interest rates on commitments to originate fixed rate mortgage loans ranged
from 7.63% to 7.75% and 6.75% and 8.33% at December 31, 1995 and 1994,
respectively. Such commitments are generally for a sixty day term.
The Bank, under an agreement with the FHLB, may receive advances for
various terms at prevailing interest rates at the time of the advance. Such
advances are collateralized by FHLB stock and securities held in safekeeping at
the FHLB.
The Bank leases certain branch offices under operating leases. At December
31, 1995, the minimum rental commitments for noncancellable leases with initial
or remaining terms of more than one year and expiring through 2011 are as
follows:
IN THOUSANDS
Year ended December 31,
1996.............................................. $ 170
1997.............................................. 133
1998.............................................. 137
1999.............................................. 142
2000.............................................. 146
Thereafter........................................ 446
------
$1,174
======
Rental expense under operating leases, included in occupancy expense in the
consolidated statements of income was $249,000, $239,000 and $226,000 for the
years ended December 31, 1995, 1994, and 1993, respectively.
Contingencies
In the normal course of business, there are various outstanding legal
proceedings, claims, commitments and contingent liabilities such as commitments
to extend credit which are not included in the accompanying consolidated
financial statements. In the opinion of management, the financial condition,
results of operations and liquidity of the Bank and its subsidiary will not be
materially affected by the outcome of such legal proceedings and claims or by
such commitments and contingent liabilities.
Concentrations of Credit Risk
A substantial portion of the Bank's loans are one- to four-family
residential first mortgage loans secured by real estate located in New Jersey.
Accordingly, the collectibility of a substantial portion of the Bank's loan
portfolio and the recovery of a substantial portion of the carrying amount of
REO are susceptible to changes in real estate market conditions.
F-19
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of
estimated fair value of financial instruments. Fair value estimates, methods and
assumptions are set forth below for the Bank's financial instruments for which
it is practical to estimate those values.
Cash and Cash Equivalents
For cash and due from Banks, interest-bearing deposits in other banks and
Federal funds sold, the carrying amount approximates fair value.
Securities Held to Maturity and Securities Available for Sale
The fair value of securities held to maturity and securities available for
sale was based on quoted market prices or dealer quotes, if available. If a
quoted market price or dealer quote was not available, fair value was estimated
using quoted market prices of similar securities.
Federal Home Loan Bank of New York Stock
The fair value for FHLB stock is its carrying value, since this is the
amount for which it could be redeemed. There is no active market for this stock
and the Bank is required to maintain a minimum balance based on the unpaid
principal of home mortgage loans.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type. Each loan category was further
segmented into fixed and adjustable rate interest terms.
The fair value of fixed rate loans was determined by discounting the
scheduled cash flows through the contractual maturity, adjusted for estimated
prepayments, using estimated market discount rates that reflect the risk
inherent in the loan type, taking into account the credit grade and maturity.
The fair value of nonperforming loans was determined by discounting the
estimated future cash flows after adjusting for collection costs and risk of
nonpayment.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as savings, NOW
and money market deposit accounts, is equal to the amount payable on demand. The
fair value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
Federal Home Loan Bank Advances
The fair value of Federal Home Loan Bank advances approximates the carrying
value.
F-20
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The estimated fair values of the Bank's financial instruments as of
December 31, 1995 and 1994 are presented in the following table. Since the fair
value of off-balance-sheet commitments are not material, these disclosures are
not included.
<TABLE>
<CAPTION>
1995 1994
-------------------- ---------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- --------- --------
IN THOUSANDS
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents................... $ 26,262 $ 26,262 $ 2,498 $ 2,498
Securities held to maturity................. 3,841 3,769 50,304 46,979
Securities available for sale............... 58,155 58,155 3,360 3,360
Federal Home Loan Bank of New York stock.... 1,568 1,568 1,367 1,367
Loans receivable............................ 111,988 113,963 113,091 111,725
Financial liabilities:
Deposits.................................... 173,822 174,278 159,013 158,153
Federal Home Loan Bank advances............. 2,000 2,000 -- --
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. The tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
(15) WAYNE SAVINGS FINANCIAL SERVICES GROUP, INC.
The Subsidiary is a wholly-owned subsidiary of the Bank. The Subsidiary
engages in brokerage services offering various types of annuities, insurance,
stocks, bonds and mutual funds. The Subsidiary's condensed statements of
financial condition at December 31, 1995 and 1994 and condensed statements of
operations for the years ended December 31, 1995, 1994 and 1993 are as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
ASSETS 1995 1994
------ ----- -----
IN THOUSANDS
Cash and due from banks ......................... $ 1 $ 1
===== =====
LIABILITIES AND
STOCKHOLDER'S DEFICIT
---------------------
Due to parent .................................... 170 130
Stockholder's deficit ............................ (169) (129)
----- -----
Total liabilities and stockholder's deficit .... $ 1 $ 1
===== =====
F-21
<PAGE>
WAYNE SAVINGS BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) WAYNE SAVINGS FINANCIAL SERVICES GROUP, INC.--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
1995 1994 1993
----- ----- -----
IN THOUSANDS
Income--income from sales and renewals .. $ 327 $ 291 $ 367
Expenses:
Compensation and employee benefits .... 321 291 307
Other ................................. 67 53 48
----- ----- -----
(Loss) income before income tax
(benefit) expense ................. (61) (53) 12
Income tax (benefit) expense ............ (21) (18) 4
----- ----- -----
Net (loss) income .................. $ (40) $ (35) $ 8
===== ===== =====
(16) INSURANCE OF DEPOSIT ACCOUNTS
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. The
risk-related assessment program provided a transition period between the prior
flat-rate system and the final risk-related system that took effect on January
1, 1994, in accordance with FDICIA. This risk classification is based on an
institution's capital group and supervisory subgroup assignment.
Currently, the Bank pays an insurance premium to the FDIC equal to .23% of
its total deposits. In August 1995, the FDIC announced that it will lower the
insurance premium for members of the Bank Insurance Fund (BIF), primarily
commercial banks, to a range of between 0.04% and 0.31% of deposits, with the
result that most commercial banks would pay the lowest rate of 0.04%. The lowest
rate was further reduced during the fourth quarter of 1995 to 0% or the
statutory minimum of $2,000 for most banks. This reduction in insurance premiums
for BIF members places Savings Association Insurance Fund (SAIF) members,
primarily Savings Banks such as the Bank, at a material competitive disadvantage
to BIF members and, for the reasons set forth below, could have a material
adverse effect on the results of operations and financial condition of the Bank
in future periods.
A disparity in insurance premiums between those required for the Bank and
BIF members could allow BIF members to attract and retain deposits at a lower
effective cost than that possible for the Bank and put competitive pressures on
the Bank to raise its interest rates paid on deposits, thus increasing its cost
of funds and possibly reducing net interest income. The resultant competitive
disadvantage could result in the Bank losing deposits to BIF members who have a
lower cost of funds and are therefore able to pay higher rates of interest on
deposits. Although the Bank has other sources of funds, these other sources may
have higher costs than those of deposits.
Several alternatives to mitigate the effect of the BIF/SAIF insurance
premium disparity have recently been proposed by the U.S. Congress, Federal
regulators, industry lobbyists and the Administration. One plan that has gained
the support of several sponsors would require all SAIF member institutions,
including the Bank, to pay a one-time assessment of up to 79 to 85 basis points
on the amount of deposits held by the member institution in order to
recapitalize the SAIF. If this proposal is enacted by Congress, the effect would
be to immediately reduce the capital of the SAIF member institutions by the
amount of the fee, and such amount would be immediately charged to earnings net
of related taxes. If a requirement had been implemented as of March 31, 1995,
for the Bank to pay a one-time assessment between 79 to 85 basis points of
insured deposits, the amount of such assessment would be approximately
$1,286,000 before tax. Management of the Bank is unable to predict whether this
proposal or any similar proposal will be enacted or whether ongoing SAIF
premiums will be reduced to a level equal to that of BIF premiums. The Bank paid
$368,000, $378,000 and $330,000 in Federal deposit insurance premiums for the
fiscal years ended December 31, 1995, 1994 and 1993, respectively.
F-22
<PAGE>
================================================================================
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 WAYNE BANCORP, INC., THE BANK OR SANDLER O'NEILL & PARTNERS, L.P.
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 TO 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 WAYNE BANCORP, INC. OR THE BANK SINCE ANY OF THE DATES
AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
-------------
TABLE OF CONTENTS
Page
----
Summary .............................................................. 5
Selected Consolidated Financial and Other Data
of the Bank ......................................................... 10
Recent Developments .................................................. 12
Risk Factors ......................................................... 15
Wayne Bancorp, Inc. .................................................. 20
Wayne Savings Bank, F.S.B ........................................... 20
Regulatory Capital Compliance ........................................ 22
Use of Proceeds ...................................................... 23
Dividend Policy ...................................................... 24
Market for the Common Stock .......................................... 24
Capitalization ....................................................... 26
Pro Forma Data ....................................................... 27
Consolidated Statements of Income .................................... 30
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 31
Business of the Bank ................................................. 41
Federal and State Taxation ........................................... 58
Regulation ........................................................... 60
Management of the Company ............................................ 66
Management of the Bank ............................................... 66
The Conversion ....................................................... 78
Restrictions on Acquisition of the Company
and the Bank ........................................................ 94
Description of Capital Stock of the Company .......................... 99
Description of Capital Stock of the Bank ............................. 100
Experts .............................................................. 101
Legal and Tax Opinions ............................................... 101
Additional Information ............................................... 101
Index of Consolidated Financial Statements ........................... 102
-------------
UNTIL JUNE 15, 1996 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
2,875,000 Shares
[logo]
WAYNE BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
WAYNE SAVINGS BANK, F.S.B.)
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MAY 13, 1996
Sandler O'Neill & Partners, L.P.
================================================================================
